Resistance Is Building. A Trading Range For The Remainder Of The Year Is Likely!

The recent breakout to new highs for 2009 has been minimal. The market has challenged SPY 111.50 three times without success. Profit-taking sets in quickly each time and buyers aren't aggressive enough to overpower profit takers. A formidable resistance level is forming. In today's chart you can see that the magnitude of each breakout is decreasing. After each new high, the market probes for resistance. A key reversal marks resistance and after a retest a few days later, the market declines. This is a very tradable pattern and I believe we are due for a few days of weakness. This morning, third-quarter GDP was revised lower from the preliminary estimate a month ago. Initially, it showed a 3.5% growth rate and analysts felt this iteration would come in at 2.9%. The actual number was 2.8% and the market declined slightly on the news. Nonresidential construction spending fell 15% and it was largely responsible for the decline. Corporate profits were robust, but companies are cutting payroll and increasing productivity to make money. Consumer confidence came in at 49.5, much better than the 47.7 analysts had expected. The number had a very temporary positive effect on the market. This morning, the FDIC released its numbers and its bank deposits fell to negative $8.2 billion in the third quarter. The number of banks on its "problem list" rose 33% in the third quarter to its highest level in over 15 years. So far this year, 124 banks have failed and that is the highest level since 1992. The Treasury added a little salt to the banking industry's wound this morning. They want banks to outline how and when TARP loans will be repaid. This afternoon, the results from the bond auction will be released. The demand has been good and I'm not expecting much of a market reaction. Similarly, I'm not expecting a reaction to the release of the FOMC minutes. There is consensus among the Fed officials to keep rates low and they barely changed their statement a few weeks ago. Tomorrow, durable goods orders, consumer sentiment and initial claims will be released. Durable goods orders are very volatile and the number tends to have a temporary impact on the market. It is heavily revised and traders look more at the components than they do the overall number. Initial claims have been improving and a number below 500,000 (analyst expectations) would be bullish. Consumer sentiment is expected to stay flat month over month (66) and it will help us gauge shopping potential ahead of "Black Friday". Resistance is building and the market does not have enough strength or a catalyst to blow through to new highs. The SPY has rallied 60% from its March lows and profit-taking has set in. Asset Managers can feel the resistance and they are no longer worried that they will miss a big year-end rally. We are likely to see buying as the market declines and selling as it rallies. A trading range will result for the remainder of the year and option spreading strategies will provide excellent returns. If we were going to break out to new highs, it would have happened last week. We had the momentum and option expiration could have sparked buy programs. That in turn could have forced shorts to cover and we would have convincingly established a new high. That did not happen and a half hearted attempt yesterday only strengthened profit-taking. Once the highs were challenged, selling ensued and the market drifted lower the rest of the day. This morning, the price action has also been fairly weak. Light volume trading ahead of Thanksgiving can result in choppy (random) movement. I believe we will see a small pullback this week and a rally into month end. Given my forecast for a trading range, I am selling out of the money call spreads on weak stocks and I am selling out of the money put spreads on strong stocks. The trend is still up and as long as it holds, my put credit spreads will outnumber my call credit spreads by a ratio of 2 to 1. Decliners outnumber advancers by 2 to 1. After yesterday's resistance and a weaker than expected GDP number, I would favor an afternoon drift lower today.

Daily Bulletin Continues...