Sell The Rips – Buy The Dips. Put Credit Spreading Opportunity Ahead!

November 20, 2009
Author: Peter Stolcers, Founder of OneOption

This week, the market broke out to a new 2009 high. It was not able to add to those gains and profit-taking set in. The S&P 500 dropped quickly after yesterday's open and we were down 20 points in a heartbeat. That selling pressure has resurfaced this morning and the futures are down another 8 points this morning. Weakness in global markets sparked yesterday's decline. Initial jobless claims, LEI and the Philly Fed were all in line and they did not cause the breakdown. The market has fallen below SPY 110 and we have a failed breakout. A small push higher this week could have generated option expiration buying. That did not happen and we are seeing a little weakness heading into the holiday. Retail results were decent this week, but most companies "under promised". They are taking a cautious stance heading into Christmas and the market was not very receptive. I looked back five years to see if selling ahead of Thanksgiving is common. In three of the last five years, we have seen weakness and a rebound after Thanksgiving. The volume has been very light. I did not get overly excited about the recent breakout and I'm not too concerned about this decline. Most of yesterday's drop took place in the first 20 minutes of trading and we hit an air pocket as buyers pulled their bids. Resistance is building at this level and I feel that we might be topping out. The recent breakouts have been minimal and selling has been quick to follow once a new high has been established. Durable goods orders, GDP and initial claims will drive the action Tuesday and Wednesday. Overall the news should be decent. I suspect prices will pull back early next week and rally into the end of the month. I have been taking advantage of this pullback by selling out of the money put credit spreads. I will continue to sell more put credit spreads next week and I believe support at SPY 106 will hold. Earnings, interest rates, M&A, economic releases and seasonality all favor the bulls. I don't expect to see a major decline in the last six weeks of 2009. Be patient, wait for support and sell out of the money put credit spreads on strong stocks. For today, I believe the lows of 108.80 will hold. That is also the low from last week. Traders don't want to get short ahead of the weekend and "Merger Monday" should keep the selling contained. image

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