Support Has Been Breached – Option Expiration Will Have A Bearish Bias!

January 14, 2009
Author: Peter Stolcers, Founder of OneOption

The market continues the slide that started last week. After a failed breakout above SPY 92, the market has breached the uptrend line that dates back to November and it has broken major horizontal support at SPY 85. Option expiration related sell programs are kicking in today and they may linger for the next two days. The VIX is on the rise and uncertainty rules the market. HSBC may need an additional $30 billion in capital according to a Morgan Stanley analyst and Deutsche Bank announced a $6 billion right off this quarter. Meanwhile, Citigroup is selling off assets to generate cash and its stock has fallen below the critical $5 level. Many pension funds can't own stocks that trade for less than $5 and that could spark additional selling. Retail sales were down 2.7% in December and November's number was revised down by an additional .3%. This is one of the worst holiday seasons ever and many retailers will fail. If you factor in a 2% inflation rate, sales were actually down 4.7%. Also remember that these sales were the result of deep discounts. Profit margins will be squeezed hard and many retailers lost money during the most lucrative time of the year. Gift card sales were also down because consumer purchased deeply discounted merchandise. That means January sales will also be weaker than normal. Tomorrow's initial jobless claims number could be a disaster. I suspect that many people postponed filing for unemployment because of the holidays. A big number tomorrow could push this market lower. I am fairly liquid at this point and I have closed many short put positions at a marginal profit. I still have many short puts that I expect to expire. They are safely out of the money, but the stocks are creeping closer. Once market support is established, I will have a chance to sell rich premiums again. I expect the market to bottom after most of the financials announce next week. This is still the best strategy for this market. Today, the market will drift lower and close on the low. The likelihood for a decline tomorrow is high. image

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