Light Volume Choppy Trading – Don’t Trade – Finish Your Shopping!

December 23, 2008

Yesterday, the market continued its slide from last week. In a very orderly manner, prices drifted lower the entire day. We have floated into the middle of a narrow trading range that has developed over the past two weeks. Horizontal support at SPY 85 attracts buyers and horizontal resistance at SPY 91 attracts sellers. When the market breaches either of those levels, it will test the major support/resistance level in today’s chart.

Light volume holiday trading has set in and after a volatile year, the reprieve is welcomed by all. Worst case scenarios are priced in and this week’s economic numbers have not produced much of a reaction.

The GDP came in right on target and it declined by .5% in the third quarter. Consumer spending shrank 3.8%, the sharpest pullback since 1980. Retailers are slashing prices ahead of Christmas and profit margins will be squeezed. Durable goods orders fell 14.8%. Weak automotive sales contributed to the decline. Cars are stacking up like cord wood in Long Beach California. Dealers have more inventory than they can move and they aren’t accepting new deliveries. As dismal as these numbers are, the expectations were low. Similarly, tomorrow’s initial jobless claims will not produce a big reaction.

After Christmas, the market often moves higher and the anomaly is known as the Santa Claus rally. A little buying by the fund managers can fuel a light volume market. They have cash on the sidelines and they are likely to try and “goose” the market. If they sense resistance, they’ll back off. On the other hand, if they are unchallenged, a year-end rally will ease some of the pain from 2008. At this juncture, the market would do well to get back to last week’s SPY 91.

As you can see in today’s chart, the VIX is declining. Take advantage of that and sell naked OTM puts on strong stocks.

May you and your families have a healthy and happy holiday!
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December 22, 2008

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