The Market Is Likely to Drift Lower Ahead Of Christmas!

December 22, 2008
Author: Peter Stolcers, Founder of OneOption

The market is in pre-holiday trading mode. A very tight range has established itself over the past two weeks. We have overhead resistance at SPY 91 and solid support at SPY 85. Buyers seem comfortable scaling into stocks at the lower end of the range and sellers are content to short stocks at the upper end of the range. There is very little news that will propel the market from now to year-end. Typically, portfolio managers try to "goose" the market into year-end to enhance performance and sweeten incentive fees. A small amount of buying can fuel the market in light trading. This year, they will be motivated to pare losses. This anomaly is known as the "Santa Claus Rally". It starts after Christmas and it lasts into the first two trading days of January. The table was set for a nice move higher last week. The Fed lowered interest rates and set a target range of 0% - .25% for the Fed Funds rate. The market rallied through resistance and it stalled at SPY 91. A little follow-through Wednesday would have sparked short covering and option expiration related buying would have pushed the market higher. When that did not materialize, the market gradually started to drift lower. That drift lower has spilled over into today’s trading. We could see buying after Christmas, but those gains will simply negate the losses from the preceeding days. Durable goods orders and the GDP will be released this week. They did not have much of an impact on trading last month even though they came in weaker than expected. Initial jobless claims will be released Wednesday and that could weigh on the market. It has been the most closely watched number and employment is critical if we are going to work our way out of this mess. Worst case scenarios have been factored into the market and I doubt that any of the numbers will have a major impact. The news won't be devastating, just depressing. That's why I believe we will drift down to SPY 85. Today's news is recycled and CNBC is hard-pressed to find anything new to talk about. There aren't any market "drivers" and this range is likely to persist. A breakout in either direction will signal a trading opportunity. Until then, sell puts on strong stocks with solid support levels. This will allow you to take advantage of time premium decay and a decline in implied volatility. image

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