Choppy Trading In A Tight Range Possible For The Rest Of The Year!

December 15, 2008
Author: Peter Stolcers, Founder of OneOption

Last Monday, the market gapped higher and it tried to challenge minor resistance at SPY 90. The rest of the week, bulls did what they could to hold the gains, but prices slipped most of the week. Congress failed to pass a Big Three bailout last week, but the Bush administration said they would make sure that the auto industry would collapse. The auto manufacturers are in dire need of money and they can't wait for Congress to reconvene. Analysts believe that the president will draw from the $700 billion TARP to get them through the year. He wants to limit his involvement to a bridge loan so that Congress can hammer out the terms and conditions of the bailout. On Wednesday, we will get an FOMC statement. Most traders are expecting a half point cut. The Fed is out of bullets and now they will resort to printing money - that might come out in the statement. The rest of the economic numbers this week won't be much of a factor. Bad results are expected and they will be confirmed. With all of the negative news, the market has been resilient. In today's chart you can see that the trading range has collapsed and the VIX is declining. The market has good support at SPY 85 and resistance at SPY 90. If last week's rally were legitimate, it would have blown through SPY 90 on year-end strength. I believe we are marking time while bad news piles up. In January, I believe there's a good chance that we will see a nice down leg. Over the next few days we will get earnings from Morgan Stanley and Goldman Sachs. Analysts believe that Goldman Sachs will post its first loss since going public. Investment banking is in for a very lean year. They now have to conform to banking regulations (higher reserve requirements), IPOs will be down (new issues, CDO, CDS, bond offerings), trading revenues will be down (higher margin requirements) and brokerage revenues will drop off (hedge fund redemptions). If the market breaks below SPY 85, option expiration sell programs could kick in and we will test the lows. A much more likely scenario is that the market chops back and forth for the rest of the year. Negative news will be offset by year-end strength. Stick with naked put writing and put credit spreads on stocks that have well-defined support levels. This strategy has been working well for two months and it will continue to work well the rest of the year. image

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