The Market Will Drift Lower and Take Out SPY 85 This Week!

November 18, 2008
Author: Peter Stolcers, Founder of OneOption

The market continues to whittle away at Thursday's gains and that massive snapback rally was not a capitulation. If legitimate buying had materialized, the market would still be grinding higher. Bad news looms over the market and prices drift lower on a daily basis. In today's chart I have drawn the downtrend line and the SPY 85 support level. You can see that a descending triangle has formed and that is a bearish sign. The longer-term trend is also bearish and we will see a breakdown soon. When a bona-fide support level has been established, the market is never truly able to retest it. Before it is reached, buyers aggressively step in feeling that they may not get another chance to get long. In today’s action, horizontal support has been tested with greater frequency and the snapback rallies don't pack the same punch. That has resulted in a downward sloping trend line with lower highs. The G20 met and leaders from around the world agreed that the credit crisis requires a coordinated effort. However, the US is the kingpin and we have a lame-duck President for two more months. We are handcuffed and the market will grow impatient. We are trading near the one-month low and option expiration should have a negative bias. Watch for selling in the last hour of trading. Over the next few months, we are likely to see gradual drift lower with sharp (temporary) bear market rallies. Given the high implied volatilities, I still prefer selling OTM puts on stocks I like. Make sure there is a bona fide support level and buy back your puts if it is violated. I don't like selling call credit spreads when the market is at the low end of the range. These sharp one-day rallies can take you out of the position. However, once they stall, you can sell OTM call credit spreads. image

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