Lack of Good News and Option Expiration Should Weigh On The Market This Week!

Last week, the market tested support at SPY 85 and we witnessed a huge snap back rally. While this might seem like a capitulation of sorts, I view it with skepticism. I believe that shorts were spooked ahead of the G20 meeting and they wanted to take profits. The market was not able to follow through and it sold off sharply heading into Friday's close. If a true low were established, the rally would have continued and we would be off to the races. The world's economic leaders met this weekend to discuss the global financial crisis. There weren't any earth shattering plans, however the general consensus was that conditions warranted a coordinated effort. For the time being, the US is straddled with a lame-duck President and that will postpone critical decisions. Time is of essence and the market will grow impatient. The SPY has been able to hold the 85 support level; however it keeps testing it with greater frequency. Each test sparks a snap back rally that stalls earlier than the previous one. That has resulted in a series of lower highs. In today's chart you can see that a descending triangle is forming. Given the longer-term downtrend, there is a good likelihood that we will see that support level fail. The earnings this week will feature retailers. Dismal results are expected and all of this negativity will weigh on the market heading into the holiday shopping season. Last week we heard from Best Buy that these are the toughest conditions they have ever seen. Target and Lowes reported weak results today. The economic numbers this week include PPI, CPI, housing starts, FOMC minutes, initial jobless claims, LEI and the Philly Fed. Initial jobless claims are considered a real-time gauge of economic weakness. Continuing claims have risen to almost 4,000,000 and this is the most significant number this week. The market is at the low end of its one-month range and option expiration is more likely to have a negative bias. Today, the market is staging a nice rally and in the absence of bad news, it might grind higher. The downward sloping trend line indicates that resistance lies at SPY 95. I don't believe we will break above that level this week. Option premiums are very rich and I like selling out of the money puts on stocks that have a well-defined support level. The energy sector looks attractive at this level. Although I am bearish, I am not looking for a big drop. A gradual grind is more of what I feel will unfold. This will bode well for the put selling strategy.

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