Use SPY 126 As Your Option Trading Guide!

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

Every year I visit the Trade Free Zone (not to be confused with the Free Trade Zone). For the rest of July I will be turning my computer screens off so that I can decompress. This helps me to regain a fresh market perspective. I am expecting lots of action this fall and I will hit it hard when I return. At the end of this post I have left you with a set of standing instructions. Wednesday, the market posted its first decent rally in weeks. Wells Fargo, Northern Trust and Charles Schwab posted good numbers and that helped to rally an oversold financial sector. Oil also retreated and that helped to take the sting out of very high PPI/CPI numbers. Comments from Ben Bernanke reassured traders that financial stability, not inflation, was the Fed's priority. The market was able to hold its gains and rally into the bell. Thursday morning, a lower than expected jobless claims number, a 9.1% jump in housing starts, lower energy prices and solid earnings from J.P. Morgan pushed the market higher. The market held most of the gains and it posted back-to-back rallies. After the close, MSFT, MER and GOOG traded lower after reporting earnings. The S&P Futures were down 10 points after hours and the market was able to reverse that decline before the open. We may have seen a minor capitulation low this week. The VIX spiked on the IndyMac failure and concerns over Freddie Mac/Fannie Mae. In the chart you can see how these VIX spikes have represented short-term lows. Strategy I am starting to see a bid to the market and I feel we could see a bounce. The overnight losses were reversed and we are just below the SPY 126 level. I feel we will rally today and close above 126. That was the double bottom from March and it will represent major support if the market gets through it. This will be the third back-to-back rally and the shorts will be covering. Next week, the economic numbers shape up like this: LEI, Beige Book, Durable Goods, Michigan Sentiment and New Home Sales. Weak economic conditions are priced in and earnings/guidance (not economic releases) will drive the market. The major earnings releases next week include Bank of America, Merck, Apple, QLogic, SanDisk, Steel Dynamics,, AK Steel, Caterpillar, DuPont, UPS, UnitedHealth, Broadcom, Norfolk Southern, Yahoo, AT&T, Boeing, General Dynamics, McDonald's, Peabody Energy, Whirlpool, Allstate, Amazon, QUALCOMM, 3M, Wynn Resorts, Black & Decker and Arch Coal. By the end of the week, we will know how the overall earnings season is shaping up. Most importantly, we will be able to gauge guidance for the third quarter. Since I am taking the rest of July off, I will leave you with these standing instructions. IF THE SPY IS ABOVE 126, PLAY THE BOUNCE AND TAKE PROFITS ALONG THE WAY. STICK WITH HEALTHCARE STOCKS (BIOTECH). IF THE SPY IS BELOW 125, STAY SHORT AND FOCUS ON WEAK STOCKS THAT HAVE BEEN IN A LONG TERM DOWN TREND AND HAVE BOUNCED RECENTLY (CONSUMER STOCKS). . . image . .

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