Option Traders – Don’t Jump The Gun – Wait for Follow Through!

July 16, 2008
Author: Peter Stolcers, Founder of OneOption

Yesterday, the market took a nasty tumble and we witnessed heavy selling right into the closing bell. Once again, the financial sector weighed on the entire market and the possibility of another bank failure looms. Positive earnings news from Intel, Wells Fargo, Charles Schwab and Northern Trust is helping to push the market higher today. Financial stocks are priced for worst-case scenarios and even dismal results could spark buying. Between now and tomorrow’s open, we will also hear from eBay, Xilinx, Yum Brands, Coca-Cola, Harley Davidson, Illinois tool, Johnson Controls, Nokia, Novartis, Ameritrade and United Technologies. Overall, I believe the stock's will rally from their oversold condition prior to Thursday’s open. On the economic front, the CPI came in much higher than expected and it made its biggest jump in 26 years. As I suspected, the core rate rose by .3% in June. This number could have spooked the market if Chairman Bernanke had not been testifying before Congress. This morning, he clearly stated the Fed's priority was financial stability, not inflation. This afternoon, the Fed minutes will be released and they will reveal more of formation about the last FOMC meeting. Tomorrow's initial jobless claims number could fuel a follow through rally if earnings releases provide a positive backdrop. Las week, the initial jobless claims fell more than expected. Another solid number might convince traders that the unemployment picture is starting to improve. This morning, oil inventories rose by an unexpected 3 million barrels. Analysts were looking for a 2 million barrel draw. This surprise drove energy prices lower and oil is currently down by more than four dollars. I would not be too eager to jump on this rally. First, we need to see the gains hold into the close. Second, we need to see follow through tomorrow with a higher close. Finally, the market needs to get back above SPY 126 - the double bottom formed in March. Until then, don't get long. I feel this market rally is vulnerable to a decline. We are bouncing from an oversold condition and shorts will only cover if the market is able to stage consecutive rallies. Long-term, I still have many more reasons to be bearish and I feel that any rally will be relatively short-lived. The closer the market gets to SPY 133, the more bearish I get. image

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