Option Trading Tip – Beware of One-Day Rallies!

July 9, 2008
Author: Peter Stolcers, Founder of OneOption

Yesterday, the market staged a nice intraday reversal as oil prices sank. This morning, oil inventories showed a much bigger than expected draw and energy prices are lower after the release. This is contrary to what most traders would expect and it shows that for the time being, oil has hit a resistance level. The bounce came from a level that was significantly below the double bottom formed in March this year. I do not believe it was a capitulation low. As I mentioned in yesterday, I have been seeing two-sided market action. That tells me that we are near a support level. I hope to see a deep intraday drop and a strong reversal off of that low. If the market is able to follow through with a two-day rally, I will consider that low to be a short-term support level. I did not see that type of price action and I will half-heartedly trade this bounce. Tomorrow, we will get earnings from MAR and they will set the tone for the tourism industry. Higher fuel costs and a slowing economy should weigh heavily on the guidance. We will also get the initial jobless claims number. If unemployment continues to creep higher, the bulls will put their wallets back in their pockets. In today's chart I have highlighted a number of recent bounces. As you can see, one-day rallies have a tendency to fail. The market is still in a downtrend and you need to position yourself on the short side - longer term. I have reeled in most of my OTM call credit spreads and I am locking and nice profits. On any decent rally, I will reestablish positions. If you plan to trade this bounce, we need to see a higher close this afternoon with buying right into the bell. Focus on biotech stocks and take profits along the way. Oil is off its highs, AA posted better than expected earnings and the A/D has a positive bias today. Consequently, I believe the market will finish higher today. image

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