Option Traders – Sell Call Credit Spreads On This Bounce.

May 27, 2008
Author: Peter Stolcers, Founder of OneOption

From its peak a week ago, the market has been steadily drifting lower from the SPY 144 level. That resistance is reinforced by a five-year uptrend line, the 200-day moving average and a horizontal resistance level that dates back over a year. This morning, prices are trying to rebound as oil pulls back slightly. We saw this same pattern last week and when oil jumped higher the next day, the market quickly retreated. Last week, the FOMC minutes painted a bleak picture. They raised their expectations for unemployment and inflation while lowering their estimates for GDP. They also voiced concern over inflation and they implied that the rate cuts have ended. This week contains many economic releases. This morning, consumer confidence plunged to a 16-year low during the month of May. Home sales rose for the first time since October; however the rate was still 42% below last year's level. New home prices fell 14% in the first quarter. Given the Fed minutes, I am expecting weak economic results this week. Earnings releases will be dominated by retail stocks. In general, the numbers have been dismal and results could weigh on the market. Financial stocks have been getting hit and many are trading at their lows from March. This morning, Bank of America cut its outlook for Lehman, Goldman and Morgan Stanley. The S&P 500 futures have lost 60 points in the last five days. Today's move feels like a bounce from an oversold condition. Tech stocks are leading the way, but the action is sluggish. Trading volume is light after the holiday. There is a chance that the market will hold its gains today since there are two advancing stocks for every loser. I am not buying into this rally. There is too much negative news and the momentum from last week will keep the bulls "at bay". The economic and earnings releases will be negatives the next few days and there is seasonal weakness ("sell in May and go away"). The one minor positive is end-of-month buying. Take advantage of this rally and look for OTM call credit spread opportunities. I would not be surprised to see the market weaken by the close. image

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