Be Patient With Your Option Trading – Overnight Earnings Should Support The Market.

April 23, 2008

Yesterday, the market took a breather after a big run up last week. The earnings news was generally good (STLD, AKS, and, DD, CME, SII, MCD), however, the market already anticipated that.

Overnight, YHOO came in as expected and BRCM, YUM and RJF beat estimates. This morning, BA, GD, and FCX beat estimates. UPS came in as expected, but lowered guidance and provided a rather dim economic forecast.

It seems that stocks that have been posting great numbers have attracted a lot of buyers and they are overbought heading into the number. Conversely, sectors that have been beaten down are oversold and worst-case scenarios are priced in. In general, strong stocks have sold off after their earnings release and weak stocks have rallied. Momentum players are dominating the trading action and that has lead to the overbought/oversold condition.

The market did not have much news to trade off of yesterday. Once the downward momentum had been established, it continued in that direction. Near the close, buyers came in to support the market.

Higher oil prices are weighing on the market and yesterday’s decline started as oil rallied to a new high. This morning, oil prices fell after the release of the oil inventories number. As soon as oil dropped, the market rallied.

The only economic numbers worth mention this week will come tomorrow morning. Initial jobless claims will give us a feel for next week’s Unemployment Report. In the last three weeks, it has averaged 370,000. A similar number tomorrow would bode well for next week’s monthly Unemployment Report. Durable goods orders are expected to be flat after a 1.7% decrease a month ago. If the number comes in as expected, I believe that will also bode well for the market. We are currently in a bottoming process and the market does not want to see continued economic deterioration.

This afternoon, all eyes will be on earnings from: AAPL, AMZN, ALL, CMG, FFIV, NE, QCOM, and TEX. Tomorrow morning, AET, BDK, BG, CNX, DO, OXY, PEP, POT, SI, WHR, and ZMH will announce. I am expecting good results from all these companies; however, they may not rally given the earnings reaction we’ve seen from other companies that have posted good numbers.

I will reiterate my comments from yesterday. If the market closes above SPY 140, take a small long position and be prepared me to take profits. As the market gets closer to 144, the headwinds will get stronger. If the market pulls back to the 132 level, start scaling into long positions. We have seen two up gaps from that level and strong support is forming. I would be more aggressive buying dips than I would be buying breakouts. Watch earnings releases and if a company posts great numbers and pulls back, wait for support and then buy.

The market has started to calm down and I am expecting it to stay on the plus side today. Keep an eye on oil.


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