Market Treading Water – Option Traders Watch The Wedge.

February 28, 2008
Author: Peter Stolcers, Founder of OneOption

Another round of bad news is weighing on the . are wondering if the wedge breakout will hold. Today, the GDP and initial jobless claims numbers were weaker than expected. The US economy slowed sharply in the fourth quarter growing at an annual rate of .6%. This is the weakest pace in five years on and inflation adjusted basis. Consumer inflation was revised higher to 4.1% on an annual basis. Initial jobless claims rose to 373,000 when the 350,000 was expected. Yesterday, durable goods orders came in weaker than expected. Before that, the PPI and CPI revealed that inflation is hot. In his testimony before Congress, the Fed Chairman sees weak economic conditions ahead and he is prepared to cut rates if needed. Today, he also discounted the likelihood of stagflation. Overseas markets were mixed. Europe was down 2% on earnings concerns while Asia was up by about 2%. The fact that the bond insurers were able to raise capital and maintain their credit rating removed some risk from the market. That resulted in a reversal Friday and strength Monday and Tuesday. For the time being, the market has been able to shoulder weak economic news. It won't be able to dodge bullets forever and it needs help from the government or private the private sector. The credit crisis can only be solved with time and money. If no one is willing to accept risk at this stage, the continual pounding of weak economic news will eventually wear out stock buyers and we will hit an air pocket. If there is outside investment flowing into these companies now, the market will be able to tread water for a few months while we determine if the current write-downs were passive or aggressive. There are signs of improvement. China's investment in Morgan Stanley, Abu Dhabi's stake in Bank of America, Warren Buffett’s lowball bid for bond insurers and the UK's nationalization of Northern Rock are a few examples. For now, the market has broken out above the wedge. I would view that with a skeptical eye until we see a close above SPY 139. The closer we get to SPY 145, the stronger the winds will blow. That is a major resistance level. Déjà vu: stay long agriculture, energy and metals. That is the only way to play this market. If the market rallies, they will lead the way. If the market falters, they will hold up relatively well and you'll have time to exit without sustaining large losses. If the market falls below SPY 133, close out your long positions. image

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