Option Trading Opportunity After The FOMC

The stock market will retest the recent low and there will be an option trading opportunity to buy calls at the end of the week. Buy in the money calls that do not carry much time premium and scale in once the next bounce materializes. Last Friday, the market could not hold the capitulation rally that was underway. Strong results from Microsoft lead to an early market rally. As the morning wore on, investors got nervous heading into the weekend. By the end of the day, we were in a full-blown decline. As you can see in the chart, the bounce last week was very shallow. The VIX spiked, but we can expect a retest soon. That means that the market is likely to have an aftershock declined and I believe the table is set for that to happen this week. Tomorrow, durable goods orders will be released. The last two months they have been extremely weak. Those results could strengthen the market’s demands for another rate cut. A half point cut is expected and I don’t think we will get it. All eyes will be on the FOMC meeting. Lately, it seems as if the Fed can do no right. If they don't lower rates, they are perceived as being too hawkish. When they do lower rates, they are perceived as being in a panic mode. Regardless of what their actions are tomorrow, I believe the market will have a negative reaction. We are likely to test the lows from last week. Overseas markets were down anywhere from 2% to 4% overnight. Weakness is creeping in to all markets. Our decline last Friday might have been a bit overdone and this morning we are seeing a relief rally. Good news is hard to find and I do not expect this rally to hold going into a close. There are too many potential landmines this week. There is a chance that Friday's Unemployment Report will provide support to the market. The last three initial jobless claims reports have been decent and that should result in an acceptable employment number. End of month/beginning of month fund buying could also add a little support. Option Analyst - Larry McMillan mentioned that the last week in January and has typically been bullish when the "Santa Claus Rally" fails to materialize. I believe that earnings have been decent and that this oversold condition is reaching its end. One more retest of the lows should shake out investors and attract bears. Once that level has held, a sustainable rally from that low could materialize. Short covering will fuel the initial rally. To recap, I am bearish for the next three to four months. I believe that there are deep issues that need to be resolved. In the short term, I believe the market is oversold but it has one more decent declined left and it. It will test the lows after the FOMC announcement and it will bounce after the Unemployment Report. The market has a chance to rally to SPY 140 and then to SPY 145 before running out of steam (end of February). Once that happens, we will be in a position to have another down leg. I am stepping aside right now and I am looking to get long after the FOMC meeting. I believe the next rally will be much more sustainable than the one we saw last week.

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