Friday’s Stock Option Trading Strategy!

Option trading should still have a bullish bias as the stock market adds to its capitulation bounce ahead of the weekend. Yesterday, the market posted nice gains as it followed through to Wednesday's capitulation rally. As you can see in the chart, the market was dramatically oversold. We now know that the weakness heading into Tuesday morning was caused by a massive $7B trading loss cover-up at Societe Generale. As the brokerage firm bailed out of its long position, it created an air pocket during light holiday trading. Before the market opened Tuesday, the Fed lowered interest rates in a dramatic fashion by .75%. We did not even see a rate cut of this magnitude after 9/11. The market popped up from its early lows and it tried to rally the rest of the day. After the close, Apple announced earnings. Last year, Apple accounted for 7% of the appreciation in the NASDAQ 100. It is known as one of the four horsemen. When its numbers disappointed in the street, the market plunged to test the opening lows from Tuesday morning. When that support level held, the capitulation rally was underway. As I have been stating, earnings from many other sectors will induce a rally. We needed to get away from the gloom and doom of the financial sector. Generally, the earnings and guidance has been positive. Yesterday, Microsoft announced stellar earnings. That helped to push the market higher on the open today. As I mentioned earlier this week, we do not want to see large gaps up. They are vulnerable to selling and if that momentum feeds on itself, this fragile rally could be jeopardized. I still feel that the market will rally today. The plan for fiscal stimulus has been announced, there is the possibility of another rate cut next week and the earnings have been decent. Now that the lows have been established, the greater risk lies in short positions. I believe the bears will be eager to lock in profits going into the weekend. By next Wednesday, I plan to be flat. I do not believe the Fed will lower interest rates again. Initially, the market will have a negative reaction. All eyes will be focused on Friday's Unemployment Report. The initial jobless claims for the last three weeks have been lower than expected and there is a decent chance that the unemployment number will be palatable. If the market swings dramatically from this level, I believe it will set up an excellent contrarian opportunity. In other words, buy big dips and short big rallies. For the time being, I am long and I expect a rally up to the SPY 140 level. Anything after that is a bonus. Today, we have seen the early shakeout. The bears wanted to keep the bulls honest and an early sell off has shaken out some of the capitulation buyers. Only a sustained rally will shakeout some of the bears and cause them to cover their shorts. I believe that it is possible late in the afternoon. Focus your longs of the strongest sectors from 2007.

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