Stock Option Trading Strategy – Line up longs and shorts and wait for a breakout or a breakdown.

September 5, 2007
Author: Peter Stolcers, Founder of OneOption

Yesterday, the market put together a nice end-of-month/beginning-of-month rally that pressured shorts into covering. The price action was steady throughout most of the day; however, there was a pullback near the bell. This morning, prices were soft going into the open. Weak housing data and a lower than expected ADP employment index pushed prices lower. Personally, I don't lend much credence to the ADP report and weak housing data is already factored into the market. I have not heard one analyst state that they think the housing woes are over. Consequently, I see this market pullback as a reaction to a short-term overbought condition. At 1:00 p.m. CST an important piece of economic data will be released. The Beige Book will allow analysts to dissect economic activity across the country region-by-region. I believe the economic activity will be moderate. The market desperately wants a quarter point rate reduction by the Fed and many are calling for a half point cut. "The Street” can't get a good read on Ben Bernanke and analysts are engaging in heated debates as they try to predict his actions. This uncertainty is creating volatility on an intraday basis. It is conceivable that the market will pullback on news that the economy is doing well because that data might jeopardize a rate cut. If that scenario unfolds, I believe it is a buying opportunity. The Unemployment Report is another big piece of economic data that will be released this week. If the unemployment rate rises slightly, I don't see that as a major concern since it is below what most economists considered to be the "natural real rate of unemployment". That measure assumes that there will always be a percentage of people that are unemployed no matter how robust the economy is. If the unemployment rate goes up dramatically, there is legitimate cause for concern. The personal savings rate just barely ticked into positive territory after 26 consecutive months where consumers spent more than they make. If their jobs are in jeopardy, this "house of cards" could come tumbling down. Economic data and the FOMC meeting will drive prices during the next two weeks. The Fed's decision will determine the market's direction for the remainder of the year. Keep your powder dry and start lining up stocks on both sides of the market. There will be huge opportunities either way. In the chart you can see the horizontal support and resistance levels that you need to use as your guide. For today, watch the market's reaction to the Beige Book. I am expecting a big move off of the number. Given that the market is already favoring the downside, that direction holds an edge. image

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