Tuesday’s Stock Option Trading Strategy!

There are times when you should halt your option trading - this is one of them. Take time to evaluate stock options. Yesterday, the market was able to stop the bleeding from last Friday. After a choppy open, buyers stepped than to buy stocks. By the end of the day a decent portion of last week's losses were recouped. After the close yesterday, and before the open today, earnings were released. For the most part, they were very positive and the market responded with the rally. AAPL helped the tech stocks, while BNI and UPS helped the transportation sector. American Express showed a 10% increase in earnings and DuPont beat as well. AT&T reported a 42% increase in profits after its acquisition of BellSouth. These are all very positive results that span many sectors. After the opening euphoria, sellers started to take profits. The S&P 500 is currently unchanged and the NDX is up 20 points. Clearly, tech stocks are relatively strong. In today's chart you can see the strength in tech stocks and I have outlined two horizontal support areas. You can also see how the QQQQ is meeting resistance at its current level and how it is also making a series of lower lows. That pattern indicates that prices might temporarily be topping out. Relative to the SPY, this tech index is much stronger. The SPY is nowhere near its recent high. I mentioned yesterday that the market could rally on a broad mix of positive earnings news. So far, that seems to be the case. Last week most of the national/regional banks announced earnings and all of the negative comments took their toll on the market. I believe that we will continue to see volatility for the next two weeks while the majority of earnings are released. Once the dust settles ann the future guidance has been analyzed, I believe the market will rally into year-end. There are times when cash is king - this is one of those times. The market has fallen very sharply three times this year. We don't know what's going to happen this time; however we do know that the other two times the market established a low in a relatively short amount of time and then it recovered quickly from that low. If you get short this market, you stand a chance of paying a lot of implied volatility and getting whip sawed. The better tactic is to wait patiently. As prices pullback, you evaluate the market as it tests key support levels. Once support is established you start getting long stocks that have held up relatively well and still have very strong upside momentum. When the recovery takes hold, these stocks will lead the way. We are also about to enter one of the most bullish periods of the year. If you are patient and the market continues to take out support levels, at some point you will determine that the bearish move is legitimate and you will be able to position yourself accordingly. Be patient and let the market tell you what to do. I'm still bullish and I believe the next big move is higher. For today, look for choppy trading. The good earnings news should provide support and even though I don't like the early reversal, I don't believe we will see a big slide today.

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