Stock Option Trading Strategy – Keep size small. Short consumer, long tech and commodities.

There is not much news to drive this holiday lightened trading session. The expectation of a .25% rate reduction during next week's FOMC meeting is driving the market higher. As I mentioned yesterday, next week will be critical in determining the market's direction for the next few months. In addition to the FOMC, we will gain insight on how the housing slump and credit crunch have impacted the earnings of Goldman Sachs and Bear Stearns. They both release on Thursday, the day before quadruple witching. There is sure to be volatility next week. The market has broken out above the SPY 148 resistance level. The A/D is a positive 2:1 and everything looks good. Today's rally is taking place on very light volume and it feels suspicious. Before you get too bullish, you should look at today's chart. Each of the last three breakout attempts have failed. There isn't any news to justify this move and I suspect that we might see it drift back to unchanged for the day. Someone is bound to get nervous between now and the FOMC meeting. A pullback between now and then will wash out those who are buying into this rally. I am not short, but if I were the noose would be getting a little tight. This rally feels like short covering. Continue to keep your positions small. Stay long tech and commodities and short consumer stocks.

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