Stock Option Trading Strategy – Take profits on long positions if SPY 146 is broken.

August 23, 2007
Author: Peter Stolcers, Founder of OneOption

Yesterday the market put together a nice little rally. It was able to finish strong for the fifth day in a row. In the absence of any additional subprime lending defaults, traders have been able to control their fear. Wednesday after the close, Bank of America announced that it was making a major investment in Countrywide Financial. CFC and the S&P 500 futures jumped immediately on the news. That excitement spread to overseas markets and they all traded to the upside overnight. This morning, the futures open higher but steadily backed off after the open. I believe the bears are still trying to keep a lid on this rally. BAC’s investment was not worth a 10 point move in the S&P 500. That type of gain will need to be "hard-earned" through a day’s worth of persistent buying. After 90 minutes of trading, the market has been able to avoid an early reversal. As I've been mentioning, a move above SPY 146 is bullish. In today's chart you can see that we have moved above that pivot point. If the bulls can grind prices higher early this morning I believe they will scare some shorts into covering. That could fuel the market higher. Many of the financial stocks have regained their footing. If you get long this market, take profits along the way and sell your longs if the SPY breaks below 146. The market has come a long way in a short period of time and this bounce may be getting tired. . image . This market sell off is different from the one we saw in March. Back then, the subprime “bubble” was a phantom fear. This time around, there are dead bodies to legitimize the concern. This issue will take time to work off. The bears are aware that there is a crack in the dam and they will be more aggressive than usual. On the positive side, there is an abundance of capital waiting on the sidelines for the right opportunity. This sell off demonstrates the power of panic. Mortgages were depreciated so quickly that deep pockets didn’t waste time scooping up assets. I expect choppy trading and volatility until the FOMC. Credit conditions must improve before the meeting in order for the market to rally. I do not believe the Fed is going to lower rates. It will continue to view this as an isolated instance that affects a small percentage of overall mortgages. The greater economic picture is still solid. The only way the Fed will lower rates is if the economy shows signs of weakness. If that happens, the market could be in trouble. I will short any rally after the rate reduction because it means that the Fed is seeing actual signs of economic strain. The market has made dramatic moves in both directions during the last two weeks. Many traders are taking their end-of-summer vacation and the activity is likely to be thin. The earnings and economic releases are very light the rest of the week. This level (SPY 146) is neutral for both the bulls and the bears and we could stay here for a few days. If we deviate up or down, use that as your directional guide.

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