One Option Trading Blog

A Great Bond Auction Saved the Day! Don’t Be Fooled By The Good Jobless Claims Number.

2009-07-09T16:45:00-05:00

Last week, the market dropped below major support when the Unemployment Report was much worse than expected. Job losses were 100,000 more than analysts had expected and bulls finally threw in the towel. Since March, they have denounced the Unemployment Report claiming that it is a lagging piece of information. Month-after-month, the news continued to disappoint and the unemployment rate has jumped in a parabolic manner. Weekly jobless claims have not subsided and traders have hawked the number each week in hopes of improvement. This morning, initial jobless claims dropped by 52,000 and it came in at 565,000. That is well …

Support Has Been Breached and Buyers Are Pulling Their Bids!

2009-07-08T16:31:00-05:00

Yesterday, the market started off on a weak note and it never recovered. It convincingly broke below the neckline of the head and shoulders pattern. That also represents the 200-day moving average. From a technical standpoint, the market is very weak. After an initial rally this morning, the market quickly reversed and it is testing the downside. Today, a 10-year bond auction is scheduled and we will have the results around 1 PM Eastern time. If interest rates continue to rise, the market will sell off. There is already a great deal of nervousness priced into the market and it is …

The Bears Have The Ball and Major Support Is Being Tested!

2009-07-07T16:17:00-05:00

Yesterday, the market declined early in the day and selling pressure from Thursday's weak Unemployment Report continued. As the day wore on, prices stabilized and buyers pushed the market back into positive territory. ISM services came in stronger than expected. Analysts had projected a reading of 46 and the number actually came in at 47. ISM services has steadily improved over the last few months and this might have provided a small spark to the market. The economic news this week is very light and initial jobless claims on Thursday will be the highlight. We are not seeing an improvement in …

Head & Shoulders Has Formed. Don’t Take Big Positions Ahead Of Earnings Season!

2009-07-06T15:27:00-05:00

This morning, the market is extending losses from Friday's weak Unemployment Report. The jobless rate rose to 9.5% and the economy shed 100,000 jobs more than expected. Until now, bulls have been able to discount the number calling it a lagging indicator. Month after month, the number has disappointed the Street and last week's number was the straw that broke the camel's back. The market has rolled over and a head and shoulders pattern has formed. If we close below SPY 89, the selling momentum will accelerate. There aren't any major economic releases this week and earnings don't really crank up …

Unemployment Rose More Than Expected - We Have a Head & Shoulders!

2009-07-02T14:11:01-05:00

Yesterday, the market was able to shrug off a worse than expected ADP employment index. Either traders completely discounted it or they didn't trust the number. An early rally tested resistance at SPY 93 and the market gradually backed off in the afternoon. This morning, unemployment rose more than expected and employers cut 467,000 jobs in June. That was 100,000 jobs higher than analysts had expected and the unemployment rate rose to 9.5%. The job losses were widespread across all sectors. After the release, the market fell 10 S&P points. As I mentioned yesterday, continuing claims have been running high and …

The Market Is Back Above Resistance - Expect Quiet Trading In the SPY 93 - 96 Range Next Week!

2009-07-01T16:21:00-05:00

Last week, the market broke below major support at SPY 93. It had been in a tight trading range and it looked like we might finally have a long overdue decline. Nervousness set in before a record $104 billion bond auction and the FOMC. The Fed stated that they would abandon their quantitative easing in September and that created selling pressure. If the Fed is not buying Treasuries yields could rise faster than they have and that would be bearish. As the week progressed, end of quarter window dressing and index rebalancing created buying pressure. Bond yields did not rise and …

Two Steps Forward - Two Steps Backwards. Keep Your Size Small!

2009-06-30T15:52:00-05:00

Yesterday, the market posted another solid day of gains. End of month buying and Q2 window dressing pushed the market right up to resistance at SPY 93. The move we have seen in the last three trading days has been very "artificial". Portfolio managers are buying stocks so that they don't appear to have missed the recent rally. They are also adjusting for index rebalancing. There hasn't been much news to drive the market. Last week, the Fed said that they will maintain their current interest rate policy. They will not be buying Treasuries past their September deadline and that could …

Lots of News Over the Next 3 Days. Keep Size Small Ahead of the Holiday!

2009-06-29T15:24:00-05:00

Last week, the market staged a nice selloff and it broke below support. The upside breakout above SPY 93 appeared to be a head fake and the market was rolling over. The selling continued Tuesday ahead of the FOMC. The Fed maintained its interest-rate policy, but it said that it would not purchase US Treasuries after the September deadline. It also stated that inflation is not a concern at this juncture. The market had a slightly negative reaction after the release. Traders felt that if the Fed stops buying treasuries, yields might rise faster than they have. Bulls will be dodging …

Window Dressing and Russell 2000 Rebalancing Sparked A Big Rally - Bears Need A Decline Today!

2009-06-26T14:08:00-05:00

Yesterday morning, the market briefly tested the downside after initial jobless claims came in worse than expected. After a one-week reprieve, continuing claims also rose. Within the first 30 minutes, those losses were erased in the market staged a massive rally. End of quarter window dressing and rebalancing in the Russell 2000 sparked buying. Funds need to purchase stocks three days early to account for settlement (T+3). While I suspected a rally, I did not think it would be nearly that large. On the close, buy balances pushed the S&P futures 10 points higher in the last few minutes of trading. …

Look For Strength Today and Friday and Weakness Ahead of the Unemployment Report.

2009-06-25T15:37:00-05:00

The market is still searching for direction. Yesterday, better-than-expected durable goods orders got things going. Analysts were expecting a drop and orders increased 1.8%. This is encouraging; however the base number is so low that many months of big gains will be needed to get us back to a reasonable level of activity. The Fed stated that it will keep its interest-rate policy unchanged. It will not engage in "quantitative easing" past its September deadline. From my perspective, this is good news. They were effectively printing money and that was putting downward pressure on the dollar. Furthermore, their actions were not …

FOMC Watch - I Expect A Rally The Next 2 Days and Then A Decline!

2009-06-24T14:18:00-05:00

Even though the market has broken key support, it's still struggling to find momentum. Monday, we broke below horizontal support and it appears that the breakout to new relative highs a few weeks ago was a head fake. Failed breakouts often produce sharp reversals as traders that were sucked in - bail out. Yesterday, the market was not able to follow through on Monday's decline. Traders are waiting to hear from the FOMC this afternoon. The Fed has gone to extreme measures (printing money, buying mortgages) to keep interest rates low and there is no way in heck they are going …

Start Scaling Into Put Positions. A Decline Is On The Horizon!

2009-06-23T15:36:00-05:00

Yesterday, the market broke major support and it closed on its low of the day. For the last few weeks, we have been caught in a very tight trading range and one way or the other, a winner would emerge. Bears now have the upper hand and serious technical damage has been done. As you can see in today's chart, the breakout above SPY 94 has failed. That's important because it sucked bullish latecomers into the market. Now that we have broken support, they will be bailing out of their positions. Profit-taking will also set in after a 40% rally from …

We Have a Breakdown - Start Buying Puts!

2009-06-22T16:01:00-05:00

Last week, the market staged a very gradual decline. Just when it looked like major support would be broken, buyers passively stepped in. They were able to keep the market from falling during quadruple witching. Rising interest rates are the concern and yields on the 30-year bond have climbed 1% in the last month. This week, the Treasury will auction a record $104 billion in 3-year, 5-year and 7-year notes. Our government has to finance a $1.8 trillion budget deficit and these auctions will continue far into the future. Every other week, bulls will be dodging bullets in hopes that the …

Next Week Is Filled With Economic Releases and Events. Here’s What To Watch!

2009-06-19T13:59:01-05:00

This week, the bears were able to flex their muscles and they pushed the market below support at SPY 93. It looked like they might be able to generate selling momentum and all they needed was a late day selloff yesterday. That didn’t happen and the market showed its resilience as buyers gradually stepped up. Before Thursday’s open, continuing jobless claims dropped by 148,000. Later in the morning, LEI and the Philly Fed came in better than expected. The S&P 500 popped five points on the news. These improvements sparked buying and the market gradually added to its gains throughout the …

Bears Need A Late Day Sell-Off or We Will Drift Back Into the SPY 93-96 Range!

2009-06-18T16:31:00-05:00

The last two weeks the market had been in a very tight trading range between SPY 93 and SPY 96. One way or the other, we were bound to break out this week. The market has run out of "drivers" and profit-taking has set in. The price action has been negative this week and traders are getting nervous as interest rates continue to climb. Yesterday, the market closed below horizontal support at SPY 93. It is just above the 200-day moving average and the uptrend line from March. If we close below SPY 91, selling momentum will accelerate. Last week, bulls …

Bears Have Bulls On the Ropes - A Decline Today Would Deliver A Knockout!

2009-06-17T14:01:00-05:00

Wednesday 10:00 pm ET - Monday, the market started off on a weak note and it did not stage one of its typical late day rebounds. We finished below key support at SPY 93 and the bears were close to a breakdown. They just needed another decline to gererate additional selling pressure and they got it Tuesday. There weren't any news events to justify Monday's decline and that strengthens my bearish sentiment. The market is tired after a 40% rebound from its March lows and it has run out of "drivers". Better than expected earnings and stability in the financial sector …

Scale In To Bearish Positions On Continued Market Weakness!

2009-06-16T16:26:00-05:00

Yesterday, the market started off on a weak note and it did not stage one of its typical late day rebounds. We finished below key support at SPY 93 and the bears are close to a breakdown. If the market stages another decline today, the selling pressure will accelerate during option expiration. There weren't any news events to justify the decline and that strengthens my bearish sentiment. The market is tired after a 40% rebound from its March lows and it has run out of "drivers". Better than expected earnings and stability in the financial sector have run their course. The …

This Market Breakdown Looks Like The Real Deal!

2009-06-15T16:07:00-05:00

The market has been in a very tight two-week trading range. Bulls were not able to add to gains and every time they try to stage a breakout, sellers stepped in. Likewise, the market tried to break down and each time, buyers supported prices. A tug-of-war of this nature ends with a victor and typically a substantial breakout/breakdown. There isn't any major news to justify the big decline this morning and in my eyes that makes it even more legitimate. Decliners outnumber advancers by an 8:1 margin and I do not believe we will see a snapback rally this afternoon. If …

The Market Is Searching For Direction - Expect A Quiet Day!

2009-06-12T15:12:00-05:00

The market has fallen into a very tight trading range. In today's chart, you can see the back-and-forth action from SPY 93 - 95. Every time the market tries to sell off, buyers step in and a late day rally recovers the losses. The last two days, the market is tried to break out. Each time, sellers have pushed the market back below resistance. Bulls have momentum on their side and they point to better-than-expected earnings last quarter. Over 70% of the companies beat earnings estimates. They also point to economic data that is improving from depths not seen in decades. …

30-Year Bond Auction This Afternoon - It Should Keep The Market From Breaking Out!

2009-06-11T15:31:00-05:00

Yesterday, I mentioned that the market action would be dictated by the ten-year bond auction. It did not go as well as planned and yields jumped to 3.99%. As that happened, the market declined. Later in the afternoon, the Fed released its Beige Book. It noted that 5 districts out of 12 had moderating conditions (activity was not deteriorating as fast as it had been). Credit conditions remained stable or weak and lending his tight. The S&P 500 futures were down as much as 12 points after the bond action. However, in the last hour of trading, the market was able …

Watch For Active Trading This Afternoon - Bond Auction and Beige Book!

2009-06-10T15:24:00-05:00

The market has fallen into a very tight trading range. There aren't any "drivers" in either direction and traders are waiting for a breakdown or a breakout. This morning, mortgage applications declined 7% from the prior week and that is the biggest drop since November. Mortgage rates have climbed more than 1% in three weeks and that is weighing on homebuyers. Interest rates will play an important part in this week's trading. Yesterday, the $35 billion three-year note auction went well and it was oversubscribed by a factor of 2.8. Yields dropped slightly and the market tried to rally on the …

Watch The Bond Auctions Wed and Thurs - The Market Will React!

2009-06-09T15:56:00-05:00

Yesterday, the market started out on a very weak note. Selling from Friday's Unemployment Report spilled over into Monday's trading. There wasn't much in the way of economic news to influence the market. The early momentum was established and it looked like we would have a negative day. Late in the afternoon, buyers step in and the market finished in a positive territory. This price action signals that buyers are still waiting in the wing. There isn't much news this week and we have fallen into a choppy, light trading pattern. Tomorrow, there will be a 10-year Treasury note auction and …

Higher Interest Rates Are Putting Pressure On The Market - Watch SPY 93!

2009-06-08T16:34:00-05:00

Four out of the last five Mondays have produced big gains. Last week, China's PMI posted its third consecutive month above 50, indicating economic expansion. Our market was already poised for a higher open when construction spending jumped .8% in April (analysts expected -1.3) and March's number was revised higher. The market broke out above major resistance at SPY 94 and short covering ensued. As the week wore on, the market was not able to add to those gains. Traders were cautious ahead of the Unemployment Report. In the last five months, the report has had a positive effect. This time …

The Problem With Debit Spreads.

2009-06-05T15:36:01-05:00

In today’s option trading blog, I will look at positions that last three months or less and I will describe why I don’t like debit spreads. A debit spread is created by buying a closer to the money option and selling a farther out option. There are a number of issues I have with this strategy. If I’m looking for a big move and I’m considering an out of the money spread, why not just buy the long call/put? Chances are that I’m capping off my profit and receiving very little in return by selling an option that is two strikes …

Covered Calls - Should I Roll Up and Out?

2009-06-05T15:34:00-05:00

My question is about the appropriate exit strategy at expiration of a covered call I've written. When is it advisable to let an option get exercised; to roll straight out by purchasing the option at the same strike and selling another call farther out in time; or roll up and out. A few months ago, I sold an option on April 120 covered call. The premium at the time was about $7.50/share. I let the option become exercised at about $160, I think. Since it was so deep in the money, I decided not to roll up and out. But why …

Employment Beats Estimates - Higher Interest Rates Are Keeping A Lid On the Market.

2009-06-05T15:27:00-05:00

This morning, the long-awaited Unemployment Report was released. It came in much better than expected. Analysts had projected 520,000 job losses in May and only 345,000 jobs were cut. The unemployment rate spiked to a 25-year high of 9.4%. Given the breakout earlier this week, I thought the market would be off to the races. After an early gap higher, the market reversed and it went into negative territory. Bond yields jumped on the news and traders are wondering if the Fed will stop its quantitative easing. As economic conditions improve, interest rates will rise. Next week, there will be two …

Use SPY 93 As Your Guide - If We Close Below It - Get Short!

2009-06-04T16:25:00-05:00

Yesterday, the market was set up for a weak open after Europe traded lower. Eastern European countries are on the brink of financial collapse and they are weighing on the rest of the EU. All European countries are fighting their own individual battles and they are not willing to extend credit to Eastern European countries. Latvia had no bids for its T-bill auction and it is in dire shape. This morning, the ECB said it expects a much sharper recession this year than earlier forecasted. The central bank's staff forecasts a 5.1% drop this year in economic activity and 2010 will …

The Market Is Testing The Breakout - A Close Below SPY 93 Is Bearish!

2009-06-03T16:01:00-05:00

Until today, the market has been able to hold onto the gains from Monday. Positive economic news from China and a better-than-expected instruction spending number pushed the market through major resistance at SPY 94. This three-month rally has been based on an economic rebound in China, stabilization in the financial sector, a deceleration in the rate of economic deterioration and corporate earnings. The news from China was good, but not great. There Purchasing Managers Index declined month over month and it is barely above 50 (economic expansion). I doubt that one country can pull the entire world out of this mess. …

This Breakout Above Major Resistance Will Spark More Buying!

2009-06-01T16:19:00-05:00

Last Friday, the market put in a rather lackluster day until last 15 minutes of trading. A huge buy program propelled the S&P 500 futures more than 10 points right into the closing bell. Traders didn't want to go home short over the weekend and I suspect that some of the buying was speculative ahead of Asian economic releases. China released its PMI number and it fell slightly to 53.1 from 53.5 in April. This marks the third straight month that it has been over 50, indicating economic expansion. The market liked this news and Asian stocks took off. The Chinese …

The Market Is Preparing For A Big Move - I Expect A Breakdown Late Next Week!

2009-05-29T15:29:00-05:00

Yesterday, the market put in a lackluster day until early afternoon. The results of the $26 billion 7-year bond auction were released and relative to Wednesday's bond auction, the "bid" was slightly better than expected. This auction was oversubscribed by a multiple of 2.6 and that is decent, but not great. Clearly, traders were tuned in to the results and when they were in line, they bought stocks. Interest rates are creeping higher as the treasury issues a mountain of debt to pay for stimulus and bailout programs. To no avail, the Fed has tried to intervene by purchasing treasuries. They …