The bulls and bears battled to a draw on Monday ahead of this week’s possible market moving events. Although the numbers don’t reflect yesterday’s action, volatility picked-up as the Dow traded within nearly a 200-point swing from high to low. After a strong start, the bulls pushed the major indexes right up to their April highs before the bears drew blood late in the day. This type of action is expected to heighten over the next few days and one side will likely carry the market’s momentum for the rest of the year, if not longer.
The Dow finished with a 6 point gain and closed at 11,124 but traded to a high of 11,244. We were hoping for a close above the 11,200 level which we have been talking about for a few weeks and then 11,258. If we get an intra-day high of the latter number or a close above either, then we should see Dow 11,500-11,600 by year-end, at least. These upper targets represent resistance from July 2008. We also think if the bulls can get through this week holding support (11,000-10,800) then the index has a shot at 12,000
The S&P 500 added a free throw (1 point) and settled at 1,184 after touching 1,195. We are looking for a close above 1,200 and then 1,220 which should clear the way for a test of 1,300. The index will run into resistance at 1,250 but we expect it to be somewhere in this upper neighborhood by year-end. The S&P held the 1,175 level once again and any dips to 1,150 should be considered buying opportunities if these levels hold on weakness.
The Nasdaq failed to finish in the green and slipped nearly 3 points to end the day at 2,504. The index traded to a high of 2,532 which was just short its 52-week high of 2,535. We said in our Weekly Wrap the index was the first to confirm a new bull TREND and we will talk about this in a minute. We already have 2,600-2,700 in our sites for Tech but a run to 3,000 could be in the cards for 2011 if support holds.
We wanted to take some time to explain the current market environment and why the next few weeks are important. Since we have a lot of new faces we wanted to explain a few things about our track record(s). We thought if we showed you this three-year graph in would help explain things a lot better, visually.
As you can see, we are very technical driven when following the market and we look for trends to help establish which side of the market we want to be on. We are neither, bullish, or bearish, we just follow the trend because 75% of stocks follow the market. If you look at 2008, the market went straight down. This is when the mortgage meltdown was just occurring and some of our biggest trades ever were in Lehman Brothers, Merrill Lynch, Freddie Mac and Fannie Mae. These stocks were trading in the $60’s and $70’s and up and now Lehman’s is bankrupt and Freddie and Fannie are trading for pennies. In other words, most of our trades were put options and our success rate was near 90%. We hit on 126 trades out of 140.
In 2009, after the financial stocks had gotten beaten down to single-digits, the casino stocks were dirt cheap and Tech had collapsed. After some extreme selling-pressure, the market started to go back up and made a strong move off the lows. We played the market last year with mainly call options. Our track record was 72% as we hit on 172 out of 238 trades.
This year, if you look at the chart, for 2010, the market has stayed in a tight trading range. These trading ranges can be stressful and since April we have been telling you this. However, we have also experienced some extreme volatility during this time due to the May “Flash Crash” and all of the bickering between Congress and Wall Street. During these times or when there is no TREND, trading options is a little harder because they are time sensitive. So, even though we have missed on some trades this year, our technical analysis has been spot on for the market and the stocks we follow.
Due to the lack of direction, our results are pretty much even for 2010 and our success rate is about 60% on just over 100 trades. Folks, this is all you can ask when the market is stuck in a range. We try to stay even keel and keep our emotions in check when we know we are in a trading range and we take less trades to reduce risk. We also only trade a set number of contracts or a certain amount of cash on each position, no matter how good the trade looks.
All of our recommendations are time stamped and dated for every trade and we don’t try to sugar coat anything. If we blow a trade, we tell you, and we try to learn from it. We have winning streaks and losing streaks and choppy streaks but overall we don’t use smoke-and-mirrors to hide our wins and losses. Our results are the hands played and how the market dealt it. We do not know of many option websites who post their recommendations but we do because it establishes trust.
Our goal is to hit on over 70% of our trades while averaging triple-digit returns. How much volatility or the trend will determine our results. It’s that simple. Our editor-in-chief has over 20 years of market experience and our research team is full of some bright minds so we have seen just about every kind of market.
As we explain in our trading manual, How to Trade Options on Momentums Stocks, once a stock or the market breaks out of a tight trading range after a long period of time, the move is usually pretty dramatic to the upside or downside. Inside of a trading range, we are trying to figure out which way the market will break. Once we get a clear sign, the rest is easy.
Trading ranges are tough and they can wear on the best traders in the world but there is good news if this rally can hold.
The market has tested support and resistance about 6 or 7 times during this range but we have been telling you since September that there was a real good chance we would TEST the April highs this time around. Although we haven’t broken out to new highs, this time of year is normally the best six-month period for stocks.
Over the past 60 years, the market has done well, on average, from November through April with November being the second best month for the S&P 500. This month is also the third best month on average for the major indexes. December is an even better month and rates as the best month for returns on the S&P and #2 for the Blue-Chips and Tech. Mid-December is usually a bullish time for small-cap stocks so we shall see.
We still need to see some strength from the Financial sector, which got whacked again yesterday, but all signs are pointing towards a market jailbreak for the bulls. Although we have seen better economic environments for bull runs, the trend has been up for 6 weeks and we could be on the verge of major breakout. That, or we will see the Mother of a correction, but the charts aren’t saying that.
As we head to press, Dow futures are up 54 points which should get us a 70 point open for the index. The S&P 500 futures are up by 7 while the Nasdaq futures are up 12 as we head to press. Subscribers, check the Members Area for the trade updates.]]>