Geopolitical events are scary and they make investors and the stock market nervous.
The bears used the recent turmoil between the two Koreas to push the market back to support levels on Tuesday as things heat up between the North and South. We were watching the news when we hit the hay Monday night and we woke up on short sleep knowing the market would probably be in a pickle once the opening bell sounded.
When news broke that North Korea had launched a direct attack on South Korea, U.S. futures tanked while the overseas markets folded like a cheap lawn chair. We thought there was a chance Tech might save the day as the Nasdaq was holding up well, but that quickly faded after the market got the latest minutes from the Federal Open Market Committee (FOMC) meeting late in the afternoon.
The “group” lowered their expectations for the economy by saying commercial and residential real estate remains weak while credit conditions remain the same which was a polite way of saying they suck. The FOMC said little to justify the $600 billion QE2 program that Bernanke continues to defend and the market failed to catch a bid.
There was some good news though…the market held support.
The Dow fell over 140 points, or 1.3%, to settle at 11,036. The index traded to a low of 10,992 as it danced around the 11,000 level before closing above it. Check.
The S&P 500 dropped 17 points, or 1.4%, to finish at 1,180. We were looking for the index to hold 1,173 and it did. The low was 1,176. Check.
The Nasdaq got hit for a 37 point loss, or 1.5%, and closed at 2,494. We didn’t like the fact the index closed below the 2,500 level but we mentioned further support was at 2,450. Tech traded to a low of 2,483. Check minus.
It is important to note we are trend traders which means we do really well when there is a trend and we try to stay even in flat and choppy markets by playing both call and put options. We turned bullish in early October and we have used the momentum to establish long positions that have January, March and April expiration dates. We have closed a few winners along the way and many of our trades held up beautifully yesterday.
We did “flinch” on one trade (when we said not too) and took profits on a half position but the trade had gained over 100% in under a week! We still have the other half open and we will enjoy further gains but it is important to take some risk off the table when you see such strong gains.
As far as our other open trades, some are showing double-digit returns while a few are down single-percentage points. The important thing about yesterday’s action is that we didn’t lose our cool. Support held and we rolled with it. This doesn’t mean things can’t turn on a dime or that the selling pressure is over, it just means we have a plan.
Here is what we said last Wednesday (11/18) and it is important to remember. We had a strong feeling we would be printing this one up again as soon as we wrote it.
“The other part of the story was to remind you that things could get volatile in the market. On Black Friday, 2009, the Dow fell nearly 300 points in a half session and traded in a range of 10,454-10,179 before finishing 150 points down. The index hit a low of 10,207 by the second week of December before touching 10,600 by year-end and then 10,763 by mid-January 2010. And here we are now.” (END)
The current action can only mean two things. We follow last year’s pattern and the market stays in a “tight” trading range with a shot at heading higher, or, the market breaks our second levels of support and we finish the year at lower levels.
They are Dow 10,800; S&P 1,150; Nasdaq 2,450-2,425.
We also realize support levels can be “tested” or “stretched” and the talking heads are already pushing the panic button. Many are calling for the end of the “rally”.
Well, not so fast. The bears could delay their hibernation but we doubt the bulls go down without a fight.
We also have an explosive trade that we are profiling on our Watch List this morning and we may make it an official recommendation shortly after the open. The front-month options (December) were relatively quiet in this well-know name but the January and March option chains saw over 100,000 contracts trade on one particular strike price. The stock is currently at $15 but bets are being made on shares going much higher. In fact, if shares can reach $22 on a rumored buyout then these options will make 10 times your money. We are serious. If you are not a current subscriber, you may want to take a look at this one.
As we head to press, Dow futures are higher by 74 points to 11,088 while the S&P 500 futures have advanced 9 to 1,187. The Nasdaq 100 futures are at 2,136, up 17.