9:00am (EST)
If you trade options or have ever been exposed to volatility then this isn’t your first rodeo as far as the market. As an option trader you can make a pretty good living by doing a lot of homework and chart reading but no matter how strongly you feel about a trend change or a pause in a trend, you don’t know exactly when it is going to happen. However, you can prepare for one.
The market traded in the red for much of the day on Wednesday with the Dow and Nasdaq making a brief trip into positive territory while the S&P never made it above water. The Dow managed to squeak out a small 6 point gain to close at 12,239 while the Nasdaq was down 8 points to 2,789.
The S&P was down a little over 3 points and settled at 1,320.
We wanted to spend a little more time on the S&P today because it is the most widely followed index of the 3. We have been saying for months that the S&P was headed to 1,325 and we mentioned how the index traded to a high of 1,324.87 on Tuesday. Folks, if you can come within 0.13 points of nailing a target months out, it is incredible feat but we are a little disappointed this morning.
We have also been saying that if the S&P 500 can break 1,325 then the index has a shot at 1,350. We also said that next week was making us a little nervous because it was February options expiration week which has been sketchy in recent years.
Our “thinking” going into yesterday’s close was that the bulls had two Aces in the hole with Cisco Systems (CSCO, $22.04, up $0.05) and Akamai Technologies (AKAM, $47.99, down $0.11) reporting after the bell. We figured if the two Tech giants could meet and beat expectations and maybe raise their forecasts going forward then 1,350 would be a cakewalk for the S&P.
It was a beautiful setup going into the turn but the bulls got “rivered” by the bears and are looking to win a big pot this morning.
We weren’t worried about Cisco’s numbers, we expected them to beat expectations, but we were surprised by their revenue outlook. The company had a lousy quarter last time out so you figured they would clear the lowered bar. For years the company had the nickname “beat by a penny” because they had a grasp on their business model. Cisco has a lot of issues and weren’t counting on them too much to power the market higher. The stock has been “dead money” for awhile as the company tries to figure out its mess but shares could fall under $20 today.
The scary thing is, Cisco might not be a bargain under $20.
As far as Akamai Technologies, well, we were shocked to say the least.
The company had a fantastic quarter, beating expectations by 2 cents and revenue by $1 million. However, we feel Akamai blew it for their shareholders by sandbagging their numbers. The company said current quarterly revenue would come in at $265-$275 million which was below estimates for $284 million. Wow.
Just like we report the good with our option recommendations, we have to report the bad as well. We recommended Akamai call options ahead of earnings and they will get hit by a truck this morning. Usually these things don’t work out too well because of the severity of the hit but options are a great speculation tool.
We liked the Akamai trade on a meet-and-beat on earnings and a raised outlook but we also liked the trade because the company is still a takeover target in a HOT sector. We have been waiting for a year for somebody to scoop this one up on the cheap and maybe the rumor mill heats up or somebody steps up to the plate over the next month as shares are getting a 10+% haircut this morning.
Given this backdrop, we don’t need to tell you that the futures are pointing towards a nasty open. Of course, Tech will take a licking and news of Microsoft (MSFT, $27.97, down $0.31) and Nokia (NOK, $11.73, up $0.45) hooking up to offer more Smartphone’s won’t help the bulls.
The good news is that there are several layers of solid support the bears will have to break through to change the trend. We haven’t mentioned support for the major indexes for a few days because we have been so focused on hitting our targets. Although Dow 12,300-12,350; S&P 1,325-1,350; and Nasdaq 2,850-3,000 remain our near-term targets, we need to mention support as well.
The bears are awake and these will be the first set of numbers they target. For the Dow, we are looking for 12,100-12,000 to hold and for the S&P we are watching 1,307-1,300. As for the Nasdaq, 2,750 but more importantly 2,700. If these levels are breached then we will go over the next wave in our 1pm update.
There will be a lot of talking heads trashing Tech today and they will be calling for a pullback for the market. Remember it will be the same knuckleheads who said the same things 3 weeks ago as the Dow struggled with 12,000 and the S&P fought 1,300. Not us, we said rock on.
The key for us will be keeping our emotions in check which we have already done by closing half positions and placing hard stop targets on other trades that are up. We will have a few trades that could suffer but also remember we have been saying since October the bull trend could last until April. Again, we are just showing a little respect for February options expiration week is all and we like to keep an eye on our rear-view mirror.
If the market can hold support then maybe there is a chance the bulls still have one last blow-off rally to get us to our price targets. Of course, if the market struggles with holding support then we either continue lower, bounce back, or fall into a trading range. It sounds simple but there are a lot of curveballs coming…good and bad.
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