7:50am (EST)
Every bull and bear market is different and when those trends are in place, option trading can be like catching fish in a barrel. Usually, the upside in bull markets can be extreme with explosive moves that shoot way past resistance levels. The same is true for bear markets as most investors panic and head for the exits. However, most investors don’t like shorting stocks because they don’t understand how put options work or the don’t get the concept of shorting. Using put options in bear markets can make you the same triple-digit returns as call options in bull markets so remember this down the road for those of you who don’t understand this strategy.
When bulls and bear markets correct or reverse course, there is usually a “trading range” that occurs following the explosive run higher or lower. These trading ranges can be hectic, confusing, nerve-racking, and can cause you a lot of sleepless nights and hours and hours or more research.
Geopolitical events, oil, natural disasters, and war can also cause markets to fluctuate. If you combine a trading range with these events, it makes it even more frustrating because volatility can also rise. However, it is important to remember that there will be a breakout or breakdown and this is when you will need to be ready. Yes, certain option trades will work in trading ranges but for the most part its best to limit your exposure and be patient.
Although we were encouraged by yesterday’s rally, there were some things we liked and some things we didn’t like.
The Dow managed to close above 12,000 by adding 178 points, or 1.5%, to finish at 12,036. The index traded up to 12,078 and the close above 12K looked pretty but the blue-chips are going to need some help.
The S&P 500 gained 19 points, or 1.5%, and settled at 1,298 after kissing 1,300.58 intraday. We were looking for a close above this level to 1,305 with the powerful open but once again the bulls were denied.
The Nasdaq also fell short of our expectations but finished with the biggest percentage gain by adding 48 points, or 1.8%, and closed at 2,692. The index traded to a high of 2,699 and we were looking for a close above 2,700.
So basically, we got one plus and two negatives. If we throw in the Financial stocks, we get another negative as many of them started off strong but faded for much of the day. This is the one sector the bulls need to participate this time around so we need to watch this action carefully.
Stocks get stuck in trading ranges along with the market and many of the potential trades on our Watch List are showing this. The good news is that we have pinpointed support and resistance so our targets are clear. We just have to wait for confirmation.
We are still in a bullish trend but we know it’s rare for markets to make a “V” off the bottom. Last week the S&P traded to a low of 1,249 and was down 55 points from the previous Friday’s close of 1,304. (Now you see why we wanted a close at 1,305+).
Since then, the index has made back the majority of those losses and has formed the perfect “V” in less than a week. However, like we said, Volatility can be hard to predict inside trading ranges so this could be the start of another leg up if the bulls can keep the momentum on their side.
]]>