9:00am (EST)
There have been numerous times this year we have seen the market move into a trading range and they are the hardest times to trade. After a big rally or a huge decline, trading ranges are common so it is important to recognize them but you still have to make small bets on a breakout or breakdown. At the beginning of November, we said the market may have peaked and there could be a pullback but it was a little more severe than we had anticipated. Instead of falling to the middle of the current trading range, the market fell to the bottom of it which has people making bets for a further decline.
Some of the recent headlines support the bears (Europe) while others make a strong case for the bulls (US economic data). However, the global picture is still mixed with new worries over China popping up and a divided White House here at home. The outlook for 4Q earnings is worsening the longer Europe stands by and does nothing but with yesterday’s bounce, there were signs the market is trying to disconnect itself from Europe’s woes.
The good news with the current range is that we were able to recognize this so we weren’t too surprised to see the bulls hold support – just like the bears have held resistance at the top of the trading range. With big bets being made at both ends of the spectrum, the bulls betting on a breakout at the top while the bears are looking for a breakdown at the bottom, it appears the market is ignoring both sides.
The Dow added 45 points, or 0.4%, to finish at 11,868 while the S&P added 4 points, or 0.3%, to close at 1,215. The Nasdaq gained a couple of points to settle at 2,541.
The S&P Volatility Index (VIX, 25.11, down 0.93) dropped another 3.5% and is at a 3-month low. Although most of the pros will tell you the VIX is a useless indicator, we have used it to make amazing market calls all year long and the index has also helped us identify the current trading range. We have been mentioning the VIX a lot of the past few weeks and we have said since October when the VIX was in the high 30’s it would come down to 22.5 according to the charts.
The problem is there hasn’t been a market “rally” which usually happens with a declining VIX, thus the trading range.
The other interesting tidbit we noticed yesterday were the gains the Russell 2000 made. The small-cap index jumped 7 points, or 1%, to close at 716. There is a mountain of support at current levels but a drop below 700 could easily lead to 650. This would equate to a 7% selloff so it was vital the bulls hold this area.
We stayed pat all week as far as opening new positions but we expect next week to be different. Although we aren’t expecting a breakout, we do feel the market can make a run back to the top of the current trading range. It may take a more than a week though because we aren’t betting on Santa but a yearend into January rally instead – as long as support holds. We have covered the downside targets as well so everyone should be aware that if a rally does fade or support flops, we will be ready to buy put options.
We do have one of our covered call trades that will likely be “called-away” today for a 14% gain and we have 3 NEW TRADES we will be releasing shortly after the open for our Weekly Wrap subscribers. One of the trades may be a carry-over play while the other is a stock we played a few months ago. If we are able to close the one position today, it will run our track record to 16-0 for closed trades for the 2011 Weekly Wrap portfolio.
For those of you who are not subscribers to the Weekly Wrap, we told you we would be running some Holiday deals this month. Our first surprise is a 1-year membership to our Weekly Wrap for just $299. For current subscribers, you can upgrade your membership. This publication is normally priced at $599 so it represents a savings of 50%.
You can use the coupon code 5F181DD20D thru the end of this month to join and please make sure you choose the 1-yr subscription model. If you sign up this morning, you will have access to the 3 new trades we are releasing today.