9:00am (EST)
For some reason the Beatles were on our mind this morning…
The market continued its predictable, yet, choppy way of trading yesterday as the bulls finally played some offense and scored a triple-digit win for the Dow. We weren’t really surprised because the bears have been on patrol for a week and the bulls were due for a big win.
Yesterday’s gains weren’t spectacular though and came on the heels of M&A talk as the bulls merely pushed the indexes to short-term resistance. However, it did snap a five-session losing streak for the Dow and showed the market could continue to be range bound for a few more weeks.
The Dow finished Tuesday’s session with a gain of 104 points, or 1%, to close at 10,405. The index traded to a high of 10,480 at one point, a pop of nearly 180 points, but finished just above our 10,400 target. Once again, the bulls and bears will play see-saw with until we get to 10,600 or 10,200 on the index.
The S&P 500 added 13 points, or 1.2%, and settled at 1,092. The index kissed 1,100, again, and quickly faded which was a good sign for the bears. The index is still below its 200-day moving average, as is the Dow, and will need to break through 1,100 if the bulls are going to extend their one-day run.
The Nasdaq advanced 28 points, or 1.3%, and ended at 2,209 and above our near-term target of 2,200. The Tech-heavy index traded up to 2,225 which was right in the area of its 200-day moving average with 2,300 serving as another layer of resistance. Support is still at 2,150.
One thing we wanted to talk about this morning is the current market compared to 2008 and 2009. For those of you who are new subscribers or new to the market, 2008 was a down year for the market. It was the year Bear Sterns and Lehman Brothers went down, the housing market’s bubble was just beginning to burst and the economy dropped on a dime. The world came to a screeching halt. Put options worked well, and there was very little choppiness. Take a look at this Dow chart for 2008 and you can see it was all downhill.
In 2009, the sun started shining, banks got bailouts, Americans got “stimulated” and everything came up roses as the market rebounded swiftly. Call options worked well as you can see from this Dow 2009 chart:
As we started 2010, the market was still in an uptrend and we stayed long and strong until the end of April which is when we started turning a little bearish. There was a big correction in May which we took advantage of, but since then the market has stayed in this tight trading range.
The problem with range-bound markets is that it makes option trading a little tougher because the market is not TRENDING and you have to take your profits quicker. There have been times we have pushed a few trades this year but it is only because we are still trying to get ahead of the market’s next big move. These are the times where you see the bigger returns on your option trades, ones that return 400%-500% or more.
We always target 100% return for our trades but we have come to the conclusion that 2010 could turn out to be choppy for the rest of the year. Although we still believe a nasty little correction could take the Dow below 10,000, we will just have to wait and play what the market gives us. This means we have been using a mixture of call AND put options.
There is also the chance the bulls breakout in a major way as November will bring new elections and Christmas is normally a bullish time for the market.
To sum things up, it means we may have to take profits, quicker, in a market like this and limit our losses on the higher premium option trades if they start to move against us. This means we may only target 50%-100% returns while we stay range bound. Of course, we are still going to play cheap out-of-the-money options on stocks that appear to be on the cusp of a major breakout or breakdown, but the number one goal is to make money – no matter what the market is doing.
As we head to press, Dow futures are showing a 30 point pop and are at 10,388 while the S&P 500 futures are up 4 points to 1,093. The Nasdaq 100 futures are higher by 3 points to 1,843.
We will be back at 1pm with a look at specific stocks and economic news, but we have another NEW TRADE this morning! Subscribers, check the Members Area for the updates.
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