July 29th, 2009

"I'm not even kissing up when I say it's about the best book on option trading I've read."  ~ Aaron James, Eastside Financial Group in regards to "Commodity Options" now available through all major book outlets

More digestion, little momentum

Tumbling Asian markets and freefalling crude oil kept tabs on the U.S. equity rally, but there is a certain lack of enthusiasm behind the selling.  Accordingly, there are likely to be a lot of nervous bears in this market....and another extension of the short covering rally isn't out of the question. 

The market started the day on bad footing with news from the Commerce Department suggesting that orders for big-ticket items have slide by 2.5% in the month of June.  The decline in durable goods orders is being attributed to a lack of demand for commercial aircraft and a struggling auto industry. 

It is important to point out that the stock market normally finds a bottom well ahead of the economy.  Accordingly, negative economic readings may not necessarily translate into immediately lower stock prices.  In fact, mixed economic news may be enough to keep a floor under pricing.  According to Russell Croft, portfolio manager at Croft Leominster Investment Management in Baltimore, "There's a good economic number and then there's a bad number and that's probably what you'd expect at this juncture of the recession," he added "Hopefully it's two steps back and three steps forward."

With that said, if you have been following this newsletter you are likely aware that we have not jumped on the bull market bandwagon quite yet.  While I think that the rally will eventually resume, I also think that the most recent run has been a little too much too fast to be sustainable without some consolidation.  However, I also respect the market's ability to fire one more rally bullet as shorts continue to be squeezed.

It is difficult to pick a direction as the selling pressure has remained moderate at best, but our overall technical levels are identical to yesterday's figures:

We see resistance in the S&P near 988, but it looks as though 995 may relatively likely in the coming sessions.  In the meantime, major support lies at 925.  The NASDAQ may be headed for 1633 but we would be bearish at such levels.  Similarly, the Russell could see prices as high as 558, but the bears should be ready to get involved should we see it. 

If you are following the short S&P call recommendation, we recommended to our clients to roll into the 995 calls for August.  This lowers the delta on the trade and gives it a bit more breathing room intrinsically.  It will also position the trade for a possible roll into September calls if this rally continues to cause grief.  If you are interested in this type of trading, you may want to check out the free articles posted on our websites as well as my book "Commodity Options".

* Due to time constraints and our fiduciary duty to put clients first, the charts provided in this newsletter may not reflect the current session data.  However, market analysis and commentary does.  Charts provided by Track 'n Trade, Gecko software.

**Seasonality is already be factored into current prices, any references to such does not indicate future market action.

Please note: A mini S&P chart is used because it is better for charting purposes, but trade recommendations are based the full sized S&P unless otherwise noted.

S&P 500 Futures and Options Trading Recommendations

**There is unlimited risk in naked option selling and futures trading

Position Trade –

July 22 - Buy cheap August S&P puts.  We like the 880's and the 885's, you shouldn't pay more than $6.50

July 15 - We like selling the August 975 calls, fills ranged from $7 to $9 today.

·         July 28 - We recommended to sell the 925 puts for a little over $8 to take a bit of the heat off of the 975 calls

·         July 29 - We recommended to buy back the 975 and sell the 995 to give the trade a bit more breathing room and lower the delta

Russell Futures and Options Trading Recommendations

**There is unlimited risk in naked option selling and futures trading

Position Trade –

Flat

Please note: A mini-NASDAQ chart is used because it is better for charting purposes, trade recommendations will denote whether a mini or full sized contract should be used.

NASDAQ Futures and Options Trading Recommendations

**There is unlimited risk in naked option selling and futures trading

Position Trade –

July 28 - Sell the e-mini NASDAQ at 1630 or better.

*Due to the volatile nature of the futures markets some information and charts in this report may not be timely.

There is substantial risk of loss in trading futures and options.

Past performance is not indicative of future results.  The information and data in this report were obtained from sources considered reliable.  Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or commodities.  Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction.