S&P correction seems to be underway…
January 13, 2012
S&P correction seems to be underway…
Despite the best Michigan Sentiment reading in recent memory, the equity markets couldn’t hold on to overnight gains. After kissing 1295 (our noted resistance area) the March S&P futures contract fell over 20 handles. The initial selling came on the heels of JP Morgan Chase earnings that met EPS expectations but missed on revenue, but the bulk of the selling came at the hands of a fresh S&P credit downgrade of several European nations.
Traders might have used the downgrade as an excuse to sell, but I don’t think that was the true motive. After all, “the market” had been expecting these downgrades for quite some time and the S&P had issued multiple warnings that it was coming. Nonetheless, we needed something to stir the pot and trigger a correction and this happened to be it.
So far the charts are “working” 1295 resistance in the S&P proved to be valid, as did our 768/772 area. From here, it seems as though there is a good chance the highs are in. If the market behaves like we think it might, we should see the mid to low 1250′s in the coming sessions but a slide well into the 1230′s doesn’t seem like a pipe dream. The low 1230′s marks the uptrend line and with thin volume, it really wouldn’t take much to get there.
Also, don’t forget about the MLK market jinx! The Martin Luther King Day holiday has marked some pretty nasty sell-offs in the past (while most in the U.S. naively believed the world shut down while they went skiing for the long weekend). That said, large equity market dips in January have historically been great buying opportunities so don’t be a greedy bear.
Enjoy the long weekend!
* 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.
**Seasonality is already factored into current prices, any references to such does not indicate future market action.
Please note: An e-mini S&P and e-mini NASDAQ chart are used because they better for charting purposes, but trade recommendations can be applied to either the full-sized S&P or the mini. Unless otherwise noted, profit and loss will be based on the mini version.
Futures and Options Trading Recommendations
**There is unlimited risk in naked option selling and futures trading
Position Trade -
1-3 – Clients were recommended to sell the February S&P 1340 calls for about $8.00 ($400 in the mini contract). We are looking for the market to digest or pullback its recent rally…but prefer to give it room to breathe.
1-9- These options weren’t losing as much value as we would have liked and with so much time to expiration it seemed prudent to offset the risk and see what happens next. Clients were recommended to buy this option back at $4.00 in premium to lock in $200 before transaction costs.
In other Markets…
12-29 – Clients were advised to sell the March crude 122 call and the 78 put for a combined premium of about $1,000. These options have 49 days to expiration and we believe time value erosion will be most noticeable from 45 to 28 days.
1-3 – Clients were advised to sell the February 123/136.50 Euro strangles for about $700 in premium (56 ticks). These options have 32 days to expiration and are vulnerable to accelerated premium erosion in the absence of a significant change in market fundamentals.
1-5- Clients were advised to buy back the short 136.50 calls in the Euro for about 10 ticks to lock in a quick profit ranging from $200 to $240 (depending on fill prices on the way in and out). We’ll look for a place to buy back the put in the coming days.
1-6- Clients were advised to sell February Euro 117 puts for about 40 ticks ($500)
1-9- Clients were advised to take a profit on the March crude oil 78/122 strangles. Most clients netted between $400 and $450 per lot.
1-10- Clients were advised to buy back their short 117 puts in the Euro for 21 ticks, a profit of about $230 per contract in a few days. We’ll look to resell them if we get the opportunity.
1-11- Clients were recommended to sell the March Euro 118 puts for about 33 ticks or $412.
(Our clients receive short option trading ideas in other markets such as gold, crude oil, corn, soybeans, Euro, Yen, and more. Email us for more information)
*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.
