The market took us for a real ride today. We sent a note out to members well before the open when the Dow futures were down over 100 points on rumors of a pending Israeli attack on Iran. While we didn’t get the high volume capitulation selloff we were hoping for today, this action is good enough. Traders stepped in and bought the gap down right away, and we moved into positive territory by 11:00 (the better-than-expected ISM report certainly helped). Then the market promptly reversed and made new intraday lows into lunch, before reversing again and rallying back up toward a positive close.
The SPX made what looks like a triple bottom today, and the hammer candlesticks in the Dow tell the same story: odds have improved somewhat for a substantial short-term bounce. Note that this would be at best a brief rally in the midst of a bear market: it would not be a place to initiate major new long positions, but rather an opportunity to exit any underperforming longs, protect profits from shorts, and look to sell call premium (ideally through verticals).
We’re not typically prone to predictions, but here’s one: we don’t see the indexes moving much higher this week, given the short day on Thursday and the long weekend. We wouldn’t be surprised to see some positive action tomorrow morning followed by flat-to-negative trading the rest of the week. Expect unremarkable volatility as well ahead of the long weekend.
Incidentally, what do we mean about selling premium? Well, the change from buying naked options to selling options spreads makes all the difference in the world. If you’re bullish right now, buying calls is about the worst thing you could do, since even if prices rise quickly, volatility will fall hard and eat up your gains. So instead, you could sell a put vertical composed of one short OTM put and one long further OTM put in the same month. This will bring in a credit (which is neither here nor there) but more importantly will profit from time decay, and will enable you to win even the market doesn’t rise very much or stays flat.