Options Trader: Monday Wrapup

by: Philip Davis

All right! We got rejected off last Monday's lows -- BUYBUYBUY!!!

There's no font for sarcasm, but the above statement needs it. What the heck are people doing?

I would love it if we can break out of this slump and rally, but this is a nice, healthy sell-off that's not even a month old after 8 consecutive months of gains (we started this rally in mid July, over 2,000 points ago). So far, we've given back, at our lows, 37% and resting on a Fibonacci line (12,000) is no reason to throw caution to the wind, but that's what I see people doing.

It's hard not to the way the press talks up every positive tick of the chart as a "huge" rally and makes you feel like you're missing something big by not jumping in immediately. But even assuming this is a recovery, we have 600 more Dow points to go to get even. Why then are there just 2,000 holders of the Diamonds Trust Series 1 ETF (NYSEARCA:DIA) May $125s at $1.50? If we just get back to 12,800 in the next 60 days those are a double at $3 -- you would think there would be more interest...

Bear chart 20 03 2007Perhaps it's because last May 10th the Dow reached an all-time high of 11,700 after rallying from 10,200 in mid-October, a 7-month rally. On May 23rd, the market dropped back to 11,100, down 600 points, retracing just over 38% of it's gain. It rallied back to 11,300 (a 33% retracement), topped there twice by June 1st and then plunged another 600 points, to bottom out at 10,700 where it retested in mid-July to set up for the current rally.

Total net retracement of the 8 month rally, 66%.

So I'm trying not to be bearish. As I revealed to my readers a few months ago, being bearish turns readers off and there is a lot of pressure on financial writers to stay positive because (and I see it) it is amazing how fast people will turn away when you insist on being gloomy. On the other hand, I can not, in good conscience, just sit here and say nothing even though TheStreet says "Global Rally Shines on Wall Street" and Fool.com tells us "Floundering Stocks are Sometimes Opportunities in Disguise."

Creating Optimism 20 03 2007ABC (NYSE:DIS) sort of has it right with the headline "Takeover news fuels U.S. market rally," as that is the proximate cause of yesterday's VERY LOW VOLUME rally. Let's see how they do on Tuesday before we all jump on board.

I'll be sticking to my level targets, but I did all my put buying this morning. I'm ready to capitulate if we move up past last week's highs, but last Monday spiked (also on low volume) all the way to 12,385 while yesterday's spike was 12,273, so we've still got a way to go before getting any kind of real buy indicator. On the other hand, last Tuesday we opened at 12,307 and closed at 12,075, so holding 12,100 would be an improvement.

How's that for ending it on a positive note?

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