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Can This Rally Hold?


Looking at the chart for the S&P 500, it looks as if we broke through critical resistance on Friday at 920. It is important to stay above 920 for the market to go higher. As of Friday's close at 929.23 it is crucial that we stay above 920 on the S&P to go higher. If we break below 920 next support comes in at 910 and if we didn't hold above that, next support minor support is at 900. Major support level is about 870 and the lower trend regression line comes in at about 860, so if we break below 860 it is an extremely bearish signal. The next minor resistance comes in at around 935 and if we break through that the S&P could potentially get to 955 on a short-term basis. The higher trend regression line comes in at about 980, so anything above 980 is a very bullish signal short-term.

So what do the options market factor in the market doing by June expiration?

I will pick the closest strike price to 10% above the current price for the June options expiration, and state the probability the options market is factoring in for that strike price.

I will analyze the options on the S&P 500 index, as well as the S&P 500 SPDR (NYSEARCA:SPY). I will also analyze major components that I blog about on frequently such as: Exxon Mobile (NYSE:XOM), Visa (NYSE:V) (soon to be in S&P 500), Caterpillar (NYSE:CAT), Amazon (NASDAQ:AMZN), American Express (NYSE:AXP), Goldman Sachs (NYSE:GS), Bank of America (NYSE:BAC), Boeing (NYSE:BA), McDonald's (NYSE:MCD), Pfizer (NYSE:PFE), Coca Cola (NYSE:KO), AT&T (NYSE:T), Kraft (KFT), General Motors (NYSE:GM), Merck (NYSE:MRK), Internation Business Machines (NYSE:IBM), Apple (NASDAQ:AAPL), Yahoo (YHOO), Google (NASDAQ:GOOG), and Research in Motion (RIMM) (sorry for the order I just typed them as I thought of them).

  • Index/Company, 10% above by June- Strike Price (if two values seperated by ... means that the +10% value is very close in between two strike values), Probability
  • S&P 500 Index, 1020, 14.1%
  • SPY, 102, 14.7%
  • XOM, 75 15.1%... 80, 7.5%
  • V, 75, 23.8%
  • CAT, 45, 24.1%
  • AMZN, 85, 30.7%
  • AXP, 30, 43.6%... 32.50, 28%
  • GS, 155, 23.6%
  • BAC, 15, 49.9%... 20, 17.1%
  • BA, 50, 23.6%
  • MCD, 60, 12.4%
  • PFE, 16, 16.6%
  • KO, 47.50, 6.2%
  • T, 27, 25.7%... 28, 14.1%
  • KFT, 27.50, 19.4%
  • GM, 1, 99.9%... 2, 42.5%
  • MRK, 27, 21.2%
  • IBM, 110, 20.2%
  • AAPL, 140, 28.6%... 145, 19.7%
  • YHOO, 16, 44.1%... 17, 33%
  • GOOG, 450, 17.8%
  • RIMM, 80, 39.9%

You'll notice that the more volatile stocks have higher probabilities of getting to the 10% strike price which should make sense. You'll also notice that a higher implied volatility will bring higher premiums to the option contract, for a list of great covered call strategies check out my blog. However To get a better idea we should look at the index option or the SPY. This gives a 14.1% and 14.7% chance of the S&P 500 index and the ETF which tracks the S&P 500 index respectively. The puts on the S&P 500 index give a 13.3% chance the index gets to 840 by June expiration, and the SPY has a 17.9% chance of getting to 84.

Looking at the chart for the VIX it looks as if we'll have a chance to get below 32 which is a critical support if this market can become more stable. If the VIX breaks below 32, we could see it move down to 30. Historically the VIX above 30 is extremely volatile, so if we could gte the VIX below 30 in the next weeks to come would be a good sign of stabilization. The VIX has not closed below 30, since mid-September when it seemed like banks were failing and getting nationalized every weekend. The VIX below 30 would be a great indicator of stabilization, and the market could possible rally on that news. Could this create a self fulfilling prophecy in itself? I doubt it, but it would certainly be nice for the bulls.

The options market is factoring in a 66% chance the VIX will get to the 30 strike by June expiration.

The options expiration for June is the 20, which means the last day for trading any of the underlying stocks/index is June 19. However the the VIX contract expires on the 17 of June. I have learned that options are a good indicator of how the market will play out in the weeks to come, but of course we can't depend 100% on what they predict. I guess time will tell what these stocks will be at come June expiration.

Disclosure Long: AXP, BAC, CAT, GOOG, GS, V