October 28, 2011
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Stock index futures digest EU summit rally
Stock index futures quietly waffled near unchaged for much of Friday's trading session. Given the magnitude of Thursday's rally, the victory seems to have gone to the bulls. After all, 94% of the S&P 500 is trading above their corresponding 50-day moving average, and that includes all 81 financial stocks! This is in blaring contrast to the bleakness of a few short weeks ago.
Anyone that has gone over the outline of the European bailout package knows that the final product isn't anything unexpected. In fact, each of the major components of the plan are nearly identical to the details leaked to the media well in advance of the announcement. In other words, there really wasn't anything new there and I suspect that many analysts will take the weekend combing over the details and might realize the plan is a band-aid on a much larger problem. In turn, some investors might come to the realization that things have moved a little too, a little too fast, and find themselves with buyer's remorse.
Based on conversations I've had with traders, industry insiders and simply watching price action; it is apparent that a large majority of Thursday's rally can be attributed to short covering (in both stock index futures and the Euro). A quick peek at the COT report from last week suggests that large speculators were holding one of the largest net short positions in the E-mini S&P that I have seen in quite some time. It is my guess that most, or maybe even all, of them have covered their positions in recent days. This doesn't mean that the move is invalid, but it does mean that if fresh longs fail to come in to support prices, we could get a downdraft at some point next week.
The question remains whether or not there will be another round of short squeeze, but it certainly seems as though prices are overdue for a correction.
Despite yesterday's upside party, we have to lean cautiously lower from here. That said, we respect the market's ability to test 1300, or a little above, in the December S&P futures before "giving up the ghost" and succumbing to the seemingly inevitable correction.
We see resistance in the S&P near 1297 and then again at 1308, if seen...aggressive traders could look to initiate or add to bearish positions. Should the market correct, as we think it might, we will be looking for a move to about 1200 and possibly 1175. If you are trading the Russell, a correction could mean 694...look for resistance near 674.
* 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 -
10 -21 - Clients were recommended to sell the November 1300 calls for about $8.25 in premium. This equates to $412.50 per mini contract, the option has about 29 days to expiration and has traded near $3.00 as recently as a few days ago. More aggressive traders might look to implement an bear put spread with a naked leg, perhaps purchase the November 1190 put, sell the 1150 put and then sell the 1300 call to pay for it (email for risk reward details if interested in this version).
10-28 - Clients were advised to roll their November 1300 calls into 2 1320's or 1325's depending on pricing and comfort level. We are still looking for consolidation but the market might need some breathing room.
In other Markets...
10-11 Clients were recommended to sell strangles in the November Euro (142/128 for conservative traders and 140/130 for aggressive traders), or December crude oil (98/67 for conservative traders and 96/70 for aggressive traders).
(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)
Senior Analyst / Commodity Broker
Local : 702-947-0701
*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.