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Equities consolidate ahead of employment report

January 4, 2012


Part 2 of our discussion on the COT Report in Stocks & Commodities Magazine:


Equities consolidate ahead of employment report


Despite some early morning weakness, equities were able to hold yesterday's gains.  Our guess is that there were a significant number of bears caught short over the weekend and they took the dip as a chance to move to the sidelines "losing less". 


If you are a fundamental trader, you might be interested in this simplified view of the global economy.  They say a picture says a thousand words, and this might be the perfect example:


The CFTC's COT Report released on Friday, but measured on Tuesday of last week suggests there could be more shorts looking to run for cover (there were over 250,000 net short large specs).  If so, we might see a test of the upper resistance levels in the stock indices.  Unfortunately, one never knows where the exact high will be until after the fact but we have to favor a strategy that sells into strength and offsets risk in weakness. 


Keep in mind that although it is a new year, it isn't a new market.  Liquidity hasn't come back from vacation and probably won't until next week (or maybe even the week after).  As we know, thin markets breed chaos so it is better to be safe than sorry.  Rather than betting the farm on the short side, aggressive traders might want to slowly wade into "risk off" trades but save plenty of ammo for what could be a buy stop running frenzy. 


Sorry to be boring, but nothing has changed...we'll stick with yesterday's overall idea:


In other words, the 1280 area should be seen as a "nibble" with more aggressive trades becoming attractive at moderately higher levels such as the mid to high 1290's, which is a distinct possibility.  In the Russell, we see strong resistance in a band between 760 and 768.  We feel as though the bulls will have a hard time breaking through this the first time up.  Similarly, significant resistance in the NASDAQ can be found near 2350..such levels could be a place to consider bearish plays. 


If we are right about a pullback from the noted resistance levels, we could see the S&P trade back to 1230ish, the Russell runs into support near 723 and again at 702, and the NASDAQ could see 2210 again. 


Don't confuse our short-term neutral to bearish outlook with long-term expectations.  The so-called "January Break" often sets the stage for another leg of rally.  Don't forget, November through March are the best 6 months to be bullish! 


* 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. 


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.


(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)


Carley Garner

Senior Analyst / Commodity Broker

DeCarley Trading


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.