Friday, May 21, 2010

Market Action

So I will admit it. I was covering some at the close. Had to sort of force myself to because I didn't really feel like it but it is discipline that wins in the end. Even if the market is down tomorrow, it was the right thing to do.

I actually shorted a tiny bit right at the open. We gaped down below 1100 and the 200 dma. It was a full risk off trade. I think tomorrow you do the opposite if we gap down (will explain below)

Tomorrow will be an interesting day for multiple reasons. The Senate bill passed tonight, Germany's parliament votes on the 1 trillion Europe package at some point during the day, and you have options expiration day which will add to volatility.

We are getting close to major resistance which ranges between 1040 to 1065. The heart and core of that resistance is between 1045 to 1055. It is always possible we bust through it but the highest probability scenario is we will bounce off that climbing back up towards 1100 to 1110. We are very oversold and any more selling sets up for a big bounce. I do think we get to that resistance sooner rather than later and would be surprised to see us bounce seriously before hitting it.

Tomorrow we could see a bounce as a result of the Senate bill (sell the rumor buy the news, banks are oversold) and we could see a bounce on the passage of the 1 trillion dollar package by the German government.

The open is important. If we gap up than I think you add shorts between 1090 and 1100. If we gap down and open anywhere between 1045 and 1065 I think you take profits. The best case scenario is you open around 1065 to 1070, sell off hard in the first 30 minutes somewhere south of 1065. If this happens I also think you take profits on shorts though it will be really really hard to do. If that happens I think it will be a false move before we rally hard.

The one scenario where all bets are off is if in some form or fashion Germany does not pass the package. I am not expecting that to happen, but if it does watch out!!

For those really aggressive a call spread on Goldman Sachs would be interesting. I limit trading in general but Goldman looks very interesting. Goldman is sitting at 136.10. If I was playing it I would buy the June 145 calls and sell the June 150 calls. You do this for two reasons. With the sky high volatility you don't want to buy an option without selling one. Second the risk reward looks interesting. Your risking 1.30 to make 5.00. Obviously, in actuality you don't hold the option to expiration. You would essentially be betting on a bounce to 145 or 1 6.7% move to unwind the trade. Goldman has started outperforming the market after being the first one to turn down. More importantly if the banks bounce on the passage of the bill because it is a sell the rumor buy the news type of thing the banks could have a little more giddy up than normal. Just a thought.

The Euro has been screaming higher. Whether that is because of central bank intervention or short squeeze or both it is hard to know. The Euro is very oversold also and has huge short exposure causing a potential massive short squeeze. It could create an interesting short opportunity before long if you missed the first move down.

Markets were once again headed down despite the Euro strengthening and the dollar weakening. I happen to think at this point the last 300 points on the Dow had more to do with the U.S. markets starting to price in a double dip over problems in Europe.

Well the world could look totally different in a few hours but that is my thoughts right now.

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