Friday’s Levels

Thursday Recap: We had another good day with a profit of
$165. Our profit was good, but it was the markets that may have had the
significant day. The cash Dow closed up 19 points and the S+P closed slightly
higher. It was the NASDAQ where the most significant action took place. That
index ended the day down some 22 points and closed under both the 50-day moving
average and the 20-day exponential moving average. Below is the exact chart and
notations that were published in our Tuesday, April 13 report. Note that we
circled an area near 2000, and we asked if the NAS was headed to this level.

Charts from www.stockcharts.com

In fact on Wednesday and Thursday we closed the gap and traded near the 2000
level (below).

While the NAS was struggling to the downside, the Dow and S+P
were staying put. I’ll address the reason for this — and why it is important
— in today’s prediction.

On the day the cash Dow started higher, briefly touching
second level resistance near 10430 (C in chart above). However, at the time of
this touch the time/price opportunities were negative. Unable to hold 10400,
the cash Dow then moved lower to test support, first at the 10360 level, then
ultimately testing strong 10330 support.

^next^

Prediction for Friday: Late in the
afternoon on Thursday the market looked like it was setting up for a little
bounce on Friday. In fact as I write this at 7:00 AM Chicago time the pre-open
futures have moved higher. However, I think any bounce might be short lived.
There is a chance we might touch both sides of the flat line Friday, but most of
the action will likely remain on the downside.

On the downside for the cash Dow, let’s watch the 10360 level
but keep a close eye on the 10330 level. A break of this level could lead to
stronger selling and a test of support near 10300. On the upside, watch the
10400 level and then the 10430 level. If we break and hold up here we could try
and get some legs, but I think this is the least likely of all
scenarios tomorrow. I
say this because of my longer term concern.

Longer Term Concern: Under “normal” bull
circumstances when the NAS breaks key support it would lead to overall market
selling. So why did the Dow and S+P hold up when the NAS faltered? It is
because money moved out of technology and financial, rate sensitive stocks and
into defensive sectors. Today we witnessed a sector rotation that wasn’t
necessarily good for
market bulls. Up until today, the NAS was leading this market. At a time when
technology was leading the market, the NAS breaking support would normally lead
to market wide selling. However, today we potentially witnessed a change in
leadership. And part of the identification of that change is that the NAS was
down big while the Dow held its own. That is what is significant, and its not
good for bulls going forward. If this is the case, you can start to expect the
Dow to outperform the NAS.

At this point I may sound a little alarmist, but if the
markets get negative on the cash Dow I wouldn’t be surprised to ultimately see
another test of the lower Bollinger band (near C on the daily chart) or Dow
10,000. We might also see another test of the NAS’s 200 day moving average.
You will recall that in our April 5 longer term
prediction, after the indices had a great move higher, I said that after our
April options expire I think we could head lower. Well, if the Dow can’t move
over and hold the 50-day moving average with some convection, then a touch of
significantly lower levels is a distinct possibility.

Portfolio Strategy: Right now we are delta
positive. Our primary options are the 10400 April calls and puts. I’m going to
wait until the market sets up and then we might peel back some of these options,
and then potentially set-up our next options position for May.

Yesterday’s results and current portfolio status:

Daily Profit: $160

9700 April Mini Dow Put
Options: We are long 2 put options. Yesterday they settled at 1, unchanged (each
point is worth $5). Loss on the day with this position was $0.

9900 May Mini Dow Put
Options: We are long 2 put options. Yesterday this option settled at 62, down
3. Loss on this position was $30.

10000 April Mini Dow Put
Options: We are short four put options. Yesterday this option settled at 1,
unchanged. Profit yesterday with this position was $0.

10400 April Mini Dow Call
Options: We are short two call options. Yesterday this option settled at 12,
down 23. Profit yesterday with this position was $230.

10400 April Mini Dow Put
Options: We are short two put options. Yesterday this option settled at 64, up
4. Loss on the day with this position was $40.

Mini Dow Futures: We are
now flat the mini Dow future.

Projected Net Maintenance Margin Required
(Minimum amount required to

Current Projected Gamma: -101.7

Trading Method: Mark Melin strategically short sells options and then
directionally trades within this short options portfolio, always hedging one
position against another to generate consistent profits.

DISCLAIMER: