Traders Are Asking These 2 Questions…

  • April 6, 2004
  • Mark Melin

Tuesday, April 6

Monday Recap:
We saw another good move higher on Monday, with the Nasdaq once again leading
this market, up 1.07% today. Even in the face of trading above the Bollinger
band, the Naz powered up some 21.90 points. That’s a signal of continued
strength. 

The questions become:

  1. How long will it last?

  2. When will we see a retracement?

In our prediction from yesterday, we noted in a
chart of the S+P that we expected a short-term touch of the Bollinger band. That
occurred, with the broad index was up 8.76 points on Monday.

In our prediction for Monday on the cash Dow, we
expected an upward bias and said we would watch resistance at 10480, 10520. 
Further, we said a potential lid on the market would occur near 10550.  In fact,
the cash Dow started the day higher and found sellers just above 10480.  The Dow
moved lower to ever so briefly touch the downside, then buyers took the Dow to
trade between 10510 and essentially 10480 for much of the morning.  The
afternoon saw a coil formation and then a strong burst higher at the end of the
trading day, with the Dow stopping just above 10550.

Another issue to consider is volatility, which is
once again approaching record lows.  While decreasing volatility is good for our
short options portfolio, it also suggests that the market may be getting too
comfortable — and we could see some selling ahead.  More on this in our
prediction for today.


Prediction for
Tuesday: In both the Dow and S+P we’ve hit our initial target,
and I wouldn’t be surprised to see a healthy retracement that will likely
provide a buying opportunity.   You’ll note how the chart of the VIX has an
inverse relationship to the stock market.  I wouldn’t be surprised to see a jump
in the VIX sometime soon — and that will conversely mean a drop in the stock
market. 

I think on the cash Dow we could see a move to
the 10520 level.  If this breaks, we could see sellers take the Dow down near
10480.  We’ll have to watch the strength of any retracement.  At some point I
wouldn’t be surprised to see a touch of the lower end of the trading channel we
have identified below.  A more serious retracement would move the Dow to the
first Fib level near 10352.  Interestingly, this coincides somewhat closely with
the cash Dow’s 20 day exponential moving average.  On the upside, we’ll watch
the 10610 level.  A break of this could indicate a move to the 10660-80 level,
but I wouldn’t expect that to happen Tuesday.  Once we get into the 10680-10710
level, we’re likely to become sellers.   


 

Portfolio Strategy: Right now
we are slightly delta positive, very close to neutral. We’ve had a big run-up
and I don’t want to get the portfolio too positive until we reach support.

Trading Results from Previous Day and Current
Portfolio Status:

Daily Profit: $35

10500 April Mini Dow Put Options: On 4/5/04 we sold one mini Dow put options
for 66.  We are now short two put options.  Yesterday this option closed at 75,
down 42 points from the previous close (each point is worth $5). Profit
yesterday with this position was $165.

10000 April Mini Dow Put Options: We are short four put options.  Yesterday
this option closed at 8, down 7. Profit yesterday with this position was $140.

10400 April Mini Dow Call Options: We are short two call options. Yesterday
this option closed at 175, up 40.  Loss yesterday with this position was $400.

9700 April Mini Dow Put Options: We are long 2 put options. Yesterday they
closed at 4, down 1. Loss on the day with this position was $10.

10400 April Mini Dow Put Options: On 4/2/03 we sold two mini Dow put options
for 80.  Yesterday this option closed at 45, down 30.  Profit on the day with
this position was $300.

9900 May Mini Dow Put Options: On 4/2/03 we bought two mini Dow put options
for 69.  Yesterday this option closed at 50, down 17.  Loss on this position was
$170.

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

Projected Net Maintenance Margin Required (Minimum amount required to

trade this position, may vary broker to broker.  Amount specified is

derived from our options analysis software):  $12,690

Current Projected Delta: 25.96

Current Projected Gamma: -79.57

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.