Expect A Bounce — Here Are The Details

Hi, I’m Mark Melin and I’m happy to be contributing
to TradingMarkets.  In  the coming weeks I’ll show you my system
for short selling options and then directionally trading futures within this
short options position.  We’ll take a look at my daily support and resistance
numbers as well as my intraday pivots.  This system has proven both profitable
and consistent, and I hope you

profit from it. 

Good trading,

Mark Melin

 

Monday Recap:  On Monday,
the cash Dow started out lower, quickly moving down some 80 points to test 10100
and ultimately break 10100 quicker than a Ben Affleck / Jennifer Lopez
engagement.  And like that fleeting Hollywood romance, the Dow quickly blew past
10100 and found temporary support near 10150, where upon it bounced back to
again test the waters at 10100.  Having decided that it wanted to explore
greener pastures, the Dow moved to the downside once again, getting close to
10,000 support before bouncing into the close to end the day at 10065, down some
122 points. 

Importantly, at the same time the Dow was testing
10,000 support, the NASDAQ was likewise testing support at 1900 – near it’s
200-day moving average.  After starting the day gap lower, the tech driven index
– which has been leading the market lower – broke it’s Bollinger band trading
range before bouncing into the close.  Much of the strength in both the Dow and
NASDAQ was due to strength in Microsoft.  It’s also interesting to note that
volatility in the form of the VIX index has moved above 20 for the first time in
a long time.  This not only impacts our options portfolio as higher volatility
increases the value of our options.  In this environment, an increase in
volatility can also provide clues that the market is in for further trouble,
particularly after a long complacent period trading near the 15 level.   

Prediction for Tuesday:  On
Tuesday, I expect a bounce – albeit one of the dead cat variety.  The question
is, where will this market find sellers?

I expect that the NAS will once again lead this
market higher.  Ultimately I expect the market leading index to fill it’s gap
created Monday.  Once this happens, the markets should get interesting.  The Dow
has to clear initial resistance at 10100. If this happens, I wouldn’t be
surprised to see a bounce take it somewhere in the 10200 range.  When it reaches
this level, we’re going to become sellers and move the portfolio to delta
negative.  In terms of the S+P, while we optimistically mentioned the 20-day
exponential moving average near 1125 as a target; however, I more realistically
expect sellers to take control of this market and start slapping it around near
1112-16.  That’s assuming it is strong enough to move past resistance near 1103.
On the downside, we’ll once again watch the 10,000 level on the Dow.  There is a
possibility that when the Dow is again testing 10,000 – and it will likely test
that level again in the near term – the NAS could be testing its 200-day moving
average. A break of either benchmark could lead to additional sell pressure.  

Portfolio Strategy: At the end
of the day yesterday we sold a June mini Dow to bring our portfolio to delta
positive anticipating a bounce Tuesday.  We’re going to use this bounce to
lighten up on our 10500 puts, so stay close to your e-mail for a trade signal. 
I’m going to watch how the market reacts to 10100 before deciding how to handle
this market.  If we clear 10100, we’ll remain positive until we get to 10200, at
which point we will get negative to neutral with a negative bias.