Friday’s Levels

Thursday Recap: We had a good
day Thursday with a profit of $245.

In yesterday morning’s prediction we said that
the Dow would be the best relative performing major index and that when the S+P
hit 1125 that might indicate a top of the market.  In fact on Thursday, the
major indices all started stronger, with the S+P reaching an early morning high
of 1124.  When the S+P couldn’t bust past this level, all the indices sold off. 
While the S+P and NASDAQ had step sell-off’s leading into the lunch hour – with
the NAS briefly touched the negative sign of the flat line – the Dow held above
10150 all afternoon.  On the day the Dow finished up some 95 points, up .94%;
the S+P was up 6.34, .57%; the NAS was up 8.35 points or .42%. 

One contributor to Thursday’s rally was Oil
moving under $40 a barrel.  Assuming there are no terrorist events, I expect oil
to start trading below $40.  I read a book that noted that Saudi Arabia has
always feared high oil prices will lead the gas guzzling yet innovative
Americans to develop alternative fuel sources, which the Saudis believe could be
done in 10 years if we Americans got serious. As such, the Saudis have a very
good sense of American’s tolerance level and don’t like the price of oil to
exceed a level that motivates alternative thinking. 

Another interesting development that has been
flying under the radar recently is that interest rates have been steadily
declining.  As you can see from the chart below, the 10-year note traded below
4.60% yesterday.  I’ve posted the same chart and notes that was posted near the
beginning of the month of May.    

It is interesting to watch volatility. 
Volatility, the measure of fear in the market, has been dropping precipitously
ever since the Dow bottomed near 10000.  However, volatility is moving to the
lower end of the value distribution region and may be signaling a short-term top
in the market.  The question for Friday will be how much fear is in the market
going into this weekend. 

 

^next^

Prediction for Friday:  This
entire week we’ve moved higher, and the question is how will the market deal
with the terrorist event risk – fear – coming into the holiday week.  Ultimately
on Friday I expect a move to both sides of the flat line. 

On the downside for the S+P we’ll watch for a
test of the 50-day MA near 1116.71 and chart support (see chart above).  On the
upside we’ll watch for an important test of the 1125 level, which could
determine if this level is a top.

On the Dow we’re going to watch yesterday’s top
near 10220.  On the downside we’ll watch for a potential fill of the gap (C in
the chart above).  If we break B this could be an early sign to fill this gap. 

Yesterday’s Results and Current Portfolio
Status
:  

Daily Profit: $245

 

10100 June Mini Dow Put Option:  We are short one put option.  Yesterday it
closed at 80, down 45.  Profit yesterday with this position was $225.

 

9700 June Mini Dow Put Options: On 5/24/04 we sold one put option for 70. 
Yesterday this option closed at 24, down 6.  Profit yesterday with this position
was $30.

10600 June Mini Dow Call Option: We are short one
call option.  Yesterday it closed at 7, up 2.  Loss yesterday with this position
was $10.

Mini Dow Futures: We came into the day flat the
mini Dow future. 

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.

 

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