Friday’s Levels
Thursday, May 6
Thursday Recap:Â Inflation is
here. Get used to it.
Last month when the monster jobs number was
released we said inflation was around the corner. With the release of today’s
jobs number, which wasn’t quite as big a surprise as last month’s report, the
message is inflation is here and you can already see the impact on stocks.Â
A recent study concluded that with gas over $2
per gallon, middle America is spending less on food and other consumer staples
— and discount stores are taking it on the chin. Take a look at the price
action of Dow components Home Depot and Wal Mart, which lead the Dow lower
yesterday. Both are trading under their 200-day MAs and Home Depot fell below
recent months lows. Yep, the market knows inflation is here – and the market’s
price action normally lead public perceptions. As for the Dow, yesterday it
started the day lower, bounced from the 10260 level but couldn’t break above
10300. From there the Dow made a steady march lower, breaking 10250 and then
when it broke 10220 it dove to 10170 before finding support and climbing back to
retrace half its loses to end the day at 10241.
On the day all the indices had a brutish day.Â
The market leader lower was the NASDAQ, which broke its 200-day MA intraday.Â
When the NAS broke this support, the rest of the market got weak. But at the
end of the day the NAS climbed back to close right at the 200-day MA, ending at
1937.74, down 19.52 on the day.Â
Prediction for Friday: I have
two questions: How low will we go intraday today? And, how long will it take for
the Dow and S+P to reach their respective long-term downside targets?
As I’ve said for the past few weeks, our initial
long-term downside target for the cash Dow is going to be the 10,000 level.Â
We’ve said previously this level could break, and we might find support at the
200-day MA. If the Dow in fact moves lower, then the question is how long will
it take? I think one scenario would have the Dow getting in the vicinity of
10,000 near the middle of this month with a potential for an options expiration
week touch of support and then a bounce going into expiration. On the outside,
I think that sometime between the kids rolling out of school for the summer and
the month of June getting going we’ll potentially see a touch of 10,000. As far
as today goes, let’s watch for an early test of the 10170 level on the cash Dow
today. If that breaks we might find buyers near the 10100 level – and maybe,
just maybe, we might see a peak into the 10,000 region.Â
Portfolio Strategy: Right now we
are delta negative. We are likely to stay negative until we reach our downside
target or market conditions change. Our 10100 put options have a lot of premium
in them, so we will likely get delta negative by selling futures. Stay close to
your e-mail for sell signals.  Â
Yesterday’s Results and Current Portfolio
Status:Â Â
Daily Loss: $155
Â
10100 May Mini Dow Put Options: We are short 2 put options. Yesterday this
option settled at 75, up 29. Loss yesterday with this position was $290.Â
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10100 June Mini Dow Put Option: We are short 2 put options. Yesterday it closed
at 157, up 32. Loss yesterday with this position was $320.
Â
10600 May Mini Dow Call Options: We are short 2 put options. Yesterday this
option settled at 10, down 2. Profit yesterday with this position was $20.Â
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10600 June Mini Dow Call Option: We are short two call options. Yesterday it
closed at 52, down 18. Profit yesterday with this position was $180.
Mini Dow Futures: We came into the day short one mini Dow futures. We sold
one additional mini Dow future at 10192. Yesterday it settled at 10222, down
83. Profit yesterday on this position was $255. We are short two mini Dow.Â
Trading Method:Â 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.
For questions and comments send an e-mail to
subscriptions@dowoptionstrader.com
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