If The Market Consolidates, Buy At This Level
Thursday Recap: We had a great
day Thursday with a profit of $1,345 on our short options portfolio.Â
On Wednesday and in our prediction for Thursday,
we said the markets were setting up for a move higher and had put in an
important bottom. Further, we predicted a 70% chance that the cash Dow would
break the 10100-25 region and then would move to 10180-10200.
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Chart courtesy of StockCharts.com
In fact on Thursday, the cash Dow started higher,
quickly gapping up to the 10125 level. From here, the Dow backed down below the
10100 area. After what seemed like a long morning of back and forth action, the
Dow broke higher just as lunch time approached in New York. The Dow jumped past
10125 hard and fast, briefly pausing at the 10150 level before jumping again to
the 10170 level, then stair-stepping higher the balance of the day to close just
above 10200 at 10218, up some 170 large points with advancers virtually pounding
decliners into submission.
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Chart courtesy of StockCharts.com
You will recall that yesterday morning we said:
“Now is a logical time for piles of institutional cash on the sidelines to move
into the NASDAQ.” We also noted that sector rotation out of energy and into
technology would impact the industrials. Today the best performing index was in
fact the NASDAQ, up close to 3%. The NASDAQ 100 was equally strong Thursday.Â
By contrast the Dow and S+P were up 1.8%. On the day the NASDAQ was up some 57
points, moving just below 20-day exponential moving average resistance. I think
the NAS is leading this market higher, and in fact is going to provide us “early
warning” clues to market direction. More on this in today’s prediction.    Â
Prediction for Friday: We’re in an uptrend heading towards
resistance.  However, today we could see a consolidation after yesterday’s
big run-up. If the market does consolidate this is the level you want to buy:
If you look at the first chart in this report, we’ve pegged one likely
consolidation region near 10150 on the Dow. That’s a point where a number of
areas converge. First, that’s an uptrend line we previously noted that kept a
lid on this market. This could now serve as support. Second, you’ll note that
a likely Fibonacci retracement level is near the 10150 area. Third, you’ll note
that the 10150 level has been a consolidative region of sorts in the recent
past. All in all, that might be a good level to get long.Â
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Chart courtesy of StockCharts.com
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Consolidation aside the question then becomes what are our new upside
targets? Even if we don’t consolidate I think there is a 75% chance we’ll
explore the 10250 level, with a test of the 20 day exponential moving average
and then significant chart resistance at 10325 in the offing. When we reach
these levels we might become sellers.Â
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Chart courtesy of StockCharts.com
The S+P is similar to that of the Dow. We’ll watch for a likely test of the
20 day EMA and then perhaps more significant resistance just above 1125. If
this is broken, we’ll watch for a potential test of the 50 day moving average.Â
One element to watch with both the Dow and S+P is how these indexes react to the
50 level on the RSI. This could provide a point of resistance as well.Â
One key index to watch is going to be the NAS. The tech index is likely
going to reach both resistance and support before the other major indicies.Â
What happens when the NAS reaches key levels will likely provide overall
direction for the market as a whole. In fact, I’ll venture to say that if the
NAS can’t break important resistance there is a 85% chance the Dow and S+P will
not break equivalent resistance. However, if the NAS breaks the 20 day EMA
currently at 1970, we could be in for a move higher.
Also of note volatility dropped significantly Thursday. It’s interesting toÂ
watch the VIX index, because when it gets overextended as it was on Wednesday
that often provides confirmation for a buy/sell signal.
Daily Profit: $1,135
10500 April Mini Dow Put Options: We are short one put option. Yesterday this
option closed at 350, down 130. Profit yesterday with this position was $650.
10000 April Mini Dow Put Options: On 3/16/04 we sold 2 mini Dow put
options for 137 points (each point is worth $5). On 3/24 we sold 2 mini
Dow put options for 151. Yesterday this option closed at 85, down 60.
Profit yesterday with this position was $1,200.
10400 April Mini Dow Call Options: On 3/16/04 we sold 2 mini Dow call
options for 94 points (each point is worth $5). Yesterday this option
closed at 50, up 20. Loss yesterday with this position was $200.
10100 April Mini Dow Put Options: On 3/19/04 we bought one mini Dow put
option for 155. This option previously closed at 190 and yesterday we sold
this option for 126. Loss yesterday with this position was $320.
9700 April Mini Dow Put Options: On 3/24/04 we bought 2 9700 mini Dow put
options for 75. Yesterday they closed at 34, down 40. Loss on the day with
this position was $400.
Mini Dow Futures: On 3/25/04 we sold one mini Dow future at 10093 and bought one
mini Dow future at 10116. Loss on the day with this trade was $115. Near the
end of the day we sold one mini Dow future at 10164. The mini Dow closed at
10180. Loss on this trade was $80. Loss yesterday with this position was
$195. We are now short one mini Dow future.Â
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):Â $8,091
Current Projected Delta: -42.52
Current Projected Gamma: -48.62
Current Projected Theta: 311.98
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