Monday’s Levels
Friday Recap: We had a good day
Friday with a profit of $430 and a good week with a profit of $730.
Friday was a day when we had to have the
discipline to stick to our trading plan. After the release of the better than
expected jobs number, the interest rate market immediately flew lower in price,
higher in yield – and as expected the stock futures moved dramatically lower in
pre-open trading. However, once the cash market opened the indices were
surprisingly firm, and were in fact briefly up on the day. This is where
discipline to a trading plan comes into play. We had predicted that the market
would move down on Friday. The trading plan for the morning was that if the
market moved over 10330 intraday I would only then start to hedge the portfolio
towards neutral. We essentially stuck to the trading plan, and just after
lunchtime the market rolled over, breaking 10200 for good, briefly pausing at
10170 before ultimately charging lower to end the panic-stricken day at 10117,
down some 124 points on the day.
One of the keys to the day was when the NASDAQ
fell off the wagon. The day started with the NAS leading the markets to the
upside, but then around 1:00 PM the NAS started rolling over the to the downside
at a quicker clip than that of the Dow and S+P. Then late in the afternoon when
the tech leader broke its 200-day moving average it was time to put the nail in
the coffin – this market was done. But here’s the punch line: the NASDAQ A-D
line broke its 200-day moving average in late April and continues to march
lower, reflecting an amazing amount of deterioration. On the day the NAS
finished down over 19 points to end at 1918.Â
Like the Dow, the broad-based S+P was trashed –
down 15.29 points and the biggest percentage loser on the day. On the big board
declining issues outpaced advancers – get this – by close to a 10 to 1 margin.
Nice… nice and ugly.
^next^
Prediction for Monday: It’s
pretty easy to make the prediction that the cash Dow is going to test the 10,000
level today. That was a much harder prediction to make a few days or a week ago
when we established 10,000 as our longer-term target. The big question is: will
Dow 10,000 hold. While Dow 10,000 is going to be the most visible test of
support Monday, we also need to watch chart support on the NAS at 1895 and the
S+P 1085-90. If any of this support is broken on an intraday basis it will
provide a clue to weakness, and if we close under these levels it could provide
clues as to a stronger move lower.Â
What I think is a likely scenario on Monday is
that we come down and test support levels and initially bounce. I think
ultimately we’re going to come down and test support again. If this happens it
will be on this second or third test of support where we have a chance to break
support. However, if this support holds we could have put in an low. If this
happens, I would expect an initial bounce to the 10220-50 level (B on the Dow
Daily chart).     Â
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Interest rates are likely to move lower in yield
today in a flight to quality. The stock market isn’t likely to find strength in
the bond market moving higher in price, lower in yield off a flight to quality.Â
However, it would find support if a back-up in rates was caused by a calculation
that the recent dramatic move was a little overdone.Â
Over the long haul, the interest rate market may
have moved a little to far, a little too fast – particularly short term rates.Â
This market is essentially predicting that the Fed will raise rates quicker and
stronger than is likely to be the case. At some point we’re likely to see
interest rates move back down to test support. Maybe not Monday, but at some
point I’m looking for a test of the recent breakout point – most notably 4.60%
on the 10-year note. When that happens the stock market will likely find
temporary support.
Portfolio Strategy: We’re coming
into the day slightly delta negative. When the market touches 10,000 our
portfolio will be close to delta neutral with a slight positive bias. Depending
on the price action of the market today, we may get additionally positive at Dow
10,000. Watch your e-mail this morning.    Â
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Yesterday’s Results and Current Portfolio Status:Â Â
Daily Profit: $430
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10100 May Mini Dow Put Options: We are short 2 put options. Yesterday this
option settled at 135, up 60. Loss yesterday with this position was $600.Â
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10100 June Mini Dow Put Option: We are short 2 put options. Yesterday it closed
at 220, up 63. Loss yesterday with this position was $630.
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10600 May Mini Dow Call Options: We are short 2 put options. Yesterday this
option settled at 3, down 7. Profit yesterday with this position was $70.Â
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10600 June Mini Dow Call Option: We are short two call options. Yesterday it
closed at 35, down 17. Profit yesterday with this position was $170.
Mini Dow Futures: We came into the day short two
mini Dow futures. Yesterday it settled at 10080, down 142. Profit yesterday on
this position was $1,420. We are short two mini-Dow.Â
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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.
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