Monday’s Levels

Friday Recap: On options
expiration Friday we had a $570 daily loss, yet we still finished the week with
a profit of $455.  In an e-mail sent to members Thursday afternoon and in our
pre-open prediction on Friday, we said we expected a bounce Friday with a touch
of both sides of the flat line.  However, I also expected to see a little more
action on the downside Friday based on some longer term concerns I had with this
market. 

In fact on Friday the cash Dow started the day higher, then moved to the
other side of the flat line, where buyers found courage and pushed the Dow back
above the 10400 level, past 10430 and even tested the 50-day moving average (A
on chart above), before moving back to close at 10452, just a sliver above the
50-day MA. How much of Friday’s upward price action should be attributed to the
expiration of options is debatable, but I would suspect that fact played a major
factor in Friday’s price action.

The Chart of the cash S+P is similar to that of the Dow.  The large cap index
touched both sides of the flat line and ended up closing just slightly above its
50-day MA.  Note that the RSI index for both the Dow and S+P held support at
50.  We’ll address this and all the points we raise in the today’s charts later
in prediction section. 

As we had predicted would happen in both our Wednesday and Thursday reports,
the NASDAQ once again under performed the Dow Industrial Average as well as the
S+P.  While the NAS did hold our lower level support target, the morning started
out looking ugly.  In fact if it wasn’t an option expiration Friday I think the
whole market could have hit the skids with the NAS leading. 

Prediction for Monday:  We’ve reached the 50-day MAs on both
the Dow and the S+P.  One of two things is going to happen: We clear the 50-day
and move to the next resistance level, or we move lower and test support.  I
think there is about a 65% chance we’re headed lower. 

Looking at the Dow 1 minute chart above, on an intraday basis I think our
first test on the Downside is going to occur near 10400.  If that breaks we
might go down and test important support near 10330.  On the upside, if the Dow
can get past resistance at 10470-80 (A on one minute chart above) we might see a
move into the value distribution region (B above) and then a test of the
formerly toppy area near 10550.  One factor working in favor of the bulls is
that the RSI has been holding at 50 (see C on the daily chart at the top of this
report).  We’ll keep an eye on that level today. 

This week we’ll see a lot of S+P companies reporting earnings. Like the Dow,
we’ll watch to see if the S+P can clear resistance near 1135.  If it does, I
would ultimately expect it to move higher and test the formerly toppy 1150
level.  On the NAS I’ll watch for an important test of 1982.  If this breaks, it
could lead the entire market lower. 

Portfolio Strategy: We’re coming into the day significantly
delta neutral, our only position being long two 9900 May puts.  This morning
we’re going to set up a short options portfolio and we may look at some Vix
futures.  The VIX is starting
to look like a buy.  We may purchase a few VIX futures to hedge our options. 
When Volatility increases, the value of our options also increases.

 

 

 

 

Daily Loss: $570

 

9700 April Mini Dow Put
Options: We are long 2 put options. Yesterday this option expired worthless. 
Profit yesterday with this position was $10.  

 

9900 May Mini Dow Put Options:
We are long 2 put options.  Yesterday this option settled at 41, down 21.  Loss
yesterday on this position was $210.

 

10000 April Mini Dow Put
Options: We are short four put options.  Yesterday this option expired
worthless.  Profit yesterday with this position was $20.

 

10400 April Mini Dow Call
Options: We are short two call options. Yesterday this option settled at 40, up
28.  Loss yesterday with this position was $280.

 

10400 April Mini Dow Put
Options: We are short two put options.  We bought one back at 36 and the other
expired worthless.  Profit yesterday on the day with this position was $460.

 

Mini Dow Futures: We came into
the day flat the mini Dow future.  We sold one at 10369 and sold another at
10379.  We bought one back at 10326 for a loss of $285.  We bought another for
10336 for a loss of $285.

 

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.