Monday’s Levels

  • June 14, 2004
  • Mark Melin

Technical Analysis and Trading Strategy

By Mark Melin, technical analyst

Weekend Report, June 12

Thursday Recap:  In our
prediction for Thursday, we said that the markets would move higher and test
resistance.   That’s what happened on Thursday, as the market started out strong
and went for the session highs within the first half hour of trading.  Then for
the balance of the day the markets traded in a narrow range, testing intraday
support and resistance.  In the last hour of trading the markets caught a bid,
squeezing shorts and closing on the highs of the day but not significantly
breaking into new territory. 

Ever since the 10-year note tested and found
support near 4.6%, interest rates have been moving steadily higher.  If interest
rates continue to move higher to challenge and potentially blow past the recent
highs, this could spell short-term trouble for stocks.  There is a reason
interest rates are moving higher, and that reason could become crystal clear
Tuesday morning. 

Inflation Prediction:  Tuesday
we’re going to get a peak at the inflation picture, and I predict that those
numbers are going to be hot, pushing rates higher and stocks lower.  All my
indicators are pointing to numbers that paint an inflation picture that is going
to cause the markets to question the Fed’s recent lack of action on interest
rates and potentially cause speculation of a .50 point rate increase at the end
of this month.  As members know, we’ve been inflation hawks ever since the
employment numbers first turned higher, and now the proof could become crystal
clear.

Prediction for Monday.  Thursday
afternoon we issued a sell signal.  As such, we expect the markets to test
support on Monday. 

On the cash S+P we’re going to watch some pretty
important support near the 1127-1131 area.  If this support breaks and holds, we
could head towards my near-term target of 1120.  If and/or when we finally find
support, I think that’s the point we’ll start to march toward higher levels,
near 1150 on the S+P. 

On the cash Dow, we’ll watch for an early test of
the 10350 level.  If this is broken, we’re likely to head to 10300 and then
again the 50-day moving average.  When this happens, we could get a buying
opportunity.  If the markets bounce and hold the recent highs, I think then
we’re headed towards the recent highs near 10550. 

Watch the price of oil.  If oil moves out of the
value distribution region we’ve identified below it means that the security
situation in the Middle East is getting worse, not better.  Absent international
security concerns, I expect prices to trade within the value distribution region
for much of the summer. 

Portfolio Strategy:  Right now
we are delta negative.  We’re likely to remain negative until we see the impact
of the inflation numbers Tuesday. 

Previous Day’s Results and Current
Portfolio Status:  

Daily Loss: $10

 

10100 June Mini Dow Put Option:  We are short one put option.  Yesterday it
closed at 7, down 8.  Profit yesterday with this position was $40.

 

9700 June Mini Dow Put Options: On 5/24/04 we sold one put option for 70. 
Yesterday it closed at 2, down 2.  Profit yesterday with this position was $10.

10600 June Mini Dow Call Option: We are short one call option.  Yesterday it
closed at 3, unchanged.  Profit yesterday with this position was $0.

10600 July Mini Dow Call Options:  On 6/10/04 we sold 2 call options for 64. 
They closed at 70.  Loss yesterday with this position was $60. 

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

 

Charts from
www.stockcharts.com

For questions e-mail,
subscriptions@dowoptionstrader.com

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.