Trading Oil? Watch For The Terror Premium To Start Withering

In
our prediction posted Friday morning, we said the cash Dow would test support
and then bounce.  In fact
on Friday we tested support and on Tuesday we bounced. 
The cash Dow started the day higher, initially testing the 10330 level
before falling back to 10300.  The
Dow then re-grouped late in the morning and made a charge, stair stepping to the
high of the day near 10360 just after the lunch hour. 
At this point, sellers took control of the market and brought the
market’s measure down to once again test the 10300 level. 
The Dow bounced off this support to close at 10343, up some 83 points on
the day. 

Oil had a nice fall in
price.  You will recall that oil
successfully tested the support region we previously identified and then
bounced.  Watch for  the
monster terror premium that is holding up oil prices to start withering. 
I ultimately think oil is going to take out this support before we
celebrate the New Year — and when it breaks support we’ll likely say goodbye
to the idea $50 oil for some time to come — unless, of course, we get a
surprise major terrorist event, particularly one that occurs on US soil. 

Prediction for
Wednesday:  We could touch
both sides of the flat line on Wednesday.  We
could start the day lower but touch higher levels in the late morning or
afternoon.  On the upside, we’ll
watch Tuesday’s highs near 10360, then again much more significant resistance
near 10400.  I expect this level to
be touched before weeks end.  On the
downside, we’ll keep an eye on 10330, 10300, then again the 200-day simple
moving average — which has been providing nice support — and additional
chart support at the 10250 level. A break of this level could cause us to
re-evaluate our bull stance on the market.

Fed boss Alan Greenspan is
scheduled to speak on Capital Hill Wednesday, where in prepared statements he is
likely to wrap the administration on the knuckles for budget deficits. 
More important for market bulls, however, should be the Q+A session. 
This is where I think Mr. Greenspan is likely to express a degree of
optimism on the economy.  Further, while interest rate traders in Chicago
have already baked in a rate hike for September, there is an outside chance we
get a glimmer of hope that Mr. Greenspan might pause after September and
re-evaluate the economy, which would cheer the market. 

Portfolio Strategy: 
Right now we are significantly delta positive. 
I’m going to want to remain positive, but trim the level of our delta
and get a little closer to neutral on any market advance.

Delta: +121

Theta: -16.26

Maintenance Margin: $5,544 (May vary from broker to broker.)

Previous Trading
Day Results and Current Portfolio Position:

Daily Profit: $525

10100 Sept. Mini Dow Call Options

Long 5. 

Yesterday these options settled at 260, up 55. 

Profit yesterday on this position was $1,375.

These options expire September 17.

10300 Oct. Mini Dow Call
Options

Short 5. 

Yesterday these options settled at 175, up 30

Loss yesterday with this position was $750

These options expire October 15

10400 Oct Mini Dow Call
Options

Short 1. 

Yesterday these options settled at 120, up 20

Loss yesterday with this position was $100

These options expire October 15