Two Trigger Points That Could Lead The Market Lower
Tuesday Recap:Â Â We had a good
day yesterday with a profit of $205. Â
In our prediction for Wednesday, we said the cash
Dow would likely touch both sides of the flat line with a downside bias. That
occurred, as on Wednesday the cash Dow started the day lower, then moved higher
above 10330, and essentially spent the balance of the day moving above and below
the flat line, ending the day down some 6 points to close at 10310. Once again,
the cash Dow was unable to close above the 10330 level – and we’ll address this
issue in today’s prediction.
While the Dow was down, the S+P and NASDAQ were
both up. In fact the S+P tested and failed at its 20-day exponential moving
average, before falling back to close at 1221.53, up close to two points on the
day. The NAS ended the day higher as well, up 6.8 points to end at 1957.30.
^next^
Prediction for Thursday: As
readers know we have been watching for an oversold bounce and reactive test of
moving average and chart resistance on the major averages. That’s occurred with
both the Dow and the S+P, and I think this is a pretty strong top on the market
(A on the chart below). We’ve had some very strong economic news over the past
month, not the least of which is that earnings have substantially surprised to
the upside. However, the fact the Dow and S+P couldn’t break past moving
average resistance on the back of this good fundamental news is telling us
something about the strength of this market.
I think we’re in a mini-trading range from 10400
to 10220 on the cash Dow. The fact that the cash Dow can’t close above
resistance at 10330 is a sign of market weakness and an indication that 10400 is
a strong top.  I think this trading range could be broken soon, and I think that
break could occur to the downside. The only thing potentially holding up this
market is the oversold condition, which can be seen in the stochastics. The
stochastics have climbed a little out of their oversold condition, and if the
market were to really sell off you would like to see it a little higher. Â
In terms of today’s prediction, I think the Bank
of England’s interest rate increase overnight has scared the market and it will
lead to a lower open. That’s the easy part. What I think could happen after
the open is that the cash Dow might come down and test recent lows near 10250-70
and then bounce but remain on the downside. However, if the interest rate
market breaks resistance – notably 4.6% on the 10-year note – we could move to
test the 10220 level on the cash Dow. A move and hold of interest rates above
4.6% could be the trigger we need to break the 10220 level support and take the
path to Dow 10,000 that we’ve been predicting for some time.
There are going to be two trigger points that
could lead the market lower. One is the aforementioned move in interest rates
above 4.6%. Another trigger could be the NASDAQ moving and holding below its
200 day moving average (A) on the chart below. If that happens we could move to
test chart support just under 1900 (B) on the chart below. One factor that
could keep rates above 4.6% is Friday’s unemployment number.
Â
Unemployment Prediction: I think
like the Fed announcement, Friday’s big unemployment number has potential not to
provide major surprises. There is a good chance it will show growth in the
economy consistent with and confirming the validity of last month’s report. I
also think were in a period of time where the report can be interpreted from a
number of different perspectives. In some respects, it could be a no win
situation for the markets. If the report is strong, the markets will focus on
the negative of future raising rates. If the report is weak, the market might
question the strength of the economy, however this is the least likely of the
potential outcomes. Â
Portfolio Strategy: Right now we
are delta negative. Let’s watch how this market sets up. If we get a bounce at
some point we might get additionally negative. We’ll watch for a break of
support and potentially sell a mini-Dow future if we break support.
  Â
Yesterday’s Results and Current Portfolio Status:Â Â Â
Daily Profit: $205
Â
10100 May Mini Dow Put Options: We are short 2 put options. Yesterday this
option settled at 46, down 14. Profit yesterday with this position was $140.Â
Â
10100 June Mini Dow Put Option: We are short 2 put options. Yesterday it closed
at 125, down 17. Profit yesterday with this position was $170.
Â
10600 May Mini Dow Call Options: We are short 2 put options. Yesterday this
option settled at 12, down 3. Profit yesterday with this position was $30.Â
Â
10600 June Mini Dow Call Option: We are short two call options. Yesterday it
closed at 70, unchanged. Profit yesterday with this position was $0.
Mini Dow Futures: We came into the day short one
mini Dow futures. Yesterday it settled at 10305, up 27. Loss yesterday on this
position was $135. We are short one mini Dow. Â
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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