Wednesday’s Levels

  • June 2, 2004
  • Mark Melin

Tuesday Recap: Tuesday was a day
when the major indices tested their moving averages.  In our prediction for
Tuesday, we said the cash S+P would test its 50-day moving average.  In fact,
the market started the day lower, moving in a stair-step fashion, first breaking
1118 then moving below the 50-day MA.  However, the S+P started to find buyers
near the end of the trading session and once it powered past its 50-day MA
shorts got nervous and buyers sensed a strong move higher and rushed to get in. 
This created an almost panic-like gap buying, with the broad-based S+P
frantically jumping higher in the closing minutes of NYSE trade.   On the day
the S+P closed at 1121.20.  While it was up only .52 on the day, it was a strong
move from the bottom. 

                                
Charts from www.stockcharts.com

For its part, the cash Dow started to the
downside and for most of the day held support.  However, in the afternoon the
market’s measure broke support and it looked like we would get a move to close
the gap created a few days ago.  At about the time I was looking for a move
lower to fill the gap and touch the 20-day EMA, the S+P came to the rescue and
buyers started to push this index higher, taking the Dow along for the ride.

The NASDAQ successfully tested its 50-day MA
yesterday and was the best performing index.  This is a good sign for market
bulls.  Let’s keep an eye on this index as it could lead to the upside and to
the downside as well. 

In other action, the Volatility index – a measure
of fear in the market – jumped on Tuesday.  This was due in part to monthly
technical options positioning as well as fear caused by a move in oil over $42. 

 

^next^

Oil closed strong today, up $2.45 per barrel to
end at its highest level since they started trading oil futures in New York. The
fact that this didn’t have a major negative impact on stocks is interesting. 
One thought is that stocks shrugged off this price action as a unfounded and are
expecting prices to move lower going into the OPEC meeting this Thursday in
Beirut.  Whatever the case, it’s a good sign that stocks found support in the
face of rising oil prices. 

Prediction for Wednesday: We
said we expected the markets to move higher Wednesday, and that’s likely to
occur.  I expect a move higher and a test of resistance near 1125 on the S+P. 
This will be an important resistance point, and I think there is a 65% chance we
clear it.  If 1125 is cleared, then we move to test the 1150 level —
significant resistance indeed.  On the Dow we’ll watch for a test of the 50-day
MA near 10250.  If we clear this we could be on the way to test 10300-25 and
then eventually the 10500 level.  On the NASDAQ, let’s watch for an early test
of 2000.  Keep an eye on NAS leadership.  When NAS leadership starts to trail
the market, that will tell us the market is getting long in the tooth.  On the
downside, the if NAS breaks its 200-day MA the entire market could be taken
lower.

Portfolio Strategy:   We’re
delta positive right now.  Depending on how this market reacts to resistance
we’re likely to remain delta positive.

Previous Trading Day’s Results and
Current Portfolio Status

Daily Loss: $25

 

10100 June Mini Dow Put Option:  We are short one put option.  Yesterday it
closed at 90, up 2.  Loss yesterday with this position was $10.

 

9700 June Mini Dow Put Options: We are short one put option.  Yesterday this
option closed at 24, up 8.  Loss yesterday with this position was $40.

10600 June Mini Dow Call Option: We are short one
call option.  Yesterday it closed at 7, down 5.  Profit yesterday with this
position was $25.

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

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.

 

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DISCLAIMER:

Past performance is not necessarily indicative of future results.

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whether this trading suits your particular needs and risk tolerance.

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