Wednesday’s Levels

Tuesday Review:  
We had another good day with a
profit of $200.

In our prediction for Monday,
resistance was identified in the 10470-80 region for the cash Dow.  While the
pre-open futures were pointing to a move to new highs, we said in our prediction
that we wanted to wait until the cash market set-up before we got too excited. 
In fact, we did wait for the cash market to set up and it moved into the
10470-80 region but didn’t get much further.  Ultimately, we weren’t buyers at
this level and we left the portfolio slightly delta negative.

 

 

 

While the Dow was holding up
relatively well in the morning, the tech-rich NAS was busy testing and
ultimately breaking its 50 day moving average.  In fact, the tech index lead the
market lower, down close to 2 ½% on the day. 

 

 

 

 

Look out below.  When chairman
Greenspan uttered a few words about the economy, all the markets — including the
S+P — took off to the downside.  In today’s prediction we have several thoughts
about this.  

 

 

Prediction for
Wednesday:  There are a lot of issues to discuss.  First, let’s address
the fear in this market and the potential knee jerk overreaction to chairman
Greenspan’s comments. 

 

Should it really come as a
surprise to anyone that rates are rising?  The bond market has been defacto
raising rates ever since the monster unemployment numbers were released about
one month ago.  (In our April 1 prediction we said inflation would soon become a
market concern.  That time is just around the corner.)  So when the chairman
just confirmed what most major market players already new was in play, why the
harsh reaction?  In a word: fear.

 

The fact that the market got
so spooked by this information and broke support speaks to the market’s soft
foundation.  So the big question is: Was yesterday’s break of support at 10330
on the cash Dow a serious technical event or just a knee jerk emotional
reaction?  I think that question will be answered shortly, and we may get an
indication early in the morning Wednesday.

 

 

On the cash Dow, we’ll watch
the 10330 level.  If the Dow can clear and hold this level, we could move to
challenge 10400-10.  If the cash Dow holds above 10330 it will provide a clue
that Tuesday’s price action was overdone.  If we can’t clear and hold 10330,
we’re likely to move on a path to the downside and potentially the lower
Bollinger band and 10,000 support.  On the S+P we’ll watch and see if support
near the 1115 level holds.

 

Pretty much across the board on Tuesday we got a
number of sell signals.  The RSI link broke 50 on all the major indices.  As
well, chart support and a number of additional indicators flashed sell signals. 
However, I’m always a little cautious when we break a technical barrier on what
could be characterized as a knee jerk, overblown emotional reaction to a news
event that shouldn’t  come as a surprise.  However, it is important that we
stick to our trading plan and our trading plan said sell a mini Dow if we closed
under 10330. 

 

So how view Tuesday’s price action?  Ultimately I
think it will lead to lower levels. I’ve been watching for the market to move
lower after the April options expired.  Further, so long as the NASDAQ is under
performing the general indices I have a major concern where this market is
headed. 

 

Portfolio Strategy:  Right now
we are delta negative.  Let’s watch and see how this market sets up.  If we see
a climb and hold above 10330 in the cash Dow we may get to delta neutral.  I’ll
watch the early morning action and send an e-mail to members after the open of
the cash markets. 

 

Yesterday’s Results and Current Portfolio
Status:

 

Daily Profit: $200

 

9900 May Mini Dow Put Options: We are long 2 put
options.  Yesterday this option settled at 65, up 20.  Profit yesterday on this
position was $200. 

 

10100 May Mini Dow Put Options: On 4/19/04 we
sold 2 Mini Dow Put Options, one at 70 and the other at 66.  Yesterday this
option settled at 107, up 37.  Loss yesterday with this position was $370. 

 

10600 May Mini Dow Call Options: On 4/19/04 we
sold 2 Mini Dow Call Options at 66.  Yesterday this option settled at 35, down
35.  Profit yesterday with this position was $350. 

 

Mini Dow Futures: We sold a mini Dow future at
10272.  It closed at 10268.  Profit yesterday with this position was $20.  We
are long one mini Dow future.

 

Mark Melin

DISCLAIMER:

Past performance is not necessarily indicative of future results.

There is a substantial risk of loss in commodity futures and options

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