Wednesday’s Levels

  • June 16, 2004
  • Mark Melin

Technical Analysis and Trading Strategy

By Mark Melin, technical analyst

Wednesday, June 16

Tuesday Recap: The inflation
numbers were released Tuesday, and while the headline number was stronger than
expected, the core number came in exactly at the expected level – comforting the
markets and propelling stocks to test higher levels.  But the main impetus for
the day was the fact that pressure on interest rates had lessoned.  You can see
that they partied hard in the bond pits, as the 10-year note moved down a stiff
1.84 to end at 4.68%.  So long as interest rates don’t break resistance (A in
chart below), I expect stocks to move higher.  In fact, if the 10-year note
breaks and holds under support (B, 4.60%) then you might see a very strong rally
in equities.  Conversely, if we get a strong number that surprises the market
and we break resistance (A), then stock indices should watch out below. 


Charts from www.stockcharts.com


You’ll recall in yesterday’s prediction we said
that if stocks moved past 10350 they would test the resistance zone near
10400-30.  In fact, once stocks say the bond market reaction, they quickly took
off, first knifing past 10350 and quickly moving higher to test the upper end of
our predicted resistance zone at 10430.  When resistance couldn’t be broken,
stocks started to drift lower.  Then with approximately an hour to go before the
close, a rumor spread throughout trading floors in New York and Chicago that a
terrorist event had caused the evacuation of JFK airport in NYC.  When that
rumor was dispelled with approximately 5 minutes to go, trading in the cash
markets found buyers, pushing the cash Dow to close at 10380, up some 46 points
on the day. 

Prediction for Wednesday:  We
could see action on both sides of the flat line with a potential upside bias. 
On the cash Dow, let’s watch for a quick test of 10430.  If that breaks and
buyers can hold the index above that level, we could see a move to the 10500
region.  On the downside, let’s watch the 10350 level.  If this breaks we could
find buyers near the 10300, and then again near the 50-day moving average. 

As far as the S+P is concerned, we touched moving
average support on Monday and then bounced higher to close at 1127 Monday.  If
1127 and moving average support hold – which I think they could, baring an
unexpected event – we could start to march to the 1150 level.  Once we clear
1137 and then again the recent highs, that could be confirmation that we’re
moving to 1150. 

Portfolio Strategy:  We’re going
to try and get delta positive at a good price today.  Watch your e-mail for
trades. 

Previous Day’s Results and Current
Portfolio Status:  

Daily Loss: $30

 

10100 June Mini Dow Put Option:  We are short one put option.  Yesterday it
closed at 5, down 5.  Profit yesterday with this position was $25.

 

9700 June Mini Dow Put Options: On 5/24/04 we sold one put option for 70. 
Yesterday it closed at 1, down 1.  Profit yesterday with this position was $5.

10600 June Mini Dow Call Option: We are short one call option.  Yesterday it
closed at 2, 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. 
Yesterday it closed at 52, up 5.  Loss yesterday with this position was $50. 

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

 

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.