What Options Say About the Dow

Monday’s rally… a nice welcome back for our bull market, or was it the kind of day that will allow investors to get their hopes up? Energy sparked the rally, with stronger-than-expected earnings from ^XOM^ and news that the U.S. factory sector logged its best performance in more than five years during January. This news helped push the Dow to its largest daily gain since January 4, but will February hold different fortunes for investors than January?

If the put-call ratio tells us anything we shouldn’t be too excited. Back in mid-January this ratio got down below 0.5. This indicator is best used as a contrarian indicator. In this case, there was one put traded for every two calls. By most accounts, this was a bearish signal. And the bears, in fact, took over as expected. Now the put-call ratio is closer to 0.7, a more normal reading, meaning there is no cause to get too enthusiastic about a big move either way.

Technically, the Dow faces overhead resistance from its 50-month moving average. This trendline capped the Dow’s past three months, making it rather potent and the largest hurdle the Dow faces in its quest to a sustained run higher. How large is this hurdle? The last time the Dow finished a month atop this trendline was May 2008, then the bottom fell out. It sure appears that clearing the 50-month moving average will signal health for the Dow. Will the blue chips have any help in their quest?

Yes, in fact, the Dow is currently positioned slightly north of its 10- and 20-month moving averages. These two trendlines could catch up to the Dow’s current position triggering bullish activity. If, and when, this scenario takes place (the Dow using this support in its climb through the 50-month moving average), we may be able to declare the Dow back and healthy. Until that time, it’s likely we’ll see the Dow trade in a technical range set by the 10- and 50-month moving averages.

But there is no lack of opportunities. Range-bound markets are excellent for certain types of option strategies. As traders, we take what we’re given, as far as opportunities go. For now, we’ll be watching for market-neutral set ups until there is a confirmation of a break out.

Dan Passarelli is the author of the book Trading Option Greeks and founder and CEO of Market Taker Mentoring LLC. Passarelli began his trading career trading on the floors of the Chicago Board Options Exchange and the Chicago Board of Trade making markets in options. He regularly shares trading insights and educational tips in his options blog. Dan can be reached through his website https://MarketTaker.com and can also be followed on Twitter at twitter.com/Dan_Passarelli.

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