MomentumOptionsTrading.com Weekly Wrap for 2/7/10 | Momentum Stock Options Trading Alerts and Option Picks Blog

2:45pm (EST)

The market spent much of the day in negative territory on Friday, as economic troubles overseas and a “surprising” unemployment report kept the bulls on the sideline. By 2pm, the market had reached its lowest point of the day as the Dow was down 167 points to 9,835. However, things changed.

In the final hour of trading, the bulls made a furious comeback and brought the Dow back into positive territory as it closed above 10,000. After all was said and done, the Dow ended the day with a 10 point gain to settle at 10,012.

The S&P 500 and the Nasdaq went through similar moves but both finished in the green as well. The S&P 500 closed with a gain of 3 points to finish at 1,066 while the Nasdaq added 16 points and closed at 2,141.

For the week, the Dow and S&P 500 fell 0.5% and 0.7%, respectively. The Nasdaq slipped 0.3% but all three are below their trend lines.

We have been mentioning the CBOE Volatility Index (VIX, 26.11, up 0.03) a lot lately and it can be a good indication of where the market is headed sometimes. The VIX shot up more than 20% on Thursday and was flat Friday but is creeping back to levels that would indicate fear in the market.

On January 22nd, here were our thoughts:

“We also said we didn’t expect February to be a very good month for the market so our hope is that we get some kind of bounce next week. Normally when the CBOE Volatility Index (VIX, 22.82, up 0.55) makes this kind of sharp reversal we know something is going on. The VIX was at 17-ish on Wednesday and has jumped over 30% in two days.” (END)

The S&P reached a high of 1,150 twice on January 14th and 19th and that “double top” really was a sign that a temporary high had been reached.

If the VIX is at 30 or more then it means the market is nervous. If the VIX is under 20, the market is confident. We were at 17 less than a month ago and now we are now rapidly approaching 30. And you thought we were kidding when we said volatility would pick up…

So what’s this mean? The bad news is that it does seem the market is finding new things to worry about which has made solid fourth-quarter earnings reports an afterthought.

The good news…well, is there really any good news? After Thursday’s VIX move, it appears the 30 level could be taken out and that could speed out any correction.

There are numerous headwinds that we face going forward and if China suddenly cools and the banks get levied with a huge tax burden then the market could be in big bubble, uh, we mean trouble. Although we do feel the economic recovery is underway, our senses continue to give bearish feelings.

For the longest time we set higher targets for the market before anyone would make those calls and we pretty much nailed the top. In August, we set our targets at 1,175 for the S&P 500 and for the Nasdaq our target was 2,275. We had the Dow pegged at 10,800. Well, the S&P traded 1,150; the Dow hit a high of 10,767; the Nasdaq reached 2,326.

Although there is a chance the market still gets a slight bounce, we feel February will continue to weigh on the indexes over the near-term. Those same targets may come into play weeks or months down the road but for now we are hoping the Dow can hold 9,750 and for the S&P 500 we are watching the 1,045 level.

If the bulls can hold these levels they will be good to go but if they can’t, the bears could take this market much lower.

For the Nasdaq, we are watching 2,075. If that level is broken, then Tech could correct the fastest.

The only 3 stocks you need to watch to get a good feel on where the Nasdaq is headed are Apple (AAPL, $195.46, up $3.41), Microsoft (MSFT, $28.02, up $0.18) and Qualcomm (QCOM, $38.04, down $0.13). These three make up a quarter of the Nasdaq 100 (^NDX, 1,746, up 13) index. We often talk about the Nasdaq futures in our morning outlook and this is the index they are based on.

Folks, if the internals continue to break down, and the major indexes continue to fail their 200-day and 20-week moving averages, then we could be setting up for a bear market that could get real nasty.

The short-term momentum continues to be down and as option traders we should focus on buying puts. We will have quite a few plays on our Watch List this week, including how you can take advantage of a rising VIX by using call options. Although we deploy a mix of both calls and puts in our trade recommendations we are leaning towards more put trades right now. If you think the market is headed much lower, we also show you how you can buy put options on some of the indexes as a pure play.

We also have more earnings reports due out and February options expire in less than two weeks. This is often the time we consider front-month options the riskiest to play but these options can provide powerful returns if you get the direction right.

Many of you reading this may have never played a down market because we have mainly been in a bull market for 10 months. When the market starts to correct the average investor will run for the hills, which is why we are not seeing any buying in the market right now.

Sideways markets are hard to trade but bull and bear markets are where options traders make their money. Again, if you think a stock, a sector, or an index is headed lower then use it to your advantage. And the best thing with options is you don’t need as much capital as you do when trading stocks.

If you are new to option trading we have an awesome Welcome Guide in our Members Area that will help you get started. You owe it to yourself to learn how to play both an up and down market.

We will be back in the morning with all of our current trade updates and later tonight we will release our updated 2010 portfolio results.

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This entry was posted on Sunday, February 7th, 2010 at 2:49 PM and is filed under Company Commentary, Earnings, Economic News, Market Analysis, Market Commentary, Trading Psychology, VIX, Watch Lists, Weekly Wrap. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.