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July 17, 2008 Options Success Market Commentary
Market Commentary is provided by Cashflowheaven.com's Options Success Newsletter.
Wednesday, the market posted its first decent rally in weeks and believe it or not it started with the banks--Wells Fargo, Northern Trust and Charles Schwab posted surprisingly good numbers which lit a fuse under an oversold financial sector. Oil also retreated and that helped to take the sting out of very high PPI/CPI numbers. Comments from Ben Bernanke reassured traders that financial stability, not inflation, was the Fed's priority and the market did an amazing thing--it was able to hold its gains and rally into the bell.
However before you don the bull horns some serious technical damage has occurred and the market needs to follow through by closing above SPY 126 two days in a row for a REAL bounce to materialize--today was a good start. This morning, a lower than expected jobless claims number, a 9.1% jump in housing starts, lower energy prices and solid earnings from J.P. Morgan pushed the market higher.But tomorrow is huge--before the open, we will hear from Advanced Micro Devices, Capital One, Gilead, Google, Merrill Lynch, Microsoft, Zions, Citigroup, Honeywell and Schlumberger--it's going to be a very BIG day. Overall our expectations for these beaten down stocks are positive and this mini-rally could have legs. If the earnings spark buying, we could have a gap up on the open due to option expiration short covering. We may have seen a minor capitulation low this week--its minor because we didn't see the huge washout associated with real panic. However, after the IndyMac failure and concerns over Freddie Mac/Fannie Mae, we did see a spike high in the VIX and that usually signals a reversal. The downside has been tested today and the bears were not able to push this market down--there are just too many positive factors in play all at once and the A/D is positive by more than two to one--there is a good chance for follow through tomorrow.
Next week, the economic numbers come at us hot and heavy with the LEI, Beige Book, Durable Goods, Michigan Sentiment and New Home Sales. Weak economic conditions are priced in and earnings/guidance (not economic releases) will drive the market.
The major earnings releases next week include Bank of America, Merck, Apple, QLogic, SanDisk, Steel Dynamics,, AK Steel, Caterpillar, DuPont, UPS, UnitedHealth, Broadcom, Norfork Southern, Yahoo, AT&T, Boeing, General Dynamics, McDonald's, Peabody Energy, Whirlpool, Allstate, Amazon, QUALCOMM, 3M, Wynn Resorts, Black & Decker and Arch Coal. By the end of the week, we will know how the overall earnings season is shaping up--and most importantly, we will be able to gauge guidance for the third quarter.
Even though a nice move higher will be welcome right now there are too many negative influences for a sustained rally. At this juncture, earnings season could provide a short-term bounce to a deeply oversold condition. The best bet is to play biotechs and international industrials during this bounce--they are in their own little bull markets. Once the rally runs its course, the negative influences like inflation, energy, unemployment, and credit risk will continue to weigh on the market and the next leg down will begin--and THAT is when you want your put positions lined up.
We already have a list of weak stocks that are in a long-term downtrends and have bounced off of their lows--once they get to the top of their down-trend channels it will be time to position for another downside profit frenzy.
Market Commentary is provided by Cashflowheaven.com.