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February 08, 2009

Blast Off Time?
by Angelo Campione

2/8/2009 6:15:13 PM

General Commentary:

The strength in the markets late in the week has now moved the system into a Preliminary Buy signal. (Please note, a preliminary signal is essentially a neutral point, where further market action is needed to confirm the direction.)

While we had a positive move this past week, and we closed above the key 850 level on the SPX, in the end we remain in a range bound market. Having said that, from a daily perspective the trading range is getting tighter and an explosive move is likely to follow when a direction is eventually decided upon.

At this point, the late week strength we saw could be a "buy the rumor, sell the fact" type scenario with everyone anticipating the announcement on Monday by the government on its proposed new plans. There was some less than pretty data released last week and this seems to have been swept under the carpet based on "hope" that the government will take care of things. I'm expecting that we dip to test at least the 850 level this week before a sustained rally begins.

In any event, the week ahead is likely to be interesting. On to the markets..

Bigger Picture

While we remain firmly in a trading range between 800 and 950, this past week could be seen as one of base building. Also the underlying indicators remain positive, so the bullish side still looks positive for the medium term.

Smaller Picture

The shorter picture is showing almost perfect symmetry with both the uptrend and downtrend lines holding this past week. It's quite a beautiful picture (if you're into patterns that is), at this point the 850 level can be called the mid-point danger line where it represents key support for now that we're above it, but if broken, signals a potential for the downside to gain momentum.

Right now, the bulls have their nose in front but more work is needed to confirm this perspective. The SPX has essentially closed at two resistance levels:

1. The 50 DMA, and
2. The Downtrend line

The week ahead could provide the confirmation we're looking for, a close above 870 would be a positive sign.

For this week, support on the SPX remains at 800 - 820 and resistance is 870 - 920.

The VIX Picture

The VIX is very tentative at the moment and is corresponding to the indecisiveness of the market. The interesting thing now is that the MACD and RSI are both flat and while the last two days have been strong on the markets, the VIX has closed relatively unchanged. This tells me that the rises in the markets are not to be trusted yet and that more work is needed (which confirms the discussion above).

As long as we stay below the 45 - 46 level, potential for a rally builds, the next key level becomes the 200 DMA between 37 and 38.

The VIX measures the premiums investors are willing to pay for option contracts and is essentially a measure of fear i.e. the higher the VIX, the higher the fear in the market place.

Current Position:

The current position from January 20, is a half position in an SPX Feb 680/670 Put Option Spread at a net credit of $0.90 and from January 29 the other half position in a 720/710 Put Option Spread for a net credit of $0.70.

The premium received now if you entered these trades is $80 per $1,000 of margin required per spread (before commissions).

While we've wanted to enter a Call Spread as well this month, it hasn't happened and even though the markets have now risen and are at resistance, the risk/reward profile isn't there.

In relation to the current open positions, we have 2 weeks to expiry and almost 150 points from the nearest sold strike. At this point we remain comfortable with this.

Quote of the Week:

The quote this week is from Dr. Joyce Brothers, "Success is a state of mind, if you want success, start thinking of yourself as a success now."

Feel free to email me at angelo@stockbarometer.com with any questions or comments.

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Regards,

Angelo Campione

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