3/22/2009 7:48:12 PM
The system is now on a Buy signal.
We're at an interesting juncture, the market continued its rise from the previous week but found resistance at the 800 level and has begun to retreat.
With the system moving into a full buy signal (after a big run), the likelihood is that we'll get a bit more of a pullback and then continuation of this rally. So far the scenario for a larger picture bullish divergence is playing out and we'll need to see strength return between the 720 - 750 range in order to hold the bullish stand.
A month ago I discussed how I'd been looking at some historical charts and that there were similarities from where we are now to the October 2002 - March 2003 period. In fact the October 2008 - March 2009 period is amazingly similar. If we continue to follow the path of what happened in 2003, we'll get a few weeks of sideways action, possibly into Easter and then a great rally into June. I know it's not easy to see a sustained rally in the midst of negativity but the bottom line is that markets love to do what most people doesn't expect and the indicators are sitting with the bulls for now.
On to the markets...
SPX Chart - Bigger Picture
So far so good, the MACD has managed to turn positive again and the bullish divergence scenario discussed last week is holding. We may have a period of consolidation now before the downtrend line that runs roughly through 850 is reached.
SPX Chart - Shorter Picture
The first half of last week was very strong, however we hit the ceiling at the 50 DMA, which also coincides with the 800-resistance level. Thursday and Friday began a reversal that should take us to at least the 750 area.
Healthy volumes on up days seem to be returning and this indicates that a bottom is in for now. I anticipate that any pullback that we do get will be contained in the 720 - 750 region, with 740 being of particular note.
For this week, support on the SPX is at 720 - 750 and resistance 800 - 830.
The VIX Picture
The VIX picture is showing that it's caught in a sideways pattern. While it closed below the 200 DMA on Wednesday, it quickly reversed and now remains range bound.
If we do get some weakness in the markets this coming week, we could get back to the 50 level, but it now seems just a matter of time before 40 is broken, which will be very positive for stocks (that could still take a few weeks).
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.
Summary of Position For March
On February 23 we suggested a half position in a Mar 640/630 Put Option and received a premium of $80 per spread. At that stage it looked as though the market had the potential to lift, however it didn't and in fact fell away quickly, a Call Spread then became a risky proposition as a big turnaround was anticipated. In the last two weeks we did get a dramatic turnaround and this helped the suggested position finish very safely at almost 150 points from the sold strike.
The outcome of this equates to a net profit of $40 per $1,000 of capital utilized over the period, i.e. 4.0% before commissions for 4 weeks in the position. The official CBOE settlement price for the March SPX options was 789.40.
Current Performance for 2009:
January - 6.0%
February - 8.0%
March - 4.0%
(Please note, this performance is raw, i.e. without brokerage/commissions taken into account)
Quote of the Week:
The quote this week is a Buddhist Proverb, "When the student is ready, the teacher will appear."
Feel free to email me at firstname.lastname@example.org with any questions or comments.
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