Option Spreads

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You may be wondering why all the hype recently from the Dow Jones Industrial Average’s (DJIA) drop yesterday, why it was such BIG news? Well it is from breaking one final major support, the 52 Week Low.

THE final support of any stock or index is the 52 week low, the majority of the time a rebound will be set off when the price reaches this level; however in some cases as what happened yesterday with Oil reaching over $140 an all time high and all the economic woes being thrown about and inflation being up, the support could not hold. So yesterday was big news as the DJIA took the plunge and closed below the 52 week Low and today it is still making new lows at the time of this writing it is another 60 points down.

For us that trade the SPX we still have not broken the 52 week low however if the Dow continues its decline which I assume it will especially after testing the previous support and falling back quickly, it will soon be breaking its 52 week low which is at 1256. With the market the way it is and a soft resistance at 1300 we could start looking for Bear Calls just above the 1300 point, just remember that this is a soft resistance and can be broken easily on a turn around.

Two things today related to trading that I want to point out from other people’s websites.

Jeff Ziegler from www.JeffreyZiegler.com is finally after several set backs and launch date changes is ready to start selling his credit spread trading program. You do not want to miss opening day as he is selling his “Credit Spread Trading Made Simple” for half the original price. Now the catch is you need to be a subscriber to his free weekly tips. One other catch is that there will only be 100 copies sold at the special price for subscribers. So go now and sign up to his weekly tips at www.JeffreyZiegler.com

Market Preview is a blog run by someone named Lionfish42, aka Prohobo, I do not know his real name, only internet names…LOL. Regardless he has a very humorous post today in regards to who a lot of people receive their stock market information. You NEED to read it and the pic is funny as well…so go check out - The Three Market Stooges! and throw him a Digg to show your appreciation for his humor.

A couple days ago I talked about the SPX and it being in a bearish channel, SPX where are we now, and described the current conservative support and resistance points.

Today lets see if we can use a couple technical indicators to give us a better idea of where we might be going. One of the laws of physics is that a body in motion tends to stay in motion. Adding to this law more specifically a body in motion in a specific direction tends to stay in that direction unless redirected by an equal or greater opposing or deflecting force. So what does this have to do with the SPX? Well similarly the stock market has tendencies to stay in the direction or trend that it is currently in, which is why I like to trade in the direction of the trend. It also changes direction when opposed by an equal or greater force such as in support or resistance. In my trading I use the 50 day moving average and the 200 day moving average as technical indicators for telling me the direction and the future direction of a stock or index. Also they can be used as support/resistance lines.

Moving averages are a simple calculation of taking the closing prices of the number of days in the average adding them together and then dividing by the number of days. Pretty simple it is the average closing price of the last whatever number of days you chose. SO in my example the 50 day moving average or 50 dma is adding the closing prices of the last 50 days and dividing that total number by 50. This gives a smooth line of and creates an idea of the trend.

How I use these -

the 50 dma - a support or resistance line but more importantly I use the line to confirm the direction of the stock or index. Angled down bearish, angled up bullish, flat neutral.

the 200 dma - a major support or resistance line and is the stock/index bullish or bearish. Above the 200 dma bullish/ below the 200 dma bearish.

Current SPX -

The 50 dma shows neutral shifting to bearish, the 200 dma shows bearish. Check back in May and in December the 200 dma has provided a strong resistance point.

The future holds for the SPX more of a bearish outlook. So we are definitely looking at bear plays such as a Bear Call Spread. In this case we should look for Call Strikes above the 200 dma or about 1430.