Market Uncertainty?

The markets are not uncertain. I am. The markets are showing bull trend especially the DOW it is currently in a bull trend channel and does not appear to be slowing. I have been waiting for the other shoe to drop and I expected it from Bernanke last week. When the opposite occurred and I was wrong it makes a trader think. So right now I have no plays I am going to sit back and watch the markets for the next day or two and redevelop a plan.

This is the best thing a trader can do - when you are uncertain about the market or a play, then stay out of the market you can lose big if you don’t. There is no rule that says you have to be in the market. It is always better to stay out when you are uncertain.

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Fed Chairman gives hope and screws up my speculative trade.

Well the new Fed Chair Mr. Bernanke gave an excellent review of where the economy is at right now, UP!, with a couple of signs of slowing such as in the housing market and energy prices high. However he also stated that the bond interest rate spread shows that inflation is in check and that even though there are mixed signals in the economy the FOMC may pause before raising interest rates to give more time for the numbers to shake out.

So what does this mean - it means the stock market down this morning off some bad earnings reports loved it and the bulls came surging forward. It closed the OEX above 595. So if you got into the specualtive play at $2.15 currently the spread is now $2.60 or so a loss of .45 per contract. Now the smart thing to do would be to take the loss and close the trade.

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Risky trade!!!

OK this trade is out of the ordinary for me and belongs in the speculative account. It is a credit spread that if speculation is correct will net a 75.44% return. This purely is a speculative play.

OEX Bear Call Spread May 595/600 for a credit of $2.00 to $2.15.

The OEX or S&P 100 has a very strong resistance at 595. There is some strength in the economy and earnings are roaring which would make you think that the markets should go up, but the better the earnings results and the better the economy is the more likely that the Fed will continue to raise interest rates which makes the market plummet. So this makes that 595 resistance point even stronger. A play here would be to sell the May 595 calls for around $4.25 and buy the May 600 calls for $2.10 creating a credit of $2.15.

Now for the good part of this trade, because you are creating such a large credit the amount of risk is actually lower. Instead of the capital risks that I normally have of $4.00 to 4.50, the capital risk of this trade is only $2.85 per contract. So the play is riskier or more speculative but the capital risk is less. Another reason that I like credit spreads as I am more risky in my plays the capital risk goes down!

So here is a chance to make a 75% gain but only lose 2.85 per contract at the most if I am wrong in 22 days.

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Step 3 Knowing where the stock will bounce - Support and Resistance

For Conservative credit spreads the most important thing to note is where the support and resistance of a stock is. I am going to let you read what someone else wrote first before I delve into this subject because it is extremely important and I want you to have a good grasp of the concept from different people - so do some homework and read up on Support and Resistance -

Go to -

Stock Charts Support & Resistance

Incredible Charts Support and Resistance

Investopedia Support and Resistance

MetaQuotes Support and Resistance

These are not links to promote these other websites but instead good explanations of support and resistance that I have found on the web. The best and most detailed is the Stock Chart explanation but many people will need another perspective. In future posts I will be giving other examples of more complex support and resistance in terms of channels, so stay tuned.

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