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Sunday, February 5, 2012

Weekend market analysis (02-05-2012)

Well, well, well, the market just doesn't want to go down. This week was impressive and gravity on the charts seems lost forever. This uptrend has been developing without pullbacks, and again, it reminds me so much of the December 2010 - February 2011 rally without pullbacks. It will happen, the pullbacks will come, they have to, in order to sustain this uptrend,.....well if the pullback doesn't show up the market will end up the year up 70% or something, which is clearly insane.

Two positions were added this week for the March expiration cycle: The March SPY 139/141 Call Credit Spread and the March IWM 88/90 Call Credit Spread. So, all the exposure right now is on the upper side. There is also the February SPY 137/139 Call Credit Spread which expires in 12 days from today and still feels comfortable although with a small unrealized loss.

Now, here's my thinking. Although the markets are overbought, I can't let it screw my portfolio. I would like to get rid of one of my Bear Call Spreads, specifically one of the March expiration cycle, which being the one farther from today is the hardest to predict. If there is some sort of pull back this week I will get rid of one of the March Call Credit Spreads, probably the IWM one, which is the one where I got the less juicy credit. At the same time, if the pull back happens, I would like to open a Bull Put Spread. Now which options to choose, that is the question.

Looking at the SPY chart you can project an uptrend to sort of forecast where a possible strong support will develop:

(Click on image to enlarge)

As you see, the uptrend support line gives me some useful information, and it looks like in case of a pull back this week or next, some support might be found around the 129 area. So, I would like to deploy a Bull Put Spread, and right now I like the 126/124 combination which is pricing a 0.21 credit. If the pull back happens, this 0.21 credit will increase nicely to the upper 20's or maybe 0.30 and that's when I will enter the position. Getting rid of the IWM Call Credit Spread and adding this SPY Credit Put Spread, would create an Iron Condor with a profit range between roughly 126 and 139, which would feel really comfortable.

As for the February 137/139 Bear Call Spread on SPY, I don't think I will touch it. This week is going to be light in news, and lately this has meant some sideways price action with a little upside bias, but the 1370 level on SPX still looks a little far from here.

I like this game of predicting where the market is not likely to go, instead of where it will.
Happy trading folks.

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