Monday, October 13, 2008

It's early Sunday evening, and the futures are stealing up on a midpoint resistance at 934.25 after opening higher on a freakishly large gap. Even so, the rally has yet to surpass a single "external" peak on the hourly chart, suggesting that it will sputter out and reverse when the last short seller has been disemboweled and immolated. The rally would need to go another 60 points from current levels, to 991.75, to create an impulse leg on the hourly chart, but merely getting past the 934.25 midpoint would put the futures on course theoretically for a cruise up to 983.50. If they get there, the Dow should be up by around 700 points.

The Mini-Dow is targeted on 9234 if it can get past the midpoint pivot associated with that number, 8768. So far, in quietly hysterical trading Sunday evening, they have been as high as 8680. Like the E-Mini S&P, the Mini-Dow would fall short of creating an impulse leg on the hourly chart even if it reaches the target. The price pattern that points toward 9234, as well as our benchmark for a mildly impulsive move, are shown in the accompanying chart.

Gold was weakly defying the daft strength in stocks Sunday night, promising to inch its way to a Hidden Pivot resistance at 877.00 if it can get by a lesser one at 868.90. This is small stuff, really, but it beats watching bullion quotes fall simply because bears are frightened of the possibility that Euroland may have "rescued" its banks for maybe a week. The rally would become most encouraging on a print today exceeding 906.90.

Like Gold, Silver is creeping higher Sunday night, seemingly too feeble to take on some small resistance peaks created during Friday's sharp slide. The off-session high so far is 10.445, but bulls will need to press on to at least 10.885 to take command of the short-term trend.

The Nov 15-20 put spread could have been exited without difficulty on Friday for as much as 4.30, but assuming you closed out the position at the price specified, it would have yielded a gain of $365 per spread, or a total of $1460. If you simultaneously covered the short Nov 12.50 put near the highs, that would have reduced the gain by about $180, to $1280. I've included a snapshot of the options grid, with O-H-L-C prices for the November series. Concerning the stock, it appeared headed for a minimum 15.27 when the clock ran out last week.

If Big Blue were to get hit hard today, we should be waiting at 121.04 to catch a possible swing low. Bid for two July 120 calls, but stop yourself out if the stock trades lower than 120.89 thereafter. A bid of 4.10 would be about right if the order were to fill today, but you should lower it by a dime if we try this trade again tomorrow. If you use a 4.10 limit order, keep your bulletin launcher switched on, since I may advise raising or lowering the bid, depending on how the options behave. Typically, call volatility increases when a stock falls, so the options could conceivably be trading as high as 4.30. If they were trading for less than 4.10, I would infer that call options in general were in plentiful supply. I've included a snapshot of an option calculator that shows how I estimated a fair value for the calls. UPDATE: IBM went the wrong way, negating our strategy.