August 19th, 2008
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Light volume and a hot (really hot) PPI report triggered equity selling.
The major indices took it on the chin for the second day in a row following a nearly shocking jump in inflation. Economists were expecting a sizable jump in producer prices but the headlines numbers were nearly unbelievable. Despite a lackluster reaction in the Treasury markets, stocks sold off sharply to compensate.
According to the Labor Department, and judging by monthly expenses, inflation is on the rise. On the wholesale level, the PPI (Producer Price Index) rose by 1.2% in the month of July. This was more than double the anticipated rate and lifted the current rate to the highest level seen in 27 years. The core component, which strips out food and energy, saw a jump of .7%. This was the biggest increase since November 2006.
The news didn't do market sentiment any favors. "Maybe investors were hoping to shrug off challenges of high commodity prices and inflation," noted Jack A. Ablin, chief investment officer at Harris Private Bank. "But now we find out that perhaps the inflation situation is worse than we thought."
On a semi-brighter note, the Commerce Department announced that July housing starts fell to an annual rate of 965,000 units. The number was higher than consensus estimates but the lowest level in more than 17 years.
The S&P crossed critical support near 1275 and unless things turn around in tomorrow's session will probably see 1238 in the coming sessions. However, with the light volume and fickle trade anything is possible. Supportive to the index is the fact that today's trade brings the S&P to trend-line support. Personally, I prefer the sidelines as I think that there may be a better opportunity to get long the market via short puts, long futures, or an option spread.
Likewise, the September Dow futures are near trend-line support but may be vulnerable to additional declines to 11,152. If you are a NASDAQ trader, major support is all the way down at 1782...
If you took our recommendation to sell calls, you should have bought back the S&P option yesterday and been filled on the Dow call today (see details below).
Please note: A mini S&P chart is used because it is better for charting purposes, but trade recommendations are based the full sized S&P unless otherwise noted.
S&P Futures and Options Recommendations...
**There is unlimited risk in naked option selling and futures trading
Position Trade -
August 8 - I am inclined to sell the September 1390 S&P calls for $4 or $1,000 before commissions and fees, if you are trading mini's this would be $200. Before considering transaction costs this trade makes money with the market below 1394 at expiration but faces unlimited risk above 1394. The maximum profit of $1,000 minus commissions and fees occurs if the market is below 1394 at expiration. However, should this order get filled I will likely recommend buying this option back before expiration.
August 11 - This order would have been filled, we will likely recommend to buy this option back should we see a pullback to approximately 1264.
August 12 - Place an order to buy these back at $1 or better.
August 18 - You should have been filled on this order, assuming that you followed the recommendation and were able to get filled at these prices you would have netted a profit of $3 in premium before commissions and fees. This is equivalent to $750 in the full sized contract and $150 in the mini version.
Please note: A mini-sized Dow chart is used because it is better for charting purposes, but trade recommendations are based the full sized Dow unless otherwise noted.
Dow Futures and Options Recommendations...
**There is unlimited risk in naked option selling and futures trading
Position Trade -
August 8 - I also like selling the September Dow 12,400 calls for 50 points or $500 ($250 on a mini). Without regard to transaction costs this trade is profitable anywhere below 12,450 but faces unlimited risk above this level. The maximum profit of $500 minus commissions and fees occurs if the market is trading below 12,400 at expiration. However, should this order get filled I will likely recommend buying this option back before expiration.
August 11 - This order would have been filled, we will likely look to recommend buying this option back if the Dow falls to 11,422.
August 12 - Place an order to buy this option back for 15 or better.
August 19 - Had you followed this recommendation exactly, you would have been profitable by 35 points before commissions and fees. That is equivalent to $350 in the full sized contract and $175 in a mini.
Please note: A mini-NASDAQ chart is used because it is better for charting purposes, trade recommendations will denote whether a mini or full sized contract should be used.
NASDAQ Futures and Options Recommendation
**There is unlimited risk in naked option selling and futures trading
Position Trade -
August 1 - If you took our advice, you would be long the September e-mini NASDAQ 1670 puts for about 20 points or $400.
August 12 - Not off to a great start, but things may begin to look better from here.
Carley Garner
Senior Analyst/Broker
DeCarley Trading
1-866-790-TRADE
Local : 702-947-0701
There is substantial risk of loss in trading futures and options.
Past performance is not indicative of future results. The information and data in this report were obtained from sources considered reliable. Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or commodities. Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction.
