Option Investor

Volatility Reigns

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The Nasdaq failed at resistance at 2090 after two days of trying to move higher and retreated to support at 2040. That support was rescued from an imminent break by the Kim Jong-il rumor on Friday morning. The rebound failed to break 2080 and it appears the Nasdaq is stepping down resistance in 10-point increments. In January it was 2010 then 2100. I February we have seen 2090 and now 2080 serve as resistance. I am beginning to become more worried that we are not moving higher.

The Dow is on the verge of retesting its 52-week and multiyear highs at 10850 and the S&P is just below its 1215 highs from last December. Neither are going to make much progress unless the Nasdaq finds some buyers. Tech funds just completed their 12th straight week of cash outflows. This is not encouraging. Were it not for the rebound in the SOX I would be much more bearish. Instead I am only cautiously pessimistic.

I say pessimistic because several of the high profile stocks which have been leading the February rebound are starting to slow if not fail entirely. This is troubling but not entirely unexpected. I want to maintain a positive bias but the facts are not supporting that position. You would think that with the Dow and S&P just a few points away from new highs that the broad market was doing great. That is not the case.

Homebuilders and energy are the only two sectors breaking out to new highs. The homebuilders were hit with downgrades on Friday but the dip was short lived. It was just deep enough to trigger our entry on Ryland Homes on the watch list. Toll Brothers was the one I wanted but it had already jumped several dollars early in the week.

I considered closing some of the non-performers this week but all are sufficiently covered by put insurance with the exception of RIMM. RIMM insurance expires next Friday and is well out of the money. The IBM rebound has stalled as well as Adobe. The Russell has fallen off its upward trajectory and that puts our IWM play in jeopardy. All in all I am not very positive this week. As we have seen for the last two weeks the picture can change drastically from day to day. There is still no trend and it may be time to start cutting the dead wood and tightening our stops. Hanging on one more week on the marginal trades could see them switch to solid green or turn a deeper shade of red. Personally I am allergic to red and I am going to take some lumps this week instead of waiting. If the markets move up from here we will still participate but if they move down we will have cut our risk.

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