Good evening. Today's huge rally has created overbought conditions and we are entering levels where short positions look more attractive. There is still some earnings noise that the market is working through but the focus is starting to shift towards Friday's employment report which will probably set the tone in trading for the remainder of August. I expect trading to be choppy and there is bound to be large swings in both directions. I've chosen a short play on the DJIA (via DIA) for tonight. This will balance our model portfolio and enable us to take advantage of an ensuing pullback. Please email me with any questions.
NEW DIRECTIONAL PUT PLAYS
SPDR DJIA ETF - DIA - close 106.73 change +2.03 stop 108.75
The investment seeks to provide investment results that, before expenses, generally correspond to the price and yield performance of the Dow Jones Industrial Average (DJIA). The fund holds the Portfolio and cash, and is not actively "managed" by traditional methods. To maintain the correspondence between the composition and weightings of stocks held by the Trust and component stocks of the DJIA, the Trustee adjusts the portfolio from time to time to conform to periodic changes in the identity and/or relative weightings of index securities, typically within three business days before or after the day on which such changes are scheduled to take effect.
Target(s): 104.85, 104.25, 103.65
Key Support/Resistance Areas: 108.00, 107.00, 105.90, 104.75, 104.20, 103.50
Time Frame: 1 week
The DJIA has rallied right into prior resistance from its January highs and is forming a bearish rising wedge pattern. This pattern calls for a sharp decline but may bounce around a little near current levels first. In addition, today's +2% gain in equities has created overbought conditions and I believe DIA will turn back to at least fill the gap higher from today. We'll use a tight stop of $108.75 and I have offered three very realistic near term targets, along with a more aggressive target should things get moving to the downside in earnest. The stop is above a gap down from 5/15 so if DIA closes the gap we have a some room. If DIA makes it up to close this gap (5/13 close was $108.10) I would be very surprised to see it go any higher before heading towards our targets. I suggest readers be quick to tighten stops as targets approach because the drop could come quick.
Suggested Position: Buy September $106.00 PUTS, current ask $2.60
Entry on August xx
Earnings: N/A (unconfirmed)
Average Daily Volume: 14 million
Listed on August 2, 2010