The bears were surprised once again and the Dow rambled to another new high. Definitely a tale of two markets because it was the only new high.
The Dow rallied to 11,982 and closed only -3 points off that high. That was a pretty bullish performance thanks to IBM again at +4.13 and CAT, UTX, BA and MMM, which all gained more than a dollar.
The other indexes including the Wilshire 5000 failed to even reach their Friday highs on the rebound. They all posted gains but those gains were lackluster and stopped right at initial resistance.
This suggests the rebound could be in trouble tomorrow. I am not trying to pick a market direction here but technically the charts suggest a failure. On a sentiment basis the bulls are in control and the bears got a fat lip today. Will that short squeeze make the bear mad or scared?
On a fundamental basis the market should be bought on any dip because all the long-term factors are lined up and pointing to a stronger economy, lower unemployment and higher profits. Add in the Fed pouring gasoline on the liquidity fire and conditions improving in Europe and you have a recipe for long-term gains.
None of that means anything if the funds decide to take profits as the earnings cycle peaks on Thursday. The market exists to make fools out of as many forecasters we possible at any given time.
There is a very good chance last week's decline and today's rebound was just enough to stimulate buyers to come off the sidelines.
We only got one entry today. That was First Solar. That stock is possessed. Up +8 one day down -7 the next, repeat. However, I think we caught the wave this time and assuming the market does not correct we should be in a good position. Unfortunately the gap open today cut the option premium about in half from what we expected but we will still be profitable.
FFIV dropped another $3 and failed to fill the entry requirements. I am not going to lower the trigger yet. I was not confident the selling was over and that is why I made $115 the trigger point. I want to see strength return before we enter the play. If we see it forming a bottom in the $105-$110 range for a couple days I might take the entry so stay tuned.
I am not adding any new plays today because these one day wonder rebounds tend to fizzle. We want to see a trend not an EKG chart for Dick Cheney.
Current Position Changes
New Long Term Recommendations
None - Waiting for a "real" market dip
Current Aggressive Recommendations
FFIV - F5 Networks (Put Spread)
I am looking for a snap back bounce in F5 but it may take a couple days to appear. Investors are afraid of buying the dip before the dip is over. I am going to recommend shorting an April put and buying a short term February put. This way we get the most bang for the buck on the long put side.
I am putting a sell stop trigger on the play so we only enter the trade if the stock is moving up.
Enter trade ONLY if S&P is positive and FFIV trades at $115.
Option prices will decline before entry if FFIV is moving higher.
Sell Short FFIV Apr $130 Put (FFIV11P13000) currently $22.80, no stop, no target
Buy Long FFIV Feb $110 Put (FFIV11N11000) currently $5.30, no stop, no target
Chart of FFIV
There are several different formulas for determining margin requirements for naked put writing. These are normally broker specific and some can require larger margin requirements than others.
Here is the most common margin calculation for naked puts.
100% of the option premium + ((20% of the Underlying Market Value) - (OTM Value))
For simplicity of calculation simply use 20% of the underlying stock price and you will always be safe. ($25 stock * 20% = $5 margin)