Market Commentary
Option Addict
Again, please excuse my absence today. Occasionally, life has a way of getting in the middle of things. With today's sell off I might be spending some time re-positioning my account as we head towards expiration. Hopefully you enjoyed the great moves I solar that I told you to take down yesterday. That was a nice source of gains while the market shift felt worse than it looked.
I'll be back in full force tomorrow, starting with a few words on "selecting strikes."
Here is the most recent "Market Commentary" at Investools.com...
Market Commentary
Jeff Kohler
Despite a late day sell off, stocks finish the trading day higher. The market has been fearful that high energy prices might have curbed consumer spending. However, today’s Consumer Price Index report concluded that inflation has been somewhat contained, as the Labor Department reported a better than expected increase in the CPI. This is taking into consideration the fact that food prices have seen the biggest one month increase in 18 years.
Many investors will disagree that inflation has been contained, but as positive data continues to roll in, this creates a higher likelihood that the Fed will end its “easy money” campaign, and stop their rate cutting frenzy. This report was taken as a surprise by the market, and as a result the Dow Jones finished up 66 points closing at 12,898. The NASDAQ posted a 1 point gain closing at 2,496, and the S&P 500 added 5 points, closing at 1,408.
Leading the stampede today were major airlines, mortgage investment companies, and retailers, while declines were led by gold miners, agricultural machinery, and oil & gas equipment and service companies.
Commodity prices scaled back today as oil closed at $124.22 per barrel, down $1.58. Gold also finished lower by $3.10, closing at $866.50 per ounce.
One of the biggest momentum groups in the market over the last couple days has been the solar stocks. On Saturday’s commentary I discussed keeping an eye on FSLR, LDK, TSL, JASO, and my favorite, CSIQ. CSIQ might possibly be the biggest percent gainer in the market this week, having moved more than 35%. Positive earnings and analyst upgrades have helped to fuel these stocks as they all continue to move higher.
Traders should start to expect a little volatility as we head into expiration week. May options expire this Friday, so make sure you are taking the necessary steps to close out your positions as needed.
Homework Follow-Up
On Tuesday I gave a homework assignment to research and get to know the trend reversal pattern- Double Top. The double top is a price pattern that occurs at the top of an upward trending stock. It is also known as the “M formation” since its price action takes on the shape of the letter M. Here is a recent example of a Double Top in TJX.
Figure 1: A Double Top in TJX.
Looking at the pattern, I have highlighted the shape to help you visualize the pattern. This price action reveals weakness in the trend as prices fail to make higher highs, and start to reveal volume contractions in price advances. When prices break below support, which is market by the bold red line, this is the signal to enter the trade. Once should set a price target that is roughly the distance between the support and resistance levels of this pattern ($32 - $30 = $2), and project that amount downward from the support level. Since support was at $30, we would expect a $2 drop down to $28. Looking at Figure 1, you can see that happened as expected over the next few days.
Last weeks assignment mentioned the possibility of a double top in OIH and $CRX. However, you can see that it is too early to call this price action a double top, because the pattern has yet to complete itself. Once prices break below relative support levels, then the pattern will have confirmed. At that point it would be reasonable to trade in anticipation of a change in trend.
Counter trend trading is a lower probability way to approach trading, but with proper tools and risk management, can be a very rewarding strategy when used appropriately.
Stocks to Watch
FSLR, PENN, CTRP, RIMM
PSA, CSH, CMG, CNH
Regards,
Jeff Kohler
Investools Content Manager
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