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The Dow Futures Report

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Bull Trap?

Mon, May 5 2008, 10:20 GMT
by Carley Garner

Alaron

Ahead of the Fed announcement it was slow going in terms of volume the direction was decisively positive. The Dow enjoyed a triple digit rally on a slightly positive GDP report and likely some short covering ahead of the excitement. I was encouraging many of my clients to be flat going into today and was likely not alone. The order flow was nearly non-existent. In fact, an hour before the Fed’s interest rate decision it was said that the S&P pit had 30 to 40 locals standing in it.

Many traders simply weren’t willing to hold positions into what may or may not have turned into excessive volatility. We have all come to know that sometimes major economic releases or announcements turn out to be a non-event and other times they can be unbelievably volatile but unfortunately you don’t know which is which until after the fact. A wise trader once said that you should trade leading up to the event but not during or immediately after. In this case, the Fed lowered rates by a quarter of a point and equities traded firmer but with relatively muted volatility (relative to some of the craziness we have seen) but weren’t able to hold gains going into the close.

The U.S. economy great at a rate of .6% in the first quarter to beat analyst estimates. Housing and credit problems are likely to blame for the dismal performance but many are relieved that the numbers didn’t suggest contraction. We are certainly in a rut, but have yet to conform to the textbook definition of a recession. Perhaps we will squeak by or perhaps this is only the beginning. One thing is for sure, the stock market is usually trading higher at the end of a recession than it started.

“The economy is weak but not collapsing” said Lynn Reaser, chief economist at Bank of America’s Investment Strategies Group. “A recession can’t be ruled out, although the starts are not lined up at this point to definitively say one way or the other.”

The team at dow-trading, an online trade signal provider, has a very different outlook on the economy and the market. They are looking at the recent rally as a great opportunity to get short the market either by selling futures or selling calls. However, they note that their services primarily involve automated day trading and are technical in nature rather than fundamental. They have contributed a chart to support their assumptions, see below.

Domestic equities have come to a fork in the road. Today’s trade may have been a bull trap or it may be the beginning of the 2008 rally that we have been looking for. My guess is that this was simply an opportunity for stop running and we will head lower from here.

I will be out of the office (and on a beach in Hawaii) from Wednesday April 30th through Tuesday May 6th. I will be available by email; however, should you have any urgent matters, feel free to contact my partner Paul Brittain or Robert Firestone by dialing 1-800-935-6492.

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 Recommendations...

**There is unlimited risk in naked option selling and futures trading

Position Trade – Flat

April 18th – My clients were advised to sell May Dow 133 calls for 50 or better (this can be done with the mini options or the full sized).

– Place an order to buy this back for 15 or better

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 Recommendation

**There is unlimited risk in naked option selling and futures trading

Position Trade – Flat

Published on  Mon, May 5 2008, 10:22 GMT