Thursday, October 1, 2009

01/10: Distribution day; apprehension ahead of tomorrow's unemployment number

Markets took a dive today, with the S&P500 down just over 2.5%.

Since I last wrote, about 72 hours ago, the markets have experienced a tightly range-bound session on Tuesday and a steep decline on Wednesday (caused by a significant miss on the Chicago-area ISM index, which came both below expectations and also well below 50%, indicating contraction), though followed by near-complete recovery later in the session. And, of course, today's sharply negative session is the most recent data-point.

For today, then, the S&P500 opened at 1055 -- itself a point below yesterday's close -- and continued to drop, closing at its low of 1030. Here's a 10-day snapshot:

Since Monday's posting, I have had some unfortunate experiences with regards to my market positions. My GS straddle went nowhere, and I unceremoniously unwound the position. I also had overnight positions in Oct HOT and X calls, both of which proved ill-timed; I entered the former late on Tuesday and the latter into Wednesday's decline, but by the time I waited for the obligatory overnight period (distinct with regards to each respective position), each was underwater and I decided to unwind rather than risk further loss. At present, I am holding Oct $37.5 CTSH puts, which I acquired today, though well into the market sell-off; at present, these are showing a slight gain. Much rides, of course, on the sentiment unleashed by the Bureau of Labor Statistics employment report, due at 7:30a CDT tomorrow.

Here's a 6-month and a 10-day of CTSH, courtesy of, of course:


Interesting to note is that I identified CTSH and entered my derivative position in rapid succession. Identification occurred on a screen of stocks with RSI values that dipped below 70 in the last prior session, with input of 2 sessions; beta values greater than 1.2; market capitalization in excess of $500M; daily volume over 400k; and price at or above $10. As such, the trade was rather impulsive; bear in mind, reader, that I was desperately looking for a suitable put candidate in the midst of intensifying market decline, while all the while holding a deteriorating position in X calls.

From a technical analysis perspective, CTSH looks prime for further pullback. On the 6-month and 10-day charts, it's clear that critical support in the vicinity $37.6-37.7 has been violated. The next support levels appear around $36.95 and $36.00. And, if markets should pull-back more aggressively -- which everyone is forecasting for quite some time already -- then support at $35, $33.9 and $32.75 might even be in play. But waiting for any of those outcomes would be very risky, indeed, and I'd probably be well-served to sell at the first or second support level approached, even if just to re-purchase the puts after the unavoidable pullbacks towards the upside. The only scenario in which it'd be advisable to hold would be a complete market meltdown following the BLS number, which is unlikely.

And a final critical point worth mentioning: if the BLS number surprises towards the upside, the markets remain well-positioned to make a run at their highs of two weeks ago. As such, I should sell the puts at a loss and enter calls in one or two leading stocks that are likely to lead the market higher, such as GS, metals/materials or technology.

Good luck tomorrow!

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