Stocks took off like a rocket after the original TARP appears to be back in favor. It was reported that the government is bringing back the original purpose of the Trouble Asset Relief Program (TARP) of buying up troubled securities, which gave a jolt to stocks early this morning. Evidently, the new administration plans on creating a "bad bank" to buy up the troubled assets that remain on the financial institutions balance sheets. What might be bad for taxpayers was great news for bank shareholders.

With this news circulating throughout the Street this morning, it was no wonder that financial stocks gapped higher on the open. If troubled banks will be able to shed these toxic assets, investors appeared to be betting that there's an upside from their current stock prices. This helped lead the Market much higher early in the day. There was also one major earnings announcement this morning from Well Fargo, who posted a $2.55 billion loss with plenty of losses related to its acquisition of Wachovia.

Adding to the credibility of authenticity to this morning's report, the chairman of the Federal Deposit Insurance Corp. (FDIC) was floating the idea that the FDIC could manage the "bad bank." The concept's goal would be to add liquidity back to bank balance sheets, which could help spur new lending for businesses and consumers alike.

Stocks continued rally throughout the session heading into the afternoon's highly anticipated policy decision from the FOMC (Federal Open Market Committee). However, for once, there was no anxiety over a rate cut or hike by the Central Bank. Rather, the anticipation was over policy comments and outlook from policymakers.

The actual statement was fairly uneventful with the committee pledging to use all tools available to help revive the economy. It also stated the obvious, that the economy has continued to deteriorate. Perhaps the most notable bit of news was that the FOMC stated that it would keep the federal funds rate between zero and 0.25% for quite some time. Analysts were quick to forecast that meant rates would stay put through the end of 2009.

Also on the session, the weekly EIA (Energy Information Agency) inventory report came in with a mixed bag. It showed another larger-than-expected build in crude supplies but a reverse in gasoline inventories. Traders were looking for a build of 2.9 million barrels of oil heading into the release, but the actual number ended up being an increase of 6.2 million barrels. This was the sixth week out of the last seven that we've seen a large build in supplies.

On the other hand, fuel inventories declined by 100,000 barrels last week, which was its first drop since November. Analysts were looking for a build of 1.5 million barrels instead of the reduction. Some analysts believe that the current level of reduced production could drive prices higher this summer due to the pullback in current refining levels. The end result of today's inventory report was a tick up in the price of crude. It gained $0.58 and closed at $42.16 a barrel on the New York Mercantile Exchange.

Today's Economic Reports

The Dow Jones Industrial Average surged higher and finished the session up 200 points at 8,375. The 2.46% climb in the index was very impressive, but not as much as the other two major indices. Unlike the other two, the Dow remains below its 50-day moving average (red line) on the chart. If the index can break through this barrier, we could see a prolonged move to the upside.

The S&P 500 roared higher today, marking the fourth straight session of gains. The last time the index has done this was last November. By the closing bell, the index was up 28 points at 874. The 3.36% advance was fueled by the strength in financials, which also have been on a roll over the last couple of sessions. Today's move higher took the S&P through its 50-day moving average (red line). Because this line has been strong resistance for the index in the past, the breakthrough is very good news for the index. Now we want to see if it can hold above that mark.  

The Nasdaq led the other two indices today with an abundance of strength in major tech names. This propelled the Nasdaq to a 3.55% gain, taking the index up to 1,558. That 53-point climb took the index right above its 50-day moving average (red line) and then much higher. If it can continue its upward momentum, this is a very good sign for the overall Market.

Today's nice move in stocks took the VIX (Chicago Board Options Exchange Volatility Index) lower. It shed 2.59 points and closed at 39.66, which is taking the index back to its lowest level since the beginning of the month. This is very good news for the bulls.

This week's strength across the board has been perfect for our put spreads. The upward momentum has helped to increase the size of the cushions in all of our spreads, which might be needed down the road. For now, we're going to stay on the put side until the Market starts to run out of steam. After all, why fight the trend, even if it's only temporary. How the indices handle their 50-day moving averages will tell us a lot about how long this move the upside is going to last. We have two-for-three that made it through the moving averages, but will they hold....that's the question? For now, let's just sit back and enjoy the ride.

We tried for two sessions to get into the new Apple spread, but without success. The stock has continued its march up the chart, preventing us from getting a fill. However, we're not going to give up just yet. The recent strength in the stock and its ability to blow right through decent resistance levels on the chart just reaffirms our belief in this stock. We are going to adjust our strike prices and the credit and send it back to the brokers tomorrow morning for another attempt.

At the same time, we want to take advantage of the money flowing into the tech sector by also placing a put spread on the MINI-NASDAQ 100 INDEX (MNX). The index has shown a lot of relative strength lately and with its new leadership position, we feel that a put spread at conservative strike prices should be a very high probability trade. We are going to place our strikes below the recent low on the chart as well as a very good support level for the index back in December, which should provide some very good reversal areas for the index if the Market starts to deteriorate.

Please Note: These are both Day Orders and Limit Orders.

NEW TRADE ALERT (2)

Apple Inc. (AAPL)

OPENING 80-75 FEBRUARY BULL PUT SPREAD (15 contracts)

Sell 15 February Puts at 80 strike price

Buy 15 February Puts at 75 strike price

Total Credit 0.40 per contract

Potential Profit $600.00

Once Filled, Use a Conditional Order: Use a Stop or Buy Market if Touched Order if stock reaches $82.50. For auto traders, we will send in a close-out order if this happens.

MINI-NASDAQ 100 INDEX (MNX)

OPENING 110-105 FEBRUARY BULL PUT SPREAD (15 contracts)

Sell 15 February Puts at 110 strike price

Buy 15 February Puts at 105 strike price

Total Credit 0.40 per contract

Potential Profit $600.00

Once Filled, Use a Conditional Order: Use a Stop or Buy Market if Touched Order if stock reaches $112.50. For auto traders, we will send in a close-out order if this happens.

AAPL DAILY CHART

MNX DAILY CHART

CURRENT FEBRUARY SPREADS

RUT 350-340 FEBRUARY BULL PUT SPREAD (15 Contracts entered on 01/20/09)

Potential profit of $65.00 per contract

Contingent Stop Order set at $355.00

It was another good session for small-caps today with the RUT rocketing 17.44 points higher. The 3.83% gain outdid the major indices and left the RUT sitting at $473.02 at the closing bell. This propelled the RUT right through its 50-day moving average (red line) on the chart and left it at its 20-day moving average (blue line). Hopefully for us, the index remains above these levels going forward. After today's move, we are sitting in great shape because the index is trading 123 points above our "short" strike price. It doesn't get much better than this.

OIH 55-50 FEBRUARY BULL PUT SPREAD (15 Contracts entered on 01/20/09)

Potential profit of $50.00 per contract

Contingent Stop Order set at $52.50

OIH also enjoyed another strong session today with the ETF advancing 3.51 points and closing at $82.29. This amounted to a gain of 4.46%, placing OIH well above its 50-day moving average (red line) on the chart. This should give us some extra support levels in case oil decides to sell-off. With OIH currently sitting almost 30 points above our put spread, we shouldn't have anything to worry about in the near-term.

GOOG 270-260 FEBRUARY BULL PUT SPREAD (15 Contracts entered on 01/26/09)

Potential profit of $75.00 per contract

Contingent Stop Order set at $275.00

Google was one of the leaders today that helped push the Market higher. It climbed 17.19 points on the session and blew right through some old resistance levels on the chart. Today's 5.19% rally in the stock just extended its week-long run up the chart. The stock has been on a terror, which has added to our already large cushion in this spread. With money flowing back into tech, we see a very nice infusion into the leaders of the industry, which should help GOOG stay well above our put spread. We currently have a very comfortable safety net of almost 80 points in this spread.

As always, Trade Happy and Trade Smart

Today's trading worked fairly well for our spreads, except for one of our new positions. Apple came close, but couldn't get filled. Due to this, we are going to adjust the credit by a nickel and send it back to the brokers for tomorrow morning.

Please Note: These are limit orders and day orders. This applies to both regular members and professional trader members.

NEW TRADE ALERT (1)

Apple Inc. (AAPL)

OPENING 75-70 FEBRUARY BULL PUT SPREAD (15 contracts)

Sell 15 February Puts at 75 strike price

Buy 15 February Puts at 70 strike price

Total Credit 0.40 per contract

Potential Profit $600.00

Once Filled, Use a Conditional Order: Use a Stop or Buy Market if Touched Order if stock reaches $77.50. For auto traders, we will send in a close-out order if this happens.

AAPL DAILY CHART

As always, Trade Happy and Trade Smart

What leads us lower can always lead us higher. At least that was the case on Friday with the downtrodden financial stocks shooting higher. While the sector was down over 7% for the week, Friday's move to the upside helped bring two of the three major indices into the green. However, the gains on the final trading day of the week were only sugarcoating the steep losses that were felt across the board last week.

While there were some upside earnings surprises, the troubling ones dealt bigger blows to the Market last week. Some big tech names like Google, Apple, and IBM announced some very pleasing numbers last week, but it was the troubling news out of Microsoft and General Electric that caused a black cloud to hang over the Street. Although nearly everybody has been forecasting a very disturbing quarter, evidently not all of the problems had been priced in.

Friday's problematic earnings announcement was from GE, which announced a drop in earnings that was well over 40%. Despite this, the company attempted to sooth the Street by saying that it expects to keep its triple-A rating and will keep its dividend plan intact. However, traders continued to dump shares, displaying their lack of confidence in the company's management.

But Friday was all about financials and commodities. The beaten-down bank stocks made a nice reversal on Friday with Citigroup and Bank of America each moving up nearly double digit percentage gains. Even with these gains, we remain skeptical that they can continue moving north this week. While it would be nice, let's just say that we won't be holding our breath.

Also enjoying nice gains on Friday were the material stocks. They were helped by a strong advance in gold, which climbed $37.10 to finish the week at $895.30 an ounce. This took gold to its highest level in three months. Meanwhile, crude continued its run on the week with a $2.80 jump on the session. The 6.4% gain took oil up to $46.47 a barrel on the New York Mercantile Exchange.

Tomorrow's Economic Reports

The Dow Jones Industrial Average was able to stabilize after Tuesday's wicked sell-off. While the Dow wasn't able to find its way into the green on Friday, it lost only 45 points while finishing well off its low on the day. The 0.56% loss left the Dow just above the 8,000-point mark heading into the weekend at 8,077. For the week, the Dow lost 203 points, which amounted to a 2.5% loss for the four trading days. The key for the index this week will be to hold above last week's low. If it can do so, we might be able to avoid re-testing last November's low. But if it breaks below last week's mark, we are more than likely to test those old lows. We just hope that we hold once we hit them because if we don't, it's going to be ugly.

The S&P 500 showed more strength than the Dow on Friday when it moved 4.45 points into positive territory at the close. Its 0.54% advance on the session put the index at 831 points heading into the weekend. Similar to the Dow, we'll be watching to see how the S&P handles last week's low on the chart, near the 800-point level. If the index falls below this number, it also is likely headed to test last year's low near 750 points on the chart. This is a situation we would like to not see any time soon.  

The Nasdaq also enjoyed a flurry of buying on Friday that took the tech-heavy index up 11.80 points to 1,477. However, it still managed to lose 18 points on the week. This week we'll be watching to see how the index handles its closest support levels on the chart. But if the index can move higher, we'll be monitoring how it handles resistance from its 50-day moving average (red line).  

It was certainly one wild week of trading last week, which caused the VIX (Chicago Board Options Exchange Volatility Index) to spike. While it was much higher on Friday, the "fear" index fell 0.02 points on Friday and finished the week at 47.27.  

The focus last week was all about earnings, or lack there of. This will continue to drive the Market this week with nearly 140 of the S&P 500 reporting this week. We also have another FOMC meeting that takes place mid-week and the GDP report coming out. The combination of all these things point to another volatile trading week that is sure to be a wild one. Our plan is to attempt to take advantage of the wild price swings and using it to get filled in a couple new spreads. Last week we attempted to get filled in both Google and Apple, but weren't successful. We're going to attempt both of them again on Monday.

Please Note: These are limit orders and day orders.

NEW TRADE ALERT (2)

Apple Inc. (AAPL)

OPENING 75-70 FEBRUARY BULL PUT SPREAD (15 contracts)

Sell 15 February Puts at 75 strike price

Buy 15 February Puts at 70 strike price

Total Credit 0.45 per contract

Potential Profit $675.00

Once Filled, Use a Conditional Order: Use a Stop or Buy Market if Touched Order if stock reaches $77.50. For auto traders, we will send in a close-out order if this happens.

Google Inc. (GOOG)

OPENING 270-260 FEBRUARY BULL PUT SPREAD (10 contracts)

Sell 10 February Puts at 270 strike price

Buy 10 February Puts at 260 strike price

Total Credit 0.75 per contract

Potential Profit $750.00

Once Filled, Use a Conditional Order: Use a Stop or Buy Market if Touched Order if stock reaches $275.00. For auto traders, we will send in a close-out order if this happens.

AAPL DAILY CHART

GOOG DAILY CHART

CURRENT FEBRUARY SPREADS

RUT 350-340 FEBRUARY BULL PUT SPREAD (15 Contracts entered on 01/20/09)

Potential profit of $65.00 per contract

Contingent Stop Order set at $355.00

After Tuesday's big drop in the RUT, the rest of the week was one of consolidation for the index. The small-cap index hovered along its support just below $440 over the four trading days last week. On Friday it continued this trend with the index gaining just $1.51 and finishing the session at $444.36. Despite the pullback on the week, we still are sitting in very good shape in our put spread with nearly $100 points of breathing room and some decent support levels on the chart.

OIH 55-50 FEBRUARY BULL PUT SPREAD (15 Contracts entered on 01/20/09)

Potential profit of $50.00 per contract

Contingent Stop Order set at $52.50

OIH had some large moves to the upside last week, but half of the trading days were also to the downside. However, the ETF moved up on the week due to Friday's $4.83 gain, which took OIH up to $76.24. It also closed just below its 50-day moving average (red line) on the chart. If it can make it through this barrier, we could see a nice run in the ETF, possibly up to the 90-point level. As of today, we have a decent cushion of over 20 points in our put spread with four weeks left to go.

As always, Trade Happy and Trade Smart

The Market started the day strong and then finished even stronger. It was quite the contrast from yesterday's rough and tumble session. While it didn't make up all of yesterday's losses, the Market did bounce back nicely by getting back almost two-thirds of Tuesday's decline.

It was the tech sector that got things moving north this morning after IBM's stellar earnings release Tuesday night. The company stated that it expects that its earnings will come in well above analysts' projections. At the same time, IBM reported a 12% jump in fourth quarter profits, which was also well above the Street's expectations.

But technology stocks weren't alone on Wednesday, with PNC and Bank of New York Mellon both pleasing the Street. PNC disappointed investors with a loss for the fourth quarter, but pleased them with expectations of a profit for 2008. Meanwhile, the Bank of New York Mellon got a shot in the arm after it was able to come through with a profit in its fourth quarter.

There was one piece of economic data that came out this afternoon, which wasn't a surprise, which homebuilders' confidence is sitting at a new low this month. According to the National Association of Home Builders/Wells Fargo housing market index, there was a one-point drop in the index to a new low of 8.0 in January. The index was at 9.0 for the previous two months, which showed a slightly better level of confidence in the homebuilders. This index has little influence on traders, especially since the drop is nothing unexpected.

Usually Wednesday would mean the weekly EIA (Energy Information Agency) report would be released. But with Monday being a Market holiday, the release was pushed off until Thursday. While oil traders are expecting the inventories to continue building (1.9 million barrels), that didn't stop the rise in crude today. It jumped $2.71 and settled at $43.55 a barrel on the New York Mercantile Exchange.

Tomorrow's Economic Reports

This afternoon's rally appeared to get a boost from the financials, in particular Bank of America. The stock surged after word that company directors and CEO have been purchasing shares of common stock. On Tuesday alone, a company director and CEO each purchased 200,000 shares of Bank of America stock. The news of these transactions appeared to give investors a boost of confidence, at least for today.

While traders had one eye on stocks today, the other eye was on Capitol Hill and the testimony of the new President's pick for Treasury secretary. The nominee has run into a bit of trouble over unpaid taxes but is expected to be approved.

The Dow Jones Industrial Average bounced back with a 279-point surge today and finished the session at 8,228. The 3.51% advance nearly wiped out yesterday's loss. With two crazy sessions so far this week, the next two days should be very interesting.

The S&P 500 also started strong this morning and finished even stronger with a 35-point move to the upside. Its 4.35% advance fueled the strength in the financial sector and left the index sitting at 840 points.

The Nasdaq also enjoyed a strong session with a 66-point move of its own. Its 4.60% gain led the other two indices on the day and left the tech-heavy index sitting at 1,507 at the close. This places the index just under its 50-day moving average (red line) on the chart. It will be very interesting to see how the Nasdaq handles this resistance level.    

After bursting through its 50-day moving average (red line) yesterday, the VIX (Chicago Board Options Exchange Volatility Index) pulled back sharply today. It tumbled 10.23 points and finished the session back below its 50-day moving average at 46.42 points. We'll be watching to see if it can hold below this line the rest of the week.

Tuesday's wicked sell-off helped fill our put spread in a matter of minutes. The good news about today is that it gave us back most of our cushion in our new spreads. With so much time left in the February cycle, we aren't in a big hurry to add additional spreads. However, we think we've found one that's just too good to pass up. Tonight after the bell, Apple came through with some excellent numbers due to excellent international sales. We want to take advantage of this upside momentum in Apple by adding a put spread on tomorrow's open. The stock is up sharply after hours, which might continue tomorrow morning pre-market. However, we're going to go ahead with a new spread and see if we get filled with the early morning volatility.

Please Note: This is a Limit Order and Day Order.

NEW TRADE ALERT (1)

Apple Inc. (AAPL)

OPENING 70-65 FEBRUARY BULL PUT SPREAD (15 contracts)

Sell 15 February Puts at 70 strike price

Buy 15 February Puts at 65 strike price

Total Credit 0.70 per contract

Potential Profit $1,050.00

Once Filled, Use a Conditional Order: Use a Stop or Buy Market if Touched Order if stock reaches $72.50. For auto traders, we will send in a close-out order if this happens.

CURRENT FEBRUARY SPREADS

RUT 350-340 FEBRUARY BULL PUT SPREAD (15 Contracts entered on 01/20/09)

Potential profit of $65.00 per contract

Contingent Stop Order set at $355.00

After falling off a cliff yesterday, the RUT reversed nicely to the upside today. It soared 23.11 points higher today and finished at $456.76. We are very interested to see what happens when the index hits its 50-day moving average (red line) in the next couple of days. After today's move by the RUT, our put spread is sitting in decent shape with over a 100-point cushion.

OIH 55-50 FEBRUARY BULL PUT SPREAD (15 Contracts entered on 01/20/09)

Potential profit of $50.00 per contract

Contingent Stop Order set at $52.50

OIH took a beating yesterday, but more than made up for it today when it surged 6.33 points. The 9.27% climb on Wednesday took the ETF well above Tuesday's opening price and left OIH sitting at $74.59. However, tomorrow might not be as bullish with the EIA report coming out mid-morning. But even if it's a bearish number, we're still looking very good in our put spread with nearly a 20-point cushion. Let's just sit back and see where we go from here.

As always, Trade Happy and Trade Smart

It was the typical expiration volatility on Friday with stocks finishing the day on the way up. The early session drop took the indexes sharply lower, but stocks were able to head higher finishing the week with two straight winning sessions. Similar to the typical volatility, there were also plenty of problematic reports in the financial sector on Friday. Of course, we have become numb to these types of stories, which is why the Market has been able to overcome the bad news recently. This, by itself, is good news for the future. Whenever stocks don't tumble on troubling news, it's very good news.

Friday's financial concerns were the two stocks that had been in the news all week. Bank of America took another beating on Friday when it reported nearly a $2 billion loss and announced a government assistance of $20 billion. The news was shocking to shareholders because the company previously told investors that it wouldn't need government assistance to acquire the troubled investment bank Merrill Lynch. According to reports on Friday, the company will get a very large backstop from the federal government in regards to losses from Merrill Lynch. The government will absorb up to $118 billion in losses, if needed. The problem for shareholders is that the government is now the largest investor with nearly 6% of ownership in the company. The effect of big brother looking over the shoulder is already being seen with the company cutting its dividend.

If the news out of B of A wasn't bad enough, Citigroup also reported earnings (or lack there of) on Friday. The company announced a quarterly loss of over $8 billion and a new restructuring plan on the management front. They also are actively looking at ways to sell off assets as a step to get the company back to earning a profit.

Besides the bad news on the corporate front, there was encouraging economic data on Friday. According to the CPI (consumer price index), prices rose by their slowest pace last year in over 50 years. This was mostly due to the 75% drop in oil prices since last July. According to the December CPI reading, prices dropped 0.7% while the core CPI fell by 0.015%.

The other good news on Friday came from the University of Michigan's reading on consumer sentiment, which came in ahead of expectations. January's number of 61.9 was also ahead of December's 60.1 reading. However, it's important to keep in mind that sentiment is only a reflection of a variety of events and not an accurate way to forecast future consumer spending. With that said, we'd much rather see it moving higher than lower.

Graphic from Briefing.com

Oil was able to rise on Friday with the price jumping $1.11 a barrel. The 3.1% advance took crude to $36.61 a barrel on the New York Mercantile Exchange. Despite the rally on Friday, oil fell 10.6% for the week. Meanwhile, the dollar was mixed on the session with it gaining on the yen but falling on the euro. Also on the day, Treasury prices declined with the two-year and 10-year notes falling.

Friday's Economic Reports

The Dow Jones Industrial Average dropped early in the session but was able to make it into green territory at the closing bell. It gained 68 points on the day and finished the week at 8,281. However, the Dow lost 317 points over the last five trading days, which puts the index down 3.7% on the year.  

The S&P 500 also finished in the green on Friday with a 6-point gain. The 0.76% advance takes the index up to 850 points. For the week, the index lost 40 points, which puts it down 5.9% for 2009.  

The Nasdaq also made it two green sessions in a row with a 17-point gain on Friday. The 1.16% rally took the index up to 1,529. This left the index sitting right at its 50-day moving average (red line) on the chart. Despite the late week rally, the Nasdaq still lost 42 points on the week, which puts it down 3% on the year.   

The VIX (Chicago Board Options Exchange Volatility Index) finally took a step back on Friday when it dropped 4.89 points and finished the session at 46.11. We'll have to wait to see if it can continue falling this week.

Last week turned out to be fairly uneventful for our spreads, just the way we like it. However, it was a little bittersweet with OIH finishing just where anticipated. Unfortunately, we were taken out of our call spread on the quick run-up in oil. Without this blemish, it would have been a very good month. We don't regret closing out the spread early because this is our new strategy of using stops to prevent any large losses. However, we wish we would have come back with another call spread after OIH started the falling. But with time running out in the cycle, there just wasn't enough premium to take on the risk. With that said, let's add up the totals from last month.

CLOSED/EXPIRED JANUARY SPREADS

RUT 370-360 JANUARY BULL PUT SPREAD (10 Contracts entered on 12/22/08)

Profit of $55.00 per contract

RUT 560-570 JANUARY BEAR CALL SPREAD (10 Contracts entered on 01/02/09)

Profit of $55.00 per contract

OIH 55-50 JANUARY BULL PUT SPREAD (15 Contracts entered on 12/22/08)

Profit of $55.00 per contract

OIH 85-90 JANUARY BEAR CALL SPREAD (15 Contracts closed on 01/05/09)

Initial Credit of $40.00 per contract

Close out debit of $171.00 per contract

GOOG 240-230 JANUARY BULL PUT SPREAD (10 Contracts entered on 12/22/08)

Profit of $60.00 per contract

TOTAL PROFIT $ 560.00

While the profit wasn't big, it was three straight profitable months. With a nice streak going, let's see if we can work on increasing the size of the profit. The upcoming month is a five week options cycle, so we have plenty of time to get into all the trades. With that in mind, let's start with two new ones for tomorrow morning.

We are going back to both the RUT and OIH put spreads. In both of these opportunities, we are placing our strike prices below the lows from last year. While we still have more of a sideways basis to the Market in the short-term, we wanted to stay on the put side for now in case we do get a Bear Market Rally. These can be fast and furious when they happen. In the mean time, by placing these new spreads on Tuesday, we are picking up plenty of premium for the longer cycle while at the same time giving ourselves plenty of cushion in case there's another round of heavy selling. We feel that both of these new spreads are an excellent opportunity to get this cycle started on the right foot.

Please Note: These are Limit Orders and Day Orders.

NEW TRADE ALERT (2)

RUSSELL 2000 INDEX (RUT)

OPENING 350-340 FEBRUARY BULL PUT SPREAD (15 contracts)

Sell 15 February Puts at 350 strike price

Buy 15 February Puts at 340 strike price

Total Credit 0.65 per contract

Potential Profit $975.00

Once Filled, Use a Conditional Order: Use a Stop or Buy Market if Touched Order if stock reaches $355.00. For auto traders, we will send in a close-out order if this happens.

Oil Services HOLDRs (OIH)

OPENING 55-50 FEBRUARY BULL PUT SPREAD (15 contracts)

Sell 15 February Puts at 55 strike price

Buy 15 February Puts at 50 strike price

Total Credit 0.50 per contract

Potential Profit $750.00

Once Filled, Use a Conditional Order: Use a Stop or Buy Market if Touched Order if stock reaches $57.50. For auto traders, we will send in a close-out order if this happens.

RUT DAILY CHART

OIH DAILY CHART

As always, Trade Happy and Trade Smart

With the Market closed on Monday, we won't have our weekend update released until Monday evening. Because we try to cover all timely events, we don't want to send something out tonight when events could change overnight. With that said, enjoy the Market being closed and look for a newsletter tomorrow night.

As always, Trade Happy and Trade Smart

Different day, same story. Weakening economic reports and more trouble in the financial sector gave little reason to be a buyer on Wednesday. This just helped fuel the bears and push the indices farther down the charts. It also had many wondering if we're going to test the lows from last November because we're definitely within striking distance.

It was twice as bad as analysts predicted for the retailers on Wednesday when the Commerce Department reported the sixth straight month of declines. The miserable holiday shopping season led to a 2.7% decline in retail sales for December. This was far worse than the 1.2% that the Street was expecting heading into the report. This number amounted to the worst holiday shopping season since the 1960's. The chart below shows that consumers have stopped spending since the credit crisis began.

Also on the day, the Commerce Department reported a cut in business inventories for November. It announced a 0.7% drop, which was the largest decline since 2003. The problem is that businesses continue to shed inventory but refuse to build supplies. This amounts to a drop in employment as businesses pull back on production. But with the weak sales numbers that we just discussed, it's hard to blame any company for cutting production when consumers are not purchasing. It's just part of the vicious circle.

This afternoon's economic data revolved around the release of the Fed's Beige Book, which is an anecdotal summary of economic conditions. The release only pointed out the obvious to us. It noted that most districts noted reduced or low activity across a wide range of industries. The government also stated that housing continued to worsen while commercial real estate deteriorated. The Fed also saw heavy retail discounting during the holiday season.

Oil continued to slide today after another large build in supplies was announced. In the weekly inventory report, the EIA showed a 1.1 million barrel increase last week. While the number was lower than analysts' expectations of a 1.8 million barrels, the demand part of the equation continues to show declining usage. At the same time, distillates surged much higher than the Street was expecting. The end result was a $0.50 drop in the price of crude. The 1.3% decline caused oil to settle at $37.28 a barrel on the New York Mercantile Exchange.

Wednesday's Economic Reports

The problems in the financial sector were intensified Tuesday after the closing bell when Citigroup announced that it would sell a controlling stake in Smith Barney to Morgan Stanley. While many have been pushing Citigroup to start shedding assets, it was the fire-sale pricing that has investors concerned.

But the anxiety in the financials wasn't contained to Citigroup. Deutsche Bank warned the Street that it would have a fourth quarter loss of over $6 billion and JPMorgan Chase bumped up its earnings announcement by a week, which left many speculating that it's going to be a dozy of an announcement. HSBC was also in the limelight when analysts predicted that the company would need to raise $30 billion in capital and cut its dividend. Once again, it wasn't a good day for the financials with many of them reaching last year's low.

The Dow Jones Industrial Average continued its precipitous slide today when it broke through a major support level at 8,400 and finished deep into the red. Today's 248-point decline took the index down to another key support area at 8,200. With the bears picking up momentum, we doubt this level will hold. The index should easily take out this support and then challenge 8,000. After this, it's off to the low from last November near 7,500.

The S&P 500 also took out a key support level at 850 today and then moved lower. While it closed off its low of the session, it wasn't by much. The index shed 29 points and closed at 842 points. While there are plenty of support levels on the chart before we hit last November's low, we could easily take out those levels in a blink of an eye if the bad news continues to hang over the Market. Let's just buckle the seat belts tight and see how low we go.

The Nasdaq continued its free-fall today when it tumbled 3.67% and closed under a former support level at 1,489. Today's 56-point loss leaves the Nasdaq on pace to reach its next level at 1,400 in the very near future. If this number does not hold, next stop is its November low.  

Today's bloodletting caused a surge in the VIX (Chicago Board Options Exchange Volatility Index). It popped 5.87 points, closing at 49.14. Another drop in the Market will give the VIX enough momentum to take it up to its 50-day moving average (red line) on the chart.

It seems "par for the course" that we'd get another big hurdle before expiration. With that said, our spreads appear to be sitting decently for the time being. We have weathered this week's selling and have just a full day left in the index spread and two days in the rest.

The only problem is that after the closing bell, there's been a bombardment of terrible news hitting the wire. It started with Apple announcing that CEO Steve Jobs is taking a leave of absence due to health concerns. It has been reported that last week's update on his health put a sugar coating on a much more severe medical problem. This news will likely put some selling pressure on the Nasdaq. Then we have more financial problems with Bank of America requesting an additional financial assistance from the government due to its acquisition of Merrill Lynch. When you add in a likely troubling earnings report from JP Morgan Chase (JPM) tomorrow morning before the bell, it points to a big sell-off on Thursday's open. But as we all know from the past year and a half, tomorrow's open is a long ways off and a lot can happen between now and the opening bell.

Barring a massive crash tomorrow, we feel very optimistic about making it to the finish line with the rest of our spreads intact. However, we want to remain prepared for whatever the Market might throw at us over the next two sessions. With that in mind, we are closely monitoring the positions in case there is any action that needs to take place. At the same time, we have the contingent close-out orders ready to go in case our trigger prices are hit. Members that are not auto trading should also have their orders placed with their brokers so that they have nothing to worry about.

Before we take a look at all of our spreads in detail, we wanted to let everyone know about a new special that one of our auto trade brokers is currently having. Any IncomeSpreadTrader member that opens up a new account or transfers an account to TradeKing, will receive a special promotion. Make sure to notify them that you are a member of IncomeSpreadTrader so that you receive the special promotion (keep in mind that restrictions such as a minimum account balance of $2,500 do apply).

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CURRENT JANUARY SPREADS

RUT 370-360 JANUARY BULL PUT SPREAD (10 Contracts entered on 12/22/08)

Potential profit of $55.00 per contract

Contingent Stop Order set at $375.00

RUT 560-570 JANUARY BEAR CALL SPREAD (10 Contracts entered on 01/02/09)

Potential profit of $55.00 per contract

Contingent Stop Order set at $555.00

After holding firm yesterday, the RUT couldn't avoid the pain today when it dropped 20.62 points and closed at 453.17. The wicked 4.35% plunge today cut into our cushion in our put spread. Normally we wouldn't be too concerned about an 83-point cushion this late into the options cycle, but after tonight's barrage of horrible news, nothing is guaranteed. For us, we're going to sit tight with our trading plan in place. We don't want to be spooked out of a good trade that still has a very good chance of expiring worthless. On the call side, we shouldn't have anything to worry about.

OIH 55-50 JANUARY BULL PUT SPREAD (15 Contracts entered on 12/22/08)

Potential profit of $55.00 per contract

Contingent Stop Order set at $57.50

OIH 85-90 JANUARY BEAR CALL SPREAD (15 Contracts closed on 01/05/09)

Initial Credit of $40.00 per contract

Close out debit of $171.00 per contract

Well, as we expected, our call spread in this position would have been golden. But that last surge up the chart knocked us out of it. Sometimes you have the perfect analysis, but things just don't work out in your favor. That seems to be the case in this one. Today, we were hurt by oil and the overall trading environment in this spread. OIH lost $4.27 and finished the session at $72.54. We can handle two more sessions of this same loss and still finish the cycle profitably. However, we don't want to see the losses grow larger. For now, let's sit tight and see what unfolds tomorrow.

GOOG 240-230 JANUARY BULL PUT SPREAD (10 Contracts entered on 12/22/08)

Potential profit of $60.00 per contract

Contingent Stop Order set at $245.00

Google had been holding up very well until today's 4.25% loss. The decline of $13.35 took the stock below its 50-day moving average (red line) and left it at $300.97 at the closing bell. Despite this loss, we shouldn't have anything to worry about in this put spread with the stock sitting 60 points above our "short" strike price. We'll continue to monitor it closely, but don't feel that it's much of a threat at this time.

As always, Trade Happy and Trade Smart

Jobs fell and took the Market with them. While the jobs number wasn't as bad as many had feared, (after Wednesday's ADP report) stocks continued to slide on Friday. The troubling economic conditions left the reasons to buy few and far between. With no underlying catalyst, the bears took control last week, taking the indexes lower across the board.

Last Wednesday's ADP report showed a much larger job loss than expected in the private sector. This caused massive selling in the indices and left traders bracing for an even scarier loss for Friday's more important non-farm payroll report. However, Friday's numbers came in just as previously expected, which gave pre-market futures a bump to the upside. But the relief rally didn't last long into the trading session.

Economists had forecasted a loss of 525,000 jobs in December. But many pundits raised their expectations to between 650,000 and 700,000 after ADP's shockingly large job loss on Wednesday. Much to the relief of traders, Friday's non farm payroll data showed a loss of only 524,000 jobs last month, slightly better than expected. However, the government did revise November's loss up to 584,000 jobs, which is the largest number since the mid 1970's. Friday's report also increased the 2008 job loss to 2.6 million jobs.

The other key metric on Friday was the unemployment report. It jumped 0.4% on Friday to 7.2% in December. This brought the percentage up to its highest level since the early 1990's. The chart below shows that we are quickly approaching the high point from the 90's. Many economists are predicting that the unemployment rate will peak out near 8% in the near future.

Oil continued to slide on Friday, capping a week of big losses. Over the past four sessions, crude has tumbled 16% and appears to have regained its selling pressure. On Friday, oil lost another $0.87 and finished the week at $40.83 a barrel on the New York Mercantile Exchange. With falling demand and increasing inventories, many believe that we're heading back to $35 or $30 a barrel pricing in the near-term.

Friday's Economic Reports

The Dow Jones Industrial Average broke back below its 50-day moving average on Friday when it shed 143 points. Its 1.64% loss took the large-cap index down to 8,599. Next support level for the Dow appears to be at 8,400 on the chart. We could see this level fairly soon unless something turns the selling tide that we saw last week.

The S&P 500 also ran into some heavy selling on Friday, but was able to hold above its 50-day moving average (red line) on the chart. However, the 19-point loss on the session left the index at its low on the session, which is never a good sign. The 2.13% decline left the S&P sitting at 890 points heading into this week. If it falls through its 50-day moving average, next stop appears to be at 850 on the chart. Let's buckle the seat belts tight if it starts to show more weakness on Monday.

The Nasdaq led the indices lower on Friday when it lost 2.81% on the session. The 45-point loss took the index down to 1,571 on the chart, but left it above its 50-day moving average (red line). However, just like the S&P 500, if there's continued weakness this week, it's likely headed to the next strong support level at 1,500.  

All of the selling last week helped the VIX (Chicago Board Options Exchange Volatility Index) to stabilize. It moved up another 0.26 points on Friday and closed at 42.82. Although the moves in the VIX were nothing close to what we've become accustomed to, (which is a good sign) the index did start to move back in the wrong direction. We'll continue to monitor this index very closely.

Other than our problems in the OIH call spread, it's been a very good cycle for our spreads. We've built up significant cushions in our remaining spreads so that the downturn last week didn't cause us any stress. With time now winding down in this cycle, we are expecting a relatively uneventful expiration week. However, we always want to be prepared for the unexpected because it seems like that's the trading environment that we now find ourselves in. With this in mind, we have our contingent close-out orders ready to go in case anything dramatic happens this week. By being prepared, it should help reduce the stress and anxiety in spread trading. For now, let's take a look at all of our spreads in detail.

CURRENT JANUARY SPREADS

RUT 370-360 JANUARY BULL PUT SPREAD (10 Contracts entered on 12/22/08)

Potential profit of $55.00 per contract

Contingent Stop Order set at $375.00

RUT 560-570 JANUARY BEAR CALL SPREAD (10 Contracts entered on 01/02/09)

Potential profit of $55.00 per contract

Contingent Stop Order set at $555.00

The RUT took a beating on Friday when it tumbled 20.71 points. The 4.13% decline was far worse than the major indices and took the RUT below its upward-trending support line (dark blue line) on the chart but left it above its 50-day moving average (red line). However, we're sure that it's going to test its 50-day moving average early this week. But with the index sitting at 481, our iron condor is in great shape. We have a cushion of almost 80 points in our call spread and well over 100 in our put spread.  

OIH 55-50 JANUARY BULL PUT SPREAD (15 Contracts entered on 12/22/08)

Potential profit of $55.00 per contract

Contingent Stop Order set at $57.50

OIH 85-90 JANUARY BEAR CALL SPREAD (15 Contracts closed on 01/05/09)

Initial Credit of $40.00 per contract

Close out debit of $171.00 per contract

OIH finally broke below its 50-day moving average (red line) on Friday when it gave up 5.22 points. The 6.18% drop left the ETF sitting at $79.23 heading into the final week of the January options cycle. As we expected, our original call spread will probably finish the cycle sitting fine. However, it was impossible to ride out the pain with our new risk management strategy. We are still looking for potential opportunities to make up for this in the next couple of sessions. If we see a high probability trade, we'll send out an alert Monday night.

GOOG 240-230 JANUARY BULL PUT SPREAD (10 Contracts entered on 12/22/08)

Potential profit of $60.00 per contract

Contingent Stop Order set at $245.00

Google wasn't able to avoid the heavy selling on Friday when it lost 10.12 points and finished the week at $315.07. Despite this pullback, the stock is still sitting above its 20-day moving average (blue line) and its 50-day moving average (red line) on the chart. We also have plenty of solid support levels above our put spread that should help us if the Market remains weak. For now, we don't have anything to worry about in this spread with Google trading 75 points above our position.

As always, Trade Happy and Trade Smart

Santa Claus has left town. With the typical Santa Claus rally time frame ending yesterday, the bears came roaring back with vengeance today. From troubling jobs data to plenty of corporate warnings, the session was full of flashing red signals. The end result was a massive sell-off that left many wondering if the recent rally was simply a Bear Market rally.

The harbinger to Friday's all-important jobs report was truly frightening this morning. With the ADP National Employment Report often giving the Street an indication of how the non-farm payroll numbers will come in, there was plenty of anxiety this morning when ADP showed a drop of 693,000 jobs last month in the private sector.  

Besides the troubling employment data this morning, there was also plenty of startling profit warnings. Some heavyweight companies such as Alcoa, Time Warner, and Intel all came out with worrisome corporate outlooks this morning, which dampened any sense of optimism that had crept into the Market over the last few weeks. Today's corporate reminders brought the reality that there's going to be additional quarters of poor earnings.

An unexpected build in oil supplies took a bite out of crude today. According to the Energy Information Administration, crude stockpiles spiked by 6.7 million barrels last week. This was surprising to the Street, which was expecting a build of only 700,000 barrels over the same time period. The massive increase in supplies reminded traders that demand continues to remain weak. By the end of today's session, oil was down 12.3%. The $5.95 drop took crude to $42.63 a barrel on the New York Mercantile Exchange.

Wednesday's Economic Reports

The Dow Jones Industrial Average finally ran into some tough resistance today when a number of troubling reports caused a sharp decline in the large-cap index. It shed 245 points in today's session and fell to 8,769. With the Dow now closing in on its 50-day moving average (red line), it will be real interesting to see if it can hold above this mark.

The S&P 500 also ran into some bloodletting today when it tumbled 28 points, closing down 3% at 906. Similar to the Dow, the S&P is also moving towards its 50-day moving average (red line) on the chart. A drop below this line would signal another round of selling to come.

The Nasdaq gapped lower on the open today and then continued to fall throughout the session. By the end of trading, the index was down 53 points at 1,599. The interesting part of its chart is that today's trading brought the index down to an old resistance line, which should now turn to support. However, the trading over the last year has broken through support levels like a hot knife going through butter. Due to this, we wouldn't bet the farm on this line holding. The index is likely moving to test its 50-day moving average (red line) on the chart.

We knew it was too good to last. After drifting lower over the last month, the VIX (Chicago Board Options Exchange Volatility Index) jumped higher today. It climbed 4.83 points and settled at 43.39. While this was not good news, the VIX is still sitting at relatively low levels compared to just a few months ago.

If only this session happened a few days earlier! We knew it was coming, but we were hoping it would have been on Monday. After the Market's recent run, we thought it was only a matter of 4-time before we'd get a decent pullback. Unfortunately, we had a casualty in our OIH call spread before it happened. In the past, we would have ridden out the run-up. But after the devastating few months that we had last fall, we knew that we needed to keep our losses very small going forward. Due to this, we followed through with our stop loss on the OIH spread and kept the loss to a minimum. We still might come back with another call spread to help reduce that amount even farther. The good news is that today's pullback took the pressure off our RUT call spread. For now, let's take a look at how we're sitting in all of our positions.

CURRENT JANUARY SPREADS

RUT 370-360 JANUARY BULL PUT SPREAD (10 Contracts entered on 12/22/08)

Potential profit of $55.00 per contract

Contingent Stop Order set at $375.00

RUT 560-570 JANUARY BEAR CALL SPREAD (10 Contracts entered on 01/02/09)

Potential profit of $55.00 per contract

Contingent Stop Order set at $555.00

The RUT finally took a step back today after its recent run-up the chart. It tumbled 17.61 points in today's trading and closed at $497.10. The interesting thing on the chart is that the RUT has pulled back to an old resistance line, which should now become support. It also is within striking distance of a rising support line on the chart (dark blue line). Normally, we would consider this area very good support. But, as we've said, nothing is typical in this type of trading environment. However, the good news is that the index is now sitting more than 60 points below our call spread and 130 points above our put spread.  

OIH 55-50 JANUARY BULL PUT SPREAD (15 Contracts entered on 12/22/08)

Potential profit of $55.00 per contract

Contingent Stop Order set at $57.50

OIH 85-90 JANUARY BEAR CALL SPREAD (15 Contracts closed on 01/05/09)

Initial Credit of $40.00 per contract

Close out debit of $171.00 per contract

The amazing upside momentum in OIH propelled it right through our trigger price on Monday, causing us to close out our call spread. The ETF continued to rally yesterday before peaking out and dropping sharply today. OIH dropped $3.70 in today's action and closed at $83.01, which is still above our original trigger (close out) price. It briefly touched its 50-day moving average (red line) today before it bounced. We'll be watching to see if it tests this support line again in tomorrow's session. For now, our remaining put spread appears to be in very good shape. We are looking for an opportunity to reduce our loss in this position even more. If we get a high probability trade, we'll send out an alert.

GOOG 240-230 JANUARY BULL PUT SPREAD (10 Contracts entered on 12/22/08)

Potential profit of $60.00 per contract

Contingent Stop Order set at $245.00

Once Google broke through its 50-day moving average (red line) on Monday, it was off to the races. The stock shot higher on Tuesday, before pulling back sharply today. It declined $12.05 in today's session, leaving the stock at $322.01. On the chart, both today's high and low were at former resistance levels. We'll see which one the stock decides to take out in tomorrow's trading. For now, we're sitting comfortably in this spread with over 80 points of breathing room.

As always, Trade Happy and Trade Smart

OIH has continued to rise and is pressuring our call spread. It has now hit our close-out price. Due to this, we are closing out our current spread.

TRADE ALERT

Please Note: This is for only those members in the current spread.

Oil Services HOLDRs (OIH)

CLOSING 85-90 JANUARY BEAR CALL SPREAD (15 contracts)

Buy 15 January Calls at 85 strike price (calls we previously sold)

Sell 15 January Calls at 90 strike price (calls we previously bought)

We suggest using a Market Order to get filled quickly.