We went one-for-two in our new spreads today. The volatility helped us get filled in our MNX spread but not PCLN. We are going to leave the strike prices and credit the same and sent it back to the brokers as a Day Order and Limit Order. If we don't get filled tomorrow, we'll discuss in the Weekend Update.

Priceline.com Inc. (PCLN)

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

Sell 15 March Puts at 70 strike price

Buy 15 March Puts at 65 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 $72.50. For auto traders, we will send in a close-out order if this happens.

Stocks whip around but finish the session down. There was plenty of selling early in the session when investors were hit with more troubling housing data. But a late afternoon rally took stocks into the green. From the Fed Chairman's testimony before Congress or the Treasury announcing its stress tests for banks, there was plenty of news on the session. The end result was late session selling that took stocks back into negative territory at the close.

The housing market is still sliding according to the Existing Home Sales data for January. This morning's report showed that sales fell to nearly a 12-year low in January with prices down almost 15% from one year earlier. The data confirmed that sales dipped 5.3% from December to January with home re-sales coming in at an annual rate of 4.49 million according to the National Association of Realtors. While that was not pretty, the fact that median home prices fell from $199,800 in 2008 to $170,300 this year shows that we're still on the declining slope in housing. Perhaps the most troubling bit of data was that around 45% of sales were from distressed properties, which includes foreclosures. With this in mind, many analysts don't believe that housing will bottom until late this year at the earliest.

In this week's Energy Information Agency report, oil inventories rose but not as much as analysts were expecting. Coming into the report, expectations were for a build of more than 2 million barrels, but it was only an increase of 700,000 barrels according to the EIA. Crude finished today's session up $2.54 at $42.50 a barrel on the New York Mercantile Exchange.

However, the big news in today's report was the big drawdown in gasoline supplies. The report showed that demand is up 1.7% for fuel over the past four weeks with inventories falling 3.4 million barrels last week.

One day after the President's address to Congress, the administration decided to give the nation's biggest banks access to more bailout funds. The Treasury Department announced that it was allowing immediate access to the second half of the TARP funds. For accessing these funds, the banks will sell the government preferred shares of bank stock that are convertible into common shares at a 10% discount. The preferred shares will also have a 9% dividend.

Besides this news, the Treasury also released information on its plan of stress-testing banks. Its goal is to determine if the nation's 19 largest banks can survive if unemployment extends beyond 10% and home prices fall by another 20%. This is aimed at figuring out which institutions might be under pressure and just exactly how much more government funding might be required if the economic conditions worsen. Officials believe that their stress-testing will be completed by April.

Federal Reserve Chairman Ben Bernanke spent his second day on Capitol Hill taking questions from lawmakers. Yesterday, Bernanke informed the Senators that the economic recovery will take between two or three years. He also went on to downplay the idea of bank nationalization. There was a bit of good news when the Fed Chief said that of the 19 largest banks that are undergoing a stress test, he did not believe that any of them are close to collapsing or in the need of government taking a more active role. Of course, this kind of contradicts some of the reports concerning the government taking a much larger stake in Citigroup. But today's big sound-bite was when Bernanke said that the regulators were not planning to nationalize Citigroup. We are still kind of scratching our heads on that one.

Today's Economic Reports

After hitting the $1,000 an ounce level, gold has pulled back below the watershed mark. It dropped $3.30 in today's session and settled at $966.20 an ounce. On the other hand, the dollar advanced against both the euro and the yen today.

The Dow Jones Industrial Average moved off its low of the session and made its way into green territory this afternoon, but that was as good as it got with the index finishing the day back in the red. At the closing bell, the Dow was off 80 points at 7,270. For the rest of this week, we'll be watching to see if the index can hold above the low from Monday and Tuesday. On the flip side, we'll be looking to see if it can move back above the old support level of 7,400 on the chart. Either way it moves will give us a good indication of where it's probably headed next week.

The S&P 500 also appeared to have things turned around this afternoon before the late selling took the index down 8 points on the day. The 1.07% loss puts the S&P 500 at 764 points at the end of trading today. The good news is that it closed well off its low of the session. The bad news is that it's also well off its high of the day. Basically it just shows a great deal of indecision today. Similar to the Dow, we'll be watching to see if the S&P 500 can hold above the low from Monday and Tuesday. This support is extremely strong because it was also the low for the index back in November. However, that same rationale didn't work out too well for the Dow when it broke right through that support level. Let's see if it works better for the S&P 500.

The Nasdaq also traded in a dizzying session today before finishing the day down 16 points at 1,425. Its candle from today looks very similar to the other two indices, which doesn't tell us too much other than traders are not able to make a bet in either direction. The only good news is that its low from this week, just below 1,400, has held up. We really want to see this hold through the remainder of the week. On the other side, the old support at 1,450 could be some resistance on the way up. Unfortunately, that's not a problem that we've seen in quite a while.

The VIX (Chicago Board Options Exchange Volatility Index) on Friday finally moved back below its 50-day moving average (red line), but not by much. Today's drop of 0.82 points took the "fear index" back below this line (barely) and left it at 44.67. If it can hold below this moving average, it should be good news for stocks. On the way down, the next stop appears to be in the 40-point area.

It's been a wild week, but it really hasn't had much effect on our spreads. We came into Monday expecting a slight sell-off and we got an even bigger one than we expected. This helped us get filled in all of our new spreads with ease. But then Tuesday's strong bounce-back more than made up for any of the extra selling on Monday and left us feeling like champs in our put spreads. Today's indecisive trading left us wondering how the rest of the week is going to shape up. After looking at the indices on the daily charts, we really want everything to hold above the low from Monday. If this happens, we feel really good heading into next week. If not, then we just might need to come back with some call spreads, making our positions into iron condors. But let's not put the cart in front of the horse just yet.

As we said in Sunday's newsletter, we still are expecting a Bear Market Rally in the next few weeks. Due to this, we want to stay on the put side for now. We are going back to the MINI-NASDAQ 100 INDEX (MNX) this month with another very conservative put spread. As we've seen over the last several months, the Nasdaq has been showing us a great deal of intraday strength. We've been saying for a while now that when we do get that short-term rally, the tech stocks are probably going to lead the way up the chart. We want to take advantage of this once again with another put spread in the MNX.

We are going to stay in the Nasdaq for our other new spread tomorrow on Priceline.com Inc. (PCLN). We haven't traded this stock for a while, but really like what we've seen out of the stock lately. On the fundamentals, the company blew away the Street's expectations last week when it beat earnings estimates by $0.24. Not only this, but the company also gave much better guidance than anyone was expecting. This caused the stock to take off like a rocket. But even before this surprise, we liked the way the stock had been moving up the chart since last November. Our goal is to take advantage of this new momentum by coming in with a put spread at very safe levels. Normally we would go with higher strike prices and pick up a better credit. But in this type of a Market, we feel safety is our first priority, not to mention that the stock is sitting right at its 200-Day moving average (black line), which might give it some temporary resistance. Regardless, we feel very good about moving forward with a put spread on PCLN.

Please Note: These are Limit Orders and Day Orders.

NEW TRADE ALERT (2)

MINI-NASDAQ 100 INDEX (MNX)

OPENING 100-95 MARCH BULL PUT SPREAD (15 contracts)

Sell 15 March Puts at 100 strike price

Buy 15 March Puts at 95 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 $102.50. For auto traders, we will send in a close-out order if this happens.

Priceline.com Inc. (PCLN)

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

Sell 15 March Puts at 70 strike price

Buy 15 March Puts at 65 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 $72.50. For auto traders, we will send in a close-out order if this happens.

MNX DAILY CHART

PCLN DAILY CHART

CURRENT MARCH SPREADS

RUT 330-320 MARCH BULL PUT SPREAD (15 Contracts entered on 02/23/09)

Profit of $335.00 per contract

Contingent Stop Order set at $52.50

The RUT was able to lift off its low today, but not as much as the major indices. Instead, the small-cap index finished the session down 2.68% at $401.44. The index tested this week's low on the chart before climbing off it, but still finished with an 11-point loss on the day. Similar to the major indexes, we want to see the support from earlier in the week hold up over the next two sessions. If so, we feel good heading into next week. However, if it breaks below this mark, we'll have to see how the RUT handles the next support level near $370. We currently are sitting in decent shape with a cushion of over 70 points in this spread.

OIH 55-50 MARCH BULL PUT SPREAD (15 Contracts entered on 02/23/09)

Profit of $40.00 per contract

Contingent Stop Order set at $57.50

The rise in oil today was good for our OIH spread, but still couldn't push it back into positive territory at the closing bell. The ETF lost $1.09 on today's session when it closed at $71.95. While it settled in the red, it was up to nearly $75 intraday. On the chart, our support line at $70 appears to be holding up fairly well. We'll continue to monitor this line in the next two sessions. On the upside, we'll be looking to see if the OIH can make it back over its 50-day moving average (red line). This moving average might cause some resistance for the ETF on the way back up the chart. For now, we're sitting fine in this position with OIH trading almost 17 points above our "short" strike price.

GOOG 280-270 MARCH BULL PUT SPREAD (10 Contracts entered on 02/23/09)

Profit of $65.00 per contract

Contingent Stop Order set at $285.00

Google showed some early strength this morning after the opening bell rang. But that was about as good as it got for the stock on the day. It finished trading down $3.81 at $341.64. The 1.10% decline puts the stock just below where it opened the session. On the chart, Google appears to like the support line at $330, which is about four points above its climbing 50-day moving average (red line). We wouldn't be surprised to see these items converge in the next few days. As long as Google stays above this mark, we have nothing to worry about. With over 60 points of breathing room in this position, we're not going to get too concerned about small moves. Let's just sit back and see how the stock finishes the week.

As always, Trade Happy and Trade Smart

Stocks suffer another week of gloom and doom, but we finish with our fourth consecutive profitable month. While the indices continued to slide, with most finishing down over 6% for the week, we were able to come away with a 100% profitable month. What really feels good about this one is that we were able to get the profit total back up to something close to the good old days. We'll talk more about this later, but first let's recap Friday's trading session.

We went into Friday's session looking to see if the Dow could hold at last November's low. Unfortunately, we didn't need to wait long to see that it couldn't. All of the indices started falling sharply just after the opening bell with the Dow taking out the old support level on the chart. We'll discuss these levels when we look at the charts.

The only economic data on Friday morning was the latest reading on inflation in the Consumer Price Index. Although the index came in slightly ahead of expectations, it was only up 0.3% in January. At the same time, the December reading was revised down 0.8%, which was flat compared to the previous year's number. The less volatile part of the report, Core CPI (excludes food and energy) also came in 0.1% above expectations at 0.2%. Just like regular CPI, this shows a slight uptick from December.

Both of these numbers were similar to Thursday's Producer Price Index that showed inflation coming in hotter than expected with a 0.4% month-over-month increase for January. On the chart below, CPI is shown in the blue line and demonstrates the rapid descent in inflation. The pink line shows Core CPI, which hasn't fallen as dramatically. While Core CPI has come down, it still remains ahead of levels that we saw in the early 2000's.

Graphic from Breifing.com

On the commodity front, gold finally broke through the $1,000 a troy ounce mark on Friday. It surged $25.70 on the session, taking it up to $1,001.80 an ounce. With analysts forecasting a rise to this mark for quite some time, it'll be interesting to see if it can avoid a lot of profit taking at this level. The only thing that might help hold the price up is the fact that investors have been buying into gold as a way to hedge against the falling value of everything else.

Speaking of falling value, oil gave back another $0.54 on Friday for March delivery contracts. This left crude sitting at $38.94 a barrel on the New York Mercantile Exchange. On the other hand, it was a good day for the dollar, which was able to gain against both the euro and yen.

Today's Economic Reports

Perhaps some of the biggest jitters on Friday were caused by the fear that the government is leaning towards the nationalization of banks. Not only were some members of Congress calling for it, but the former Fed Chairman Greenspan was also calling it a good idea. Of course, we've long been skeptical of anything he says these days. After all, as far as we're concerned, a lot of responsibility for our current situation can be laid at his feet. While these rumors have been floating around for weeks now, traders continued to flee from both Bank of America and Citigroup on Friday as both stocks continued to get hammered. However, there was some relief rallying in the afternoon when the President's spokesman tried to reassure investors that nationalization is not in the administration's plans. Based on where the bank stocks finished the week, investors appear to betting on nationalization.

Instead of looking at the indexes on a daily chart, we thought the recent action suggests that we look at a longer time frame such as the monthly charts. Keep in mind, it's always a good idea to monitor everything on a daily, weekly, and monthly time frame. The more that we see support and resistance showing up on multiple charts, the more credence we give to the levels.

The Dow Jones Industrial Average finished the session on Friday down 100 points at 7,365. On the monthly chart, it shows that the index fell below support from last November along with support from 2003. The index is now pressing previous levels from October of 2002. If this level doesn't hold, the Dow won't run into any support until it hits 7,000. We'll continue to monitor the index on all three time frames.

The S&P 500 has held up stronger on the daily and weekly charts. However, it still lost another 9 points on Friday and finished the week down 6.9% at 770 points. While it is still holding above last November's low on the monthly chart, the S&P has taken out the low from 2002 and 2003. That is not anything to be proud of. On the chart, the support line that we have drawn below the 750-point level seems to be the key area to watch this week. We need to see a nice bounce off this mark or it's going to be another ugly leg down the chart because the next decent support level is sitting at 700.

The Nasdaq continues to remain the strongest of the three major indices, but even its performance last week was a dozy. The tech-laden index shed 93 points over the last four sessions and finished the week down 6.1% at 1,441 points. On the monthly chart, the Nasdaq remains well above last November's low along with the support lines from 2002 and 2003. Heading into this week, we'd obviously like to see the index hold above all these lines on the chart. But based on the Market's performance so far this year, we are somewhat skeptical.

It was one wild ride for the VIX (Chicago Board Options Exchange Volatility Index) on Friday. The so-called "fear index" traded in a 10-point trading range on Friday alone. Wow! The index broke back below its 50-day moving average (red line), but then rallied back above to finish up 2.22 points on the session. That 4.72% advance leaves the index sitting at 49.30 points. If it continues to hold above its 50-day moving average, we're likely to continue the choppy trading with a bias to the downside. However, if it falls back below it, then it's good news for the few remaining bulls at are still out there.

Expiration on Friday was the fourth straight Payday for us. But what makes it even more special was the 100% winning spreads on the cycle, which helped turn a good profit of $3,075 on the month. With that nice-sized profit, we're starting to creep back into the kind of profits that used to be a given every month. But what we're proud of is the fact that we've kept the strike prices very conservative along with the risk management in check over the past four months. We think that this is a winning strategy that will help keep this winning streak alive for many more months to come. Let' go ahead and take a look at individual spreads that expired on Friday.

EXPIRED FEBRUARY SPREADS

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

Profit of $65.00 per contract

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

Profit of $50.00 per contract

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

Profit of $75.00 per contract

MNX 110-105 FEBRUARY BULL PUT SPREAD (15 Contracts entered on 01/29/09)

Profit of $40.00 per contract

Our only disappointment last month was that we couldn't get the auto traders filled in the Apple put spread. Like we said last week, any member that was fortunate enough to get filled in that position would have cleared an even nicer profit last month. Cheers to those members that can claim that feat. But enough about February, now it's time to get things rolling for March.

The interesting thing about all of our spreads last month was that they were all put spreads. Looking back the month before, our only loss in January was a call spread. Doesn't that seem hard to believe when two of the three major indices are down double digits on the year?

We've done a few very smart things to achieve this. First, we've placed our put spreads at secure strike prices that are below several solid support levels on the chart. It's not because we don't think the indices/stocks won't move lower, but by placing them at such conservative strike prices and below such strong support levels, it should take the indexes/stocks several weeks to reach them. Remember, remaining below historical pivot and reversal areas provides even stronger support.

The other nice thing about placing put spreads at this time is that the rise in the VIX has pumped up the premiums for puts. This helps us go even farther out of the money and still pick up a decent premium. The final thought is that in every Bear Market, we see some very strong Bear Market rallies. This is because any news event or start of a rally causes all of the shorts to cover their positions. This turns small rallies into fast and furious moves to the upside. We got one of those last month and it helped us coast for nearly the whole options cycle. All of these things tell us to come back with the same strategy that we've been using over the past several months.

For tomorrow, we are starting off with another put spread on the RUSSELL 2000 INDEX (RUT). We have quite a string of profitable put spreads going on this index and believe that by placing our strike prices at very conservative levels, this winning streak should continue. We are going much lower even than last month and are actually going to a level that the RUT hasn't seen since 2002 when it briefly dipped down to this level. If you throw out that quick nosedive to this area, the previous time the RUT has been that low was back in the 1990's. We have both the daily chart and monthly chart listed below, which show just how safe we are being with this new spread.

Our next new spread is going to be on another stock from last month, Google Inc. (GOOG). This stock has been a large part of the reason why the Nasdaq has held up so strong over the last several weeks. Although Google wasn't able to avoid selling last week, it has been able to hold up fairly well compared to the Market. If we do get another Bear Market Rally, this stock is ready for take off. By coming in with a put spread at 280-270 strike prices, we are able to come in below its 50-day moving average (red line) and numerous support levels on the chart. We might need a little move down in the stock on Monday in order to get filled, but really like coming back with a put spread in this stock. If, for any reason it does not maintain its strength this cycle, then we will make this spread into an iron condor and try to profit on both sides of the stock.

Our final new spread is also going back to another favorite, Oil Services HOLDRs (OIH). While the ETF has been under pressure due to the falling price of oil, we feel that we can take advantage of the recent dip by coming in with a put spread at very safe strike prices. We are also coming in with a credit that is higher than the current midpoint for the spread. This means that we'll need OIH to pullback tomorrow in order to get filled. For the last few months we've employed this same strategy of making the spread come to us on the entry point and it's worked out very good for us. Let's do the same thing tomorrow and see if we can get paid for our patience.

Please Note: These are Limit Orders and Day Orders.

NEW TRADE ALERT (3)

RUSSELL 2000 INDEX (RUT)

OPENING 330-320 MARCH BULL PUT SPREAD (15 contracts)

Sell 15 March Puts at 330 strike price

Buy 15 March Puts at 320 strike price

Total Credit 0.85 per contract

Potential Profit $1,275.00

Once Filled, Use a Conditional Order: Use a Stop or Buy Market if Touched Order if stock reaches $335.00. For auto traders, we will send in a close-out order if this happens.

Google Inc. (GOOG)

OPENING 280-270 MARCH BULL PUT SPREAD (10 contracts)

Sell 10 March Puts at 280 strike price

Buy 10 March Puts at 270 strike price

Total Credit 0.65 per contract

Potential Profit $650.00

Once Filled, Use a Conditional Order: Use a Stop or Buy Market if Touched Order if stock reaches $285.00. For auto traders, we will send in a close-out order if this happens.

Oil Services HOLDRs (OIH)

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

Sell 15 March Puts at 55 strike price

Buy 15 March Puts at 50 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 $57.50. For auto traders, we will send in a close-out order if this happens.

RUT DAILY CHART

RUT MONTHLY CHART

GOOG DAILY CHART

OIH DAILY CHART

One last tidbit tonight is that the futures made a sharp reversal this evening after a report broke that the U.S. government could take a substantial stake of up to 40% of Citigroup. This report took the futures from deep in the red to firmly in the green. But even the initial pop has now started to ware off. We'll have to wait until the morning to see how this might play out. After all, when the government controls nearly half of a bank, it does nothing to quiet the nationalization talk.

As always, Trade Happy and Trade Smart

Stocks teeter after yesterday's wicked stimulus plunge. Yesterday's finalization of the government's stimulus package sent investors fleeing and the Dow tumbling. But government was back in the focus today with the new administration unveiling its new housing plan. Unlike the Treasury's plan (or lack of plan) laid out last week, this one seemed to actually have details to it. While it is way too early to judge the results of the new plan, the Street initially appears to be underwhelmed.

According to the newly released details, the government is attempting to help struggling homeowners to not only refinance their homes, but also get a principal reduction, not to mention the ability to earn incentive pay for the homeowners and banks when borrowers make mortgage payments on time. The administration claims that the program will help stabilize the housing market while helping nine million homeowners. According to the President, the program has a cost of $75 billion.

It was certainly a day with housing in the focus with pre-market reports giving us insight into new construction. Housing starts continued to decline sharply in January according to this morning's report from the Commerce Department. The data showed that January's new housing starts dropped by 16.8%, which was much larger than the 4.9% that the Street was expecting. This puts the annual rate at a seasonally adjusted 466,000, which is also lower than the 523,000 that analysts had predicted ahead of the report. The chart below shows just how steep the decline has been on an historical basis.

Graphic from Breifing.com

While the continued decline might sound bad at first glance, we tend to think of it as a very good sign. The lower the amount of new production means that there will be less new inventory added to the housing mix. This is exactly what we need to get to a bottom in the housing market. While it's still a fool's game to predict a bottom, today's data suggests that we're getting closer. The graphic below shows the most recent eight months of housing starts. What we are most interested in, is the decline since last June. The troubling part is the high number of starts up until that date.

Graphic from Breifing.com

This afternoon, the FOMC minutes from its most recent meeting were released. While there weren't any big surprises, the headlines centered around a forecast of a deeper contraction with rising unemployment. The Fed's latest projections call for unemployment to possibly rise to 8.8% this year, up from previous suggestions of a range of 7.1% to 7.6%. The committee also sees the GDP declining between 0.5% and 1.3% this year, which is a tad bit worse than previous forecasts. However, the FOMC does see growth in GDP and a decline in unemployment for the year 2010. At the same time, the government is projecting that inflation will fall to 0.9% to 1.1% this year while core inflation is expected to come in between 1.5% to 2%.

The meeting minutes also showed that the committee does not see any indication that the housing market is beginning to stabilize. Members also were concerned over a possible increase in deterioration in the commercial real estate sector.

Today's Economic Reports

Usually Wednesday is the weekly EIA report, but with Monday being a holiday, this was pushed off until Thursday. But with that said, oil struggled on the session, dipping back below $35 a barrel on the New York Mercantile Exchange. By the time crude settled this afternoon, it was down $0.31 at $34.62 a barrel. Meanwhile, gold continued to rise with another $10.70 advance today, taking the metal up to $977.70 an ounce. This is the highest level for gold since last summer.

The Dow Jones Industrial Average stabilized after yesterday's nasty plunge. The index actually traded in a relatively small range today before settling up 3 points at 7,555. The fact that the downward spiral didn't continue today was a good sign, especially considering that the index remains very close to last November's low. However, the problem with this is that it also didn't move very far to the upside. Today's candle can be considered a doji candlestick, which is what technicians look for at a key reversal point. If this actually plays out tomorrow, it means that we should move to the upside. But with so many wild variables like government intervention driving this Market, we wouldn't bet the farm on any direction at this point in time.

The S&P 500 also gave us a flat session with the index closing down just 0.75 points at 788. However, the S&P remains well above last November's low on the chart. While this candle also could be considered a reversal candlestick, the problem is that it's not sitting at a former support level on the chart. This doesn't convince us that we'll see a big rally in the index. But with the Dow at such a level, let's see which one is the leader.

Tuesday's move in the Nasdaq was especially troubling because not only did it fall back below its 50-day moving average (red line), but it also gapped significantly lower. The only good thing is that the index was able to hold at a key support level in today's trading at 1,450. The index still declined $2.69 in the session, but finished the day at 1,467. We'll be watching to see if the Nasdaq can hold above the key support level the remainder of the week. If not, the index is likely headed to the next serious support level at 1,400 on the chart.

Yesterday's trading was very troubling for the VIX (Chicago Board Options Exchange Volatility Index) because it took the index back above its 50-day moving average (red line) on the chart. In today's session, the "fear index" traded relatively flat and closed down 0.20 points at 48.46. If the VIX remains above its 50-day moving average, it's going to be another prolonged move to the downside for the indices.  

The Market took another huge beating yesterday, but we're still on pace for a 100% profitable month! That's the great thing about our spreads; they can take a licking but keep on ticking. With one full day left in our index spreads and two full sessions in our stock positions, we are sitting in excellent shape across the board. Our only regret this cycle is that we weren't able to get filled in our Apple put spread earlier in the month. But that's the way it goes, sometimes we get filled, sometimes we don't. For those members who were able to get filled, your profit will be closer to $4,000 this month. Our hats go off to those that got into that spread. Although we've had three straight profitable months in a row, it sure feels good to be on the verge of a profit that is more in line with the good old days. But let's not celebrate too early. For now, let's take a look at all of our spreads in more detail and see just how safe we're sitting heading into the finish line.

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

The RUT wasn't able to make it back into positive territory today when it lost another 5.72 points. The 1.33% loss for the index left it sitting at $423.18 at the closing bell. On the chart, the index has some decent support at $420. After this level, the next stop appears to be last November's low. However, with only one full day of trading left in this spread, our 73 point cushion should be good enough to get a full profit in this spread.

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

Oil's continued fall has not helped our OIH put spread. However, the ETF was able to bounce back with a gain of $0.97 in today's session after yesterday's ugly sell-off. The 1.35% advance in OIH left the index well off its low of the session at $73.04. This gives our put spread just under 20 points of breathing room with only two trading days left in the February options cycle. This should be more than enough to get us to expiration with our spread intact.

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 defied the Market today when it shot up 10.45 points and finished the day at $353.11. On the chart, the stock reversed right at its 20-day moving average (blue line). Of course, the stock took a beating yesterday after a relatively unknown analyst downgraded the stock. Today's reversal should be more than enough for us to put this spread in the profit column. With just two days left of trading, we are sitting on a safety net of over 70 points in this one.

MNX 110-105 FEBRUARY BULL PUT SPREAD (15 Contracts entered on 01/29/09)

Potential profit of $40.00 per contract

Contingent Stop Order set at $112.50

Our only real concern at this point is in the MNX spread. This comes after yesterday's drubbing that the index took. Today's trading was very good to see when the MNX was able to gain $0.18 and close at $118.88. While the gain wasn't huge, it was some stabilization after a very large losing session. With only one full day of trading left in this one, today's action probably was good enough to get us to Friday's settlement with a profit. Let's keep a close eye on it tomorrow. Keep in mind that we still feel very confident in this one with the index trading almost 9 points above our "short" strike price.

As always, Trade Happy and Trade Smart

It was Friday the 13th, but fear is nothing new for us. Friday capped off another dismal week for the indices after Washington D.C. felt the need to get more proactive. Unfortunately, all the Market-moving data last week came from the beltway instead of Wall Street. As we often say, this makes things much more difficult to deal with because it feels like a third party is in every trade.

While we're pretty good at being able to judge the Market's reaction to economic reports, earnings releases, Fed speak, etc. etc. etc., we'll be the first to say that attempting to judge the Street's reaction to political action is like a crap shoot. Normally, any influence is a very bad thing but the times we live in are anything but normal.

To counteract this uncertainty, we just stick to our strategy of being very conservative when we enter our spreads. Then we stick to our new risk management strategy of using stops and we let everyone get worked up about the day's latest news while we sit back and enjoy the ride. With time winding down in the February cycle, we really couldn't ask to be sitting much better, but we'll discuss that a little bit later.

It was a slow day on the economic front Friday with the lone report coming from the Reuters University of Michigan index of consumer sentiment. After starting to tick up in prior reports, Friday's reading showed a decline in sentiment. The Street was looking for a number of 62.0, but the actual figure was much lower at 56.2. This was down from the previous reading of 61.2. The chart below shows that we're now just above last November's report, which is not a good place to be historically.

Graphic from Breifing.com

Oil made a 10% advance on Friday, but still finished the week down over 6% after nearly touching its lowest point in nearly five years. Friday's gain of $3.53 helped oil finish the week on a positive note at $37.51 a barrel on the New York Mercantile Exchange. Although crude moved up on Friday, gold went the other direction after posting a very strong week of gains. But on the final session of the week it fell $7 and settled at $941.50 an ounce.

Friday's Economic Reports

The big news after the Market closed on Friday was the passing of the $787 billion stimulus package. Unfortunately, we have a hard time getting excited about it. Although the government appears to be the only one willing to spend right now, we just don't see much stimulus in the final package. The Street has already discounted its passing and also showed no excitement for the bill. However, like everyone else, we would love nothing more than to be surprised with a jumpstart to the economy from this legislation. Let's just hope for the best because there's not much we can do about it.

The Dow Jones Industrial Average fell another 82 points on Friday, taking the index down to 7,850. For the week, the index lost 430 points and is now down 10.6% on the year. Although Friday's close left the Dow sitting at a support level on the chart, that line will probably do little to hold up the index this upcoming week. While anything can happen, all indicators are pointing to a retest of last November's low on the chart.

The S&P 500 also took a hit on Friday when it lost 8 points and finished the week at 826 points. That increased its loss on the week to a negative 4.8%. While that was definitely not good news, the positive spin is that the S&P is holding up better on the chart than the Dow. Its support near 822 points has been holding up fairly well with the index testing it but then closing above the mark. We'll continue to watch this level over the next few sessions. A drop below it would then take the index to next support level just above 800 points on the chart.

Unlike the other two indexes, the Nasdaq came into last week with a positive return on the year. That turned around over the last five sessions when the index tumbled 3.6% by giving up 57 points. While that was not a good performance, it was much better than the other major indices. This also shows on the chart with the Nasdaq sitting at its 50-day moving average (red line). We definitely want to see the index move higher off of this line. This week we'll be watching to see if tech stocks can continue to lead the way.

Friday's tumble in the Market caused the VIX (Chicago Board Options Exchange Volatility Index) to bounce back with a 1.68-point move to the upside. The good news is that despite the losses for the Market over the last week, the VIX has actually moved lower. This is a very good indicator that shows the fear is continuing to dissipate.  

We certainly had plenty of excitement this week, but all of our spreads handled it well and finished the week in very good shape. Actually, we couldn't ask to be sitting any better heading into the final week of the option cycle. Especially when we consider that we get a day off on Monday for Presidents Day. There's nothing like getting paid for doing nothing. That's the beauty of spread trading, time decay does all the heavy lifting for us. For now, let's take a look at how all our positions are sitting heading down the home stretch.

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

The RUT wasn't able to add to Thursday's gains on the final trading day of the week. Instead, it fell $2.06 on Friday, closing near its low of the session at $448.36. Despite this loss, we head into the final trading week of the February options cycle in great shape. We have nearly 100 points of breathing room in this spread with only three full trading days left in this position. Remember, index spreads settle on Friday's opening settlement. Although we never take anything for granted, this is certainly one that should be able to coast to the finish line.

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

The rebound in oil on Friday helped give our OIH position a lift. The ETF moved up $0.16, despite being much higher earlier in the session. Its 0.20% advance on the day left OIH sitting at $78.68 heading into the weekend. On the chart, it was key that OIH reversed nicely to the upside after hitting its 50-day moving average (red line) on Thursday. Heading into the final four trading days for this spread, we are left with a nice cushion of nearly 25 points. Let's just sit back and enjoy the ride in this one.

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

After starting last week with a continuation of its run up the chart, the rest of the week was all down hill. Google capped off the week with a 5.37-point drop on Friday that took the stock down to $357.68. While we never want to see a stock fall when we have a bull put spread, our position is still sitting at very safe strike prices. Since the stock took off like a rocket shortly after we entered our position, we've had a very easy time in this spread. With Google sitting 87 points above our "short" strike price, we shouldn't have any anxiety down the home stretch.

MNX 110-105 FEBRUARY BULL PUT SPREAD (15 Contracts entered on 01/29/09)

Potential profit of $40.00 per contract

Contingent Stop Order set at $112.50

The MNX held up stronger than most on Friday, but still couldn't finish the session in the green. It shed $0.60 and finished the session just below where it opened the trading day at $123.68. The important sessions for this spread came on Wednesday and Thursday when the index tested its 50-day moving average (red line) on the chart but was then able to reverse sharply off the line. Heading into this week, we would like to see it continue trading above this moving average. While this spread has the smallest cushion with just over 13 points of breathing room, we still feel very confident about it expiring worthless.

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

Stocks rebound from the Treasury fallout on Tuesday. Today's trading revolved around more of the action in Washington D.C. than on the Street. While the man at the top of the Treasury didn't give us an encore performance (although he did testify for a second day), the top executives of the nations' largest banks were called before a committee in the House for questioning. Then of course, there appeared to be an acceptable compromise on the stimulus bill between the House and Senate. The end result of today's trading was slight gains for the major indices, which we'll certainly take after yesterday's troubling performance.

The highly touted new Treasury Secretary opened his mouth yesterday and the Market tanked...big time. For over a week now, the administration has leaked out word that the Treasury was crafting a plan for the second half of the TARP funds. With the new secretary Timothy Geithner already involved with the first half of the TARP, along with previous financial bailouts such as AIG, the Street was expecting him to hit the ground running. Not to mention that the President himself said on Monday that he didn't want to steal the Treasury Secretary's thunder (talking about the following day's press conference). We got that thunder on Tuesday as traders hit the sell button at a frantic pace after Geithner appeared to have nothing more than a conceptual idea of how to fix the banking system. Disappointment would be an understatement for describing the new Secretary's debut on the big stage. The Market showed uneasiness with the Secretary's lack of details with the Dow falling nearly 400 points on Tuesday.

Of course, that could all be changed if he's actually able to craft a successful agenda to fix the problems. Keep in mind that we still have no idea how it will assess the banks (stress testing), price the bad assets, and create a market for those toxic assets. The one thing that we did take away from Geithner's testimony is that he's talking a few more trillion dollars of intervention.

The fun today revolved around watching the "dog and pony show" in Washington D.C. With executives of the nation's top banks appearing before a House committee, everyone was anticipating fire works. While there were a few of those moments, most of the questioning was as expected while many of the members showed their ignorance regarding the current financial situation. There were some members that had legitimate questions and concerns over the banks' use of TARP funds, but most of the representatives wouldn't fit into that category.

We had a better idea for testimony. They should have called upon former executives of the companies and put them back under the spotlight. At least it would have been more entertaining. Better yet, why don't they call some members of the board of directors, who are supposed to be looking out for the shareholders, and ask them some tough questions. They could really take their pick with whom they wanted to haul in, perhaps Citigroup and Merrill Lynch could get things started.

In pre-Market trading this morning, the Nasdaq was under pressure after Research In Motion warned that its fourth quarter profits would fall to the low end of previous forecasts. It really shouldn't have been such a large shock in this type of economic environment, but it gave the stock a fairly large haircut. It also put tech names under a lot of pressure across the board.

Oil took another hit today when the Energy Information Administration reported that inventories rose to nearly a 16-year high last week. The Street came into the report expecting an increase of 3 million barrels, instead, the actual supply jumped by 4.7 million barrels to a stockpile of 350.8 million barrels. The rise showed that suppliers have not cut production comparative to demand. The effect of today's report sent crude down $1.61 a barrel, where it settled at $35.94 a barrel on the New York Mercantile Exchange. However, there was an increase in gasoline demand last week with inventories falling by 2.7 million barrels. This was another bullish surprise in the gasoline market, which has been a trend over the past few weeks. It also has caused the average price at the pump to rise again to $1.94 a gallon, according to the AAA.

Yesterday's uneasiness over the Treasury Secretary helped drive up the demand for long-dated U.S. Treasury securities. With so much uncertainty about the government's latest bailout plan, domestic and foreign investors bid up the price of the 10-year note at today's auction. Instead of the 17.7% that was offered at the most recent auction, today's bid of 37.8% took some market watchers by surprise.  Tomorrow, the longer-dated 30-year Treasury bond will follow suit with the government planning to sell $14 billion.

In other economic news today, the U.S. trade deficit fell to its smallest gap in almost six years. According to the Commerce Department, the gap came in at a negative $39.9 billion, which was much smaller than the previous $40.4 billion. Of course, the downside to this small trade gap is that it was caused by a global slowdown that forced Americans to pull back on their purchasing of imported goods not because our exports have increased.

Friday's Economic Reports

The Dow Jones Industrial Average started to stabilize after yesterday's bloodletting. The index moved into green territory with its 50-point advance on the day. That 0.64% move left the index just shy of 8,000 points at 7,939. While the index has been able to hold near 7,850 the past few sessions, the sentiment has certainly worsened this week. This is the key support level that we'll be watching on the chart over the final two trading days of the week.

The S&P 500 also bounced back today with a small gain of 6 points. That amounted to a 0.80% gain that took the index up to 833 points. The S&P was able to hold near a decent support level on the chart in the neighborhood of 820 points. The key is for this level to hold over the next two days. If so, perhaps the S&P can start moving its way back up the chart. If not, then it's likely headed to the 800-point mark.

The Nasdaq traded in a fairly wide trading range today, but finished the session 5 points above where it started this morning. At its low of the session, the index was able to reverse at its 20-day moving average (blue line) and then close at its 50-day moving average (red line) on the chart. Today's 0.38% gain left the Nasdaq sitting at 1,530. There's nothing more we'd like to see than for it to hold above its 50-day moving average.

After rising to its 50-day moving average (red line) yesterday, the VIX (Chicago Board Options Exchange Volatility Index) pulled back 2.14 points in today's session. The 4.59% fall today, leaves the VIX at 44.53 points. We want to see the "fear index" hold below its 50-day moving average on the chart.

While Tuesday's plummet was worrisome to most traders, we had such large cushions in all of our spreads that it didn't cause us any pain. However, we were reassured by today's stabilization after such a big move. After all, we can give up some pretty large moves against us, but we don't want to see it happen multiple days in a row. As long as we avoid this, we should be home free and on our way to a profit of $3,075 this month. For now, let's take a look at all our spreads individually.

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

The RUT barely made it back into the green today after yesterday's massive sell-off. The index moved up 2.18 points in today's session and closed at $447.95. While we didn't like the fact that the small-cap index fell below its 50-day moving average (red line) yesterday, we still have plenty of breathing room in this position. With just over a week left until expiration, we still have almost a 100-point cushion and plenty of solid support levels between the index and our "short" strike price. We shouldn't have much to worry about in this spread.

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

Oil continued to fall and has put the OIH under a bit of pressure. The ETF took a big hit yesterday, but was able to move up late in the session today and cut the actual loss to just $0.85.  The good news is that it was able to close well off its low of the session and hold above its 50-day moving average (red line) on the chart. Especially considering the pain that it took on after the weekly EIA data was released late this morning. However, we feel very good about our put spread with the OIH sitting at $78.59. We also like the fact that there are plenty of solid support levels above our strike prices in case there's continued weakness over the next week and a half. For now, let's just sit back and see where it goes from here.

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's bull-run took a setback yesterday when the stock finally got hit with some heavy selling. It appeared to be continuing that selling today until a late rally cut into that loss. By the closing bell, Google was only down $0.47 at $358.04. With tech under so much pressure today, it wasn't surprising to see Google struggling. However, even with today's setback we still have nearly 90 points of breathing room in this position. We couldn't ask to be sitting much better than that.

MNX 110-105 FEBRUARY BULL PUT SPREAD (15 Contracts entered on 01/29/09)

Potential profit of $40.00 per contract

Contingent Stop Order set at $112.50

The good news is that the index bounced nicely off its low of the session, the bad news is that it still meant a losing day for the MNX. It gave up $0.22 in trading and finished the session just below where it opened the day at $122.71. The other positive aspect is that it managed to stay above its 50-day moving average (red line) on the chart on such a tough session for most of the day. Although this position has the smallest cushion of all our spreads, we still are sitting fine with the index trading 12 points above our "short" strike price. Let's just sit back and see what plays out over the next two sessions.

As always, Trade Happy and Trade Smart

Jobs get slashed and burned but the Market takes off like a rocket. Payrolls got cut and unemployment climbed but that had little effect on slowing down the bulls on Friday. Instead, traders once again put their faith in Washington D.C.'s ability to solve the problems in the banking system. Once again, word spread that the Treasury was going to be unveiling its plans for the second half of the TARP and a way to shore up the banking system. Then there were some who also thought that Friday's weak employment numbers will turn up the pressure on Congress to pass the President's stimulus bill. While the bull-run on Friday was great news for our spreads, we are always skeptical when the Street is betting on Washington to solve the Market's problems.

The highly anticipated non-farm payroll report came in weaker than expected pre-Market on Friday. The Street was looking for a loss of 525,000 to 540,000 jobs in January, but the actual number came in at a decline of 598,000 jobs. At the same time, December was also revised down to show a larger loss than earlier reported. The new number showed a loss of 577,000 for the month. With the latest revision, the U.S. economy had shed 3 million jobs for 2008. The chart below shows just how steep the loss has been on a historical basis.

Graphic from Briefing.com

The continued deterioration of the workforce is the effect of last fall's credit crisis. When the spreads widened, LIBOR (London Interbank Offertory Rate) climbed sky high and the commercial paper froze up and businesses slashed where they could. With payrolls making up such a large percentage of costs, employers cut back, causing a dramatic increase in job cuts spilling into the New Year. The good news is that the credit markets have improved greatly and returned to a more normal range. This is the first step in returning the economy to a functioning business climate.

Although the January job loss was the largest in three decades, keep in mind that the U.S. workforce is much larger now than ever before. Because of this, we are more focused on the unemployment rate, which uses a percentage of the working population in its calculation. However, the news wasn't much prettier on Friday when the unemployment rate hit a 16-year high at 7.6%. This rate, calculated using a survey of households, hit its highest mark since 1992 on Friday, while most economists expect it to reach 9% before the job market starts to improve.

Graphic from Briefing.com

When we look inside the unemployment numbers, it actually gets worse than the headline number. That's because there's a large number of discouraged workers that don't factor into the overall number. According to the government, discouraged job seekers and part-time workers shot up to 13.9% in January. Discouraged workers are those who are available to work, become frustrated because they are unable to find employment, and have not looked for employment within the last four weeks. This figure is also considered the underemployment rate.

Of course, the only categories that saw job increases during the month were education, healthcare, and the always reliable government. The only problem is that once the government adds employees, it can never seem to get rid of them.

Oil continued to slide last week, marking its second straight weekly decline. On Friday, it fell $1.00 a barrel and closed at $40.17 on the New York Mercantile Exchange. Over the past five sessions, it declined 3.6% and has many traders believing that it's headed lower. Crude will likely remain under pressure until the economy starts to recover. We wouldn't be surprised to see it heading to the low $30's in the near-term. Then again, we always have to be concerned about unrest in Russia and Iran. Remember, these countries need the price to climb in order to fund their regimes that are facing serious economic problems due to the falling price of crude.

Meanwhile, U.S. Treasury notes came under serious pressures on Friday due to the belief that the government is rolling out a relief program for the banks. The benchmark 10-year Treasury fell, which drove up its yield to 2.98%. Of course, it didn't help matters when the Treasury Department announced that it was going to sell $67 billion in new securities. It also stated that it was going to once again start selling the seven-year note for the first time since the early 1990's.

The dollar was able to post gains against the euro, moving up to $1.2926. It was helped by the ECB cutting rates last week. The dollar was also able to move higher against the yen, up to $0.920132. Keep in mind that no matter how bad off our economy, it's still better than the rest of the world. This sentiment is exactly why the dollar is now up over 8% on the euro so far this year.

Friday's Economic Reports

The Dow Jones Industrial Average started strong and finished the session even stronger. For the day, it gained 217 points and closed at 8,280. The 2.7% advance helped the large-cap index finally finish the week in the green, after four straight losing weeks. However, the Dow is likely to test a key resistance level on the chart near 8,400 in the coming week. If it can make it through this barrier, we could see a nice run to the upside.

The S&P 500 also caught fire on Friday with banks leading the way. It shot up 2.7% on the day and finished the week at 868 points. The index also made it up to a very significant resistance level on the chart at its 50-day moving average (red line). How the index handles this line will tell us a lot about where the index is headed next week.

The Nasdaq continued its hot streak on Friday when it jumped 2.9% and closed at 1,591. This put the index firmly above its 50-day moving average (red line) on the chart and close to a decent resistance level at 1,600. If tech continues to be strong, it could help to lead the other indices to the upside.

Today's surge in the Market caused the VIX (Chicago Board Options Exchange Volatility Index) to pullback 0.36 points. The 0.82% decline in the "fear index" leaves the VIX at 43.37 heading into this week. Despite the strong surge in stocks, the VIX didn't fall as much as we would have expected. This does give us a sense of caution heading into this week.

Friday's rally was music to our ears. With the bulls in firm control, we were able to expand the cushions in our spreads. It also increases the probabilities of them finishing worthless at expiration in two weeks. While we're not ready to start counting our money yet, it does seem that we're getting closer. However, last fall is still burned into our memory (probably forever) and we have to have our contingency plans in place just in case things decide to take a quick U-turn. After all, the bulls seem to be counting on the Treasury to come through with a plan that actually works. As we've said time and time again, it's never a good trade to be betting on the government.

The last two weeks' talk on the Street was regarding the Treasury's plan for a "bad bank" to buy up the toxic assets from the banks' balance sheets. This weekend, the word of the day seems to be the so called "aggregator bank." According to reports out this weekend, the government would use the TARP money to seed the operation, but would attempt to bring in private firms to help run the operation. Under this plan, the "aggregator bank" would purchase mortgage-backed securities along with other toxic securities and then attempt or hold them or re-sell them in the future when their values rose. To us, this plan seems the same as the one former Secretary Paulson sold Congress. We've already spent a great deal of time talking in previous newsletters about the problems with the details of such a plan. But then again, these officials are supposed to be a lot smarter than we, so maybe they've figured out what Paulson couldn't? Secretary Geithner was set to unveil this plan on Monday, but it appears that he might postpone it until Tuesday.

With no control over how the Market is going to react to this plan and the probable passage of the stimulus package in Congress, let's focus on what we can control....our spreads. For now, let's take a look at them in more detail..............

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

The RUT took off like a rocket on Friday, bursting through its 50-day moving average (red line) and gaining $15.62 on the day. That 3.43% advance capped off an excellent week for the small-cap index and left the RUT sitting at $470.70. With only two weeks left to go in this cycle, we couldn't ask to be in better shape with the index trading 120 points above our put spread. We shouldn't have anything to worry about in this spread.

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

Despite the pullback in oil, OIH continued to march up the chart on Friday. It gained $2.52 and capped off another excellent week for the ETF. Its 3.11% advance on Friday puts the index at $83.64, which leaves OIH nearly 30 points above our "short" strike price. Similar to our RUT spread, we couldn't ask to be sitting much better with not a lot of time to expiration. For now, let's just sit back and enjoy the ride in this one.

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

It couldn't get much stronger than Google was on Friday. The stock shot up $17.56 during the session. That amounted to a 4.96% jump in the stock and left Google sitting at $371.28 heading into the weekend. Similar to our other spreads, last week's gains have pushed GOOG way above our put spread. This gives us over a 100-point cushion heading into the final ten sessions of the February cycle.

MNX 110-105 FEBRUARY BULL PUT SPREAD (15 Contracts entered on 01/29/09)

Potential profit of $40.00 per contract

Contingent Stop Order set at $112.50

The MNX broke through another strong resistance level on Friday when the index surged $3.24 on the session. This took the MNX through resistance at $125 and put it in position to test another one on Monday. Friday's 2.60% gain left the index sitting at $127.75 heading into tomorrow's session. With 17 points of breathing room and plenty of strong support levels on the chart, we are feeling really good about this spread.

As always, Trade Happy and Trade Smart

Stocks teeter after weak earnings and troubling economic reports. Wednesday morning started with weak earnings reports from two large-caps, Walt Disney and Kraft Foods. Although they were both disappointing, stocks were able to make it into positive territory at the open. This was largely due to this morning's employment report coming in better than last month, even though it still showed massive job losses. This helped stocks spend a big chunk of the session in positive territory, but more concerns over Bank of America and other financials eventually sent stocks lower into the closing bell. The selling took back a big portion of yesterday's gains and set up some additional pressure for tomorrow's initial claims report and Friday's closely-watched non-farm payrolls.

Employers continued to shed jobs in the private sector according to today's Automatic Data Processing (ADP) report. The report showed that 522,000 private sector jobs were lost in the month of January. This was more than the 508,000-job loss that analysts were expecting, but down from the 659,000 jobs that were lost in December. These two mixed factors give you an opportunity to look at the report as if the glass were half full or half empty. In previous reports, it was the large and medium size companies that were cutting back on their workforce. But in today's figures, it shows that now even small companies are deciding to shed their workforce. Keep in mind that Wall Street uses this report as an indicator for Friday's more important non-farm payroll number.

After news last week that the new administration was rethinking its "bad bank" plan, some troubled financials continued to reel this week. The selling in Bank of America has been unrelenting. Today, the stock took another nose-dive as traders wait to see what the new Treasury Secretary will do to help shore up troubled banks. Until there is some tangible plan in place, the Street has felt the need to sell first and ask questions later. Although the President hasn't been able to fix the problems on Wall Street, he has come out once again with more jawboning. Today he requested that his administration will attempt to curb executive pay for institutions that receive government funds.

There was a bit of good news in today's Institute of Supply Management's non-manufacturing report. The index of mostly service sector activity came in better than expected at 42.9 for January. This was better than analysts' expectations of 39.0 and up from December's number of 40.1. While the uptick in the index was definitely positive, remember that any reading below 50 shows contraction in activity. Again, the report gives us a mixed bag with the data being better than expected, but the index remains at troubling levels.

Graphic from Briefing.com

In today's Energy Information Agency's report on oil levels, it was apparent that demand remains at very weak levels. According to the report, U.S. stockpiles increased to 7.2 million barrels last week. That number was over double the average expectation of a 2.9 million barrel increase of inventories. The high level of supplies has kept the front-month contracts trading at a deep discount to later months. This shows that traders believe that the price won't remain at the lower levels in months to come. On the session, crude fell 1.1% and settled at $40.32 a barrel on the New York Mercantile Exchange. At the same time, gasoline numbers came in similar to last week. Stockpiles increased by 300,000 barrels, but that was less than half the 600,000 barrels that analysts had predicted. This will make it difficult for the price of gas to come down at the pump.

Today's Economic Reports

After yesterday's strong session, the Dow Jones Industrial Average decided to give back most of those gains today. It tumbled 121 points and finished the trading day back below the 8,000 mark at 7,956. The longer the index flirts with this support level the higher the probability that it's going to fall hard. Our only hope is that it finds some upward momentum over the next two sessions.

The S&P 500 also gave up some of yesterday's gains when it fell 6 points in today's session. The index was moving higher until it ran into its 20-day moving average (blue line) on the chart. By the end of today's session, the index had pulled back to 832 points. It also appears to be headed towards Monday's low on the chart. Similar to the Dow, the S&P is going to need some type of momentum shift to get the index moving back up the chart.

It appeared that the Nasdaq was going to avoid a losing session today, but the late selling took the index into the red at the close. After trading above its 50-day moving average (red line) on the chart, the Nasdaq finished the session back below with its 1-point loss. However, unlike the other two indexes, this one appears well above Monday's low on the chart at 1,515. With money still flowing into tech, we'll be watching to see if the Nasdaq can lead the way higher or rollover hard.

After falling yesterday, the VIX (Chicago Board Options Exchange Volatility Index) moved higher in today's session. It gained 0.79 points and closed at 43.85. Which way it goes from here will tell us a lot about how the indices will finish the week. A VIX moving higher will mean the selling has returned while a falling VIX would be welcomed by the bulls.

Even though the indices finished the session lower, our positions did fairly well on the trading day. Our only problem so far this week was our inability to get filled in the Apple spread. With the stock not giving us any opportunity of a pullback, we feel it's time to leave it alone and just sit tight with the spreads that we already have going for this cycle.

After all, with two and a half weeks left to go in this options cycle, we really couldn't be sitting much better in the majority of our spreads. The only thing causing us concern is that the indexes have been flirting with some very touchy support levels on the charts. If they break lower, we're likely headed to the November lows, which would certainly cause a lot of our cushions to evaporate. The biggest market-moving piece of economic data this week will be from the non-farm payroll report that comes out on Friday. This number will be dissected vigorously before the opening bell and will certainly set the direction for the trading day. As of today, the Street is looking for a job-loss of 500,000 jobs. This number would be down slightly from the previous report of a negative 524,000 jobs.

Due to this, we are monitoring all of our positions extremely closely and wouldn't be afraid to close any of them out early to lock in our gains. The only problem is that there is still quite a bit of time value left. But now that we're heading into the final few weeks, we should see that dry up fairly quickly. Of course, that's assuming that the volatility doesn't take another run up into the nosebleed territory. With that said, let's take a look at all of our spreads in more detail.

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

This morning, it looked like the RUT was headed back up the chart to test its 50-day moving average (red line) on the chart. But after two straight sessions with gains, the index finished the day falling $4.42. The 0.98% loss wasn't much, but it did take the RUT down to $448.48. The index appeared to like the support near $440 on Monday and might be headed back to test it again tomorrow. But even with this pullback today, the RUT is still trading nearly 100 points above our put spread and doesn't have us too concerned at this time.

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 was one position that took a beating on Monday and then traded wildly on Tuesday. It was able to move higher in today's session with an advance of $2.65. This took the ETF back up to $77.99 and leaves it back above its 50-day moving average (red line) on the chart. At this time, we still have over a 20-point cushion in this spread and plenty of strong support levels between OIH and our "short" strike price. For now, let's just sit tight and see how this one plays out.

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 flying high early in today's session, but then was hit with strong selling all afternoon. Despite this, the stock still managed to finish the session in positive territory with a $2.55 gain. The 0.75% move leaves the stock at $343 and over 70 points above our put spread-- not a bad place to be for us. The company was in the news today when AOL acknowledged that Google has asked the company to return its $1 billion investment or to spin AOL Internet off as a public company. Google invested that $1 billion in 2005 in exchange for a 5% stake in AOL. However, the company retained the right to demand a refund or for AOL to spin off the internet unit as a public company. This should be interesting to watch over the next few weeks.

MNX 110-105 FEBRUARY BULL PUT SPREAD (15 Contracts entered on 01/29/09)

Potential profit of $40.00 per contract

Contingent Stop Order set at $112.50

The MNX was also headed sharply higher this morning, but then finished the session barely in the red. The index lost $0.03 on the day and closed at $121.54. The selling started once MNX hit a resistance line near $124 on the chart. The good news is that the index remains above its 20-day moving average (blue line) and its 50-day moving average (red line) on the chart. We also have several good support levels between the index and our put spread. Currently, MNX is sitting over 11 points above our position.

As always, Trade Happy and Trade Smart

The devil appears to be in the details. As we mentioned in Wednesday's newsletter, we were very skeptical about the   government's idea to move forward with the "bad bank" plan. Unfortunately, the government leaked out information earlier in week that got the indices racing higher. Well, that came to a crashing end on Friday when reports started to surface that the Treasury was now being scrapped or at least put on hold. Evidently, the details are a little more challenging than the new administration was expecting. The effect on stocks was apparent right after The Wall Street Journal broke the story. Although it wasn't such a rosy day to begin with, the news that the "bad bank" had been put on ice drove stocks much deeper into the red. This capped off the trading for January, which turned out to be the worst month ever recorded for the first month of the year. Not a good indicator for 2009.

While stocks were able to bounce into the green right after the opening bell, it was only because the fourth quarter GDP wasn't nearly as bad as the Street was expecting. Ahead of the report, analysts had predicted a decline of 5.5%. While the contraction was certainly apparent in the number, a reading o a -3.8% was nowhere near as devastating as everyone was expecting. However, it does mark the second quarter of the recession and it is getting deeper than the third period. Just the headlines of all the job cuts last week show that things are still on the downward trend.

Graphic from Briefing.com

Although the number was better than expected, it was only the increase in inventories of goods that kept the figure from falling farther. Keep in mind that the gross domestic product is the gauge of a country's output. The problem with the jump in inventory is that those goods were not sold last quarter. Instead, most of the inventory was still sitting in warehouses at the end of the fourth quarter. If that number was adjusted for the unsold inventory, the true GDP would have fallen by 5.1% last quarter. Not a good picture, but probably a more accurate state of the current economy.

The latest consumer sentiment reading came out Friday morning from the Reuters and the University of Michigan. It showed that consumer confidence remained relatively flat from December, with this month's reading coming in it at 61.2, up slightly from last month's 60.1. Analysts were expecting a number of 61.9, which was slightly above the actual figure.

While the consumer sentiment remained unchanged, the Institute for Supply Management-Chicago's Midwest factory index took a turn for the worse on Friday. It showed another sign of concern in the manufacturing sector with the reading falling another 1.8 points in January, hitting nearly a 30-year low of 33.3. This keeps the index firmly in the area of contraction, which is any reading below 50.0.

Today's Economic Reports

While crude was able to move up $0.30 a barrel on Friday, it finished the month down 6.6%. It settled at $41.74 a barrel on the New York Mercantile Exchange while marking its seventh straight month of declines.

Meanwhile, gold has continued to climb. It moved up another 2.5% on Friday, taking gold up to $927.30 an ounce. The dollar followed suit, with it gaining 1.23% against the euro on the final session of the month.

After starting last week on fire, the Dow Jones Industrial Average was hit hard on the final two sessions of the week. It dropped 148 points on Friday and finished the session at 8,000. This put the index down 8.84% for the month of January, topping the previously worst month on record of 8.64% in 1916. On the chart, the index has fallen to a strong support level that has helped prop up the index in the past. However, the fact that the Dow keeps coming back to the number increases the odds that it's going to fall through it and test the old low from last November.

The S&P 500 tumbled 2.2% on Friday, taking the index down to 825 points. This also marked a historic month for the index, putting the S&P down 8.57% for the first month of the year. On the chart, this index remains a little stronger than the Dow, with it still remaining above the support at 800. However, if it takes out this level, it also will more than likely be headed to last November's low on the chart.

After moving straight up the chart at the beginning of last week, the Nasdaq also ran out of steam late in the week. This was despite some outstanding earnings reports to boot. After falling through its 50-day moving average (red line) on Thursday, it fell hard on Friday. It tumbled 31 points on the final day of the week, taking the index down to 1,476. While this keeps the Nasdaq above the recent pivot low near 1,450, it does bring it back to within striking distance of that support level. Although the Nasdaq finished the month ahead of the other two indices, unfortunately, that doesn't mean that it was in positive territory. Rather, it was down 6.4% for the first month of 2009.

All of the selling on Thursday and Friday caused the VIX (Chicago Board Options Exchange Volatility Index) to spike higher. It climbed 2.21 points on Friday and settled at 44.84. The only positive is that the "fear index" remains well below its 50-day moving average (red line) on the chart.

While the selling was ugly across the board at the end of the week, our spreads fared extremely well. Of course, we don't want to find out what damage can be caused by a continuation of that selling. Instead, we'd like to see some stabilization of the Market. But with plenty of earnings left to come, we're sure of more government intervention; we wouldn't place a bet on an end to the pain and suffering. But even with all the selling on Thursday, we still couldn't get filled in the Apple spread. Once again, we are going to adjust the strike prices (but this time lower) and the credit for tomorrow. We hope to take advantage of the volatility and get another good spread entered for February (trade alert listed below).

Even though the selling might make members nervous, it's important to remember that we have plenty of cushions in our spreads (currently). Also, keep in mind that we strategically placed our strike prices below long-term support levels. This adds an extra level of security in our positions. Although that doesn't guarantee that we'll make it to the finish line with our spreads intact, it does add some extra probability of success. Of course, we also have our contingency close-out orders ready to go in case they're needed. This should help us all sleep better at night knowing that we will keep the losses small if things do get real ugly. But for now, we're a long ways from having to use them. So let's just keep a close eye on all of our positions and see what unfolds this week.

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

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.

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 breaking through its 50-day moving average (red line) last Wednesday, it appeared that the RUT was going to continue screaming up the chart. But that all changed on Thursday when the index made a sharp U-turn. Then it continued the selling on Friday when the RUT fell 9.71 points and finished the week at $443.53. While the action at the end of last week points to additional selling this week, keep in mind that we still have a very large cushion in this spread. The index is still sitting over 90 points above our "short" strike price and it also has plenty of good support levels in between.

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 wasn't able to avoid the selling on Friday, but it really wasn't that bad for this ETF. It only lost $1.94 on the final day of the week, leaving it at $76.96 heading into the weekend. OIH also remains above its 50-day moving average (red line), which should be a very good support level. For now, we feel very good about this position with OIH trading 21 points above our put spread.

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 finally ran out of steam on Friday, but it took a huge Market sell-off to temper its upward momentum. The stock lost $4.79 on the trading day and closed at $338.53. This still leaves Google well above its 50-day moving average (red line) and nearly 70 points above our put spread. We also like the fact that we have several good support levels above our put spread, just in case they're needed. For now, let's sit tight and see if it can regain its strength over the next week.

MNX 110-105 FEBRUARY BULL PUT SPREAD (15 Contracts entered on 01/29/09)

Potential profit of $40.00 per contract

Contingent Stop Order set at $112.50

The MNX was another one that looked like it was going to the moon last week. That was until Thursday selling caused the index to reverse sharply. On Friday, the MNX declined 2.36 points and fell back below its 50-day moving average (red line) and closed at $118.03. Although we don't like the sudden reversal and current trend, we still have 8 points of breathing room in this spread. This is the position with the least amount of cushion, but we still feel good about its possibility of expiring worthless.

As always, Trade Happy and Trade Smart