Stocks start strong and finish even stronger. Some of the internals in the GDP number helped boost the Market early this morning and then the statement from the Federal Reserve kept things moving up this afternoon. The end result was a big resurgence from the bulls, which helped push stocks dramatically higher in today's session.  

This morning's reading on the first quarter Gross Domestic Product (GDP) came in much worse than economists had predicted. However, traders looked past the overall number and focused on the internals of the report, which helped jumpstart the Market early on. According to the government, GDP contracted by 6.1% (at an annual rate) over the first three months of 2009. Coming into the announcement, the Street was looking for a 5% decline during the same period.

Despite the weak overall number, there were a few bright spots in the report. The data showed an uptick in consumer spending, which is very good news for an economy that revolves around the service sector. More than two-thirds of the U.S. economy revolves around consumer spending. Today's rebound in consumer spending was dramatic. In the fourth quarter of 2008, it had contracted by 4.3%. For the first quarter of 2009, spending has increased by 2.2%.

At the same time, today's report showed another decline in business inventories. This is also very optimistic news because it means that companies will have to start restocking their supplies in the near future. This should translate into increased production levels and lead to a bump in employment. The only question is how much and how soon? The answer to that question could tell us a lot about when we're going to start to see a recovery in the overall economy.

While the focus on GDP got things started in the right direction this morning, there was plenty of excitement surrounding the Federal Open Market Committee's policy statement this afternoon.  Perhaps the best piece of news out of today's policy statement was the wording that gave a modest upgrade to the economic outlook. The Fed also stated that consumer spending appears to be stabilizing, which was very good news to the Street. As expected, the members decided to keep its target for the federal funds rate at its present level near zero for what it calls an extended period.

Meanwhile, there was another big jump in oil inventories this morning according to the government's Energy Information Agency (EIA) report. While this has been a weekly occurrence over the past several months, this time the surplus has hit a 19-year high. To compound matters, the data also showed that the U.S. is consuming less than it has in several years. If you thought this combination would bring down the price of oil.......you were wrong. Remember, we've seen this same combination repeat itself over the past several months. The result is that oil just keeps holding its ground. This has a lot to do with being a safe haven from the future of high inflation that we'll likely encounter once the global economy starts to recover.

Today's EIA report once again showed another big jump in crude supplies. The U.S. inventories climbed 4.1 million barrels last week to a level of 374.7 million barrels. This was once again nearly double what analysts were expecting heading into the release of the data. The last time supplies were this high was the summer of 1990.

Today's Economic Reports

Industrial stocks got a boost this morning when Caterpillar reported that activity in China had picked up. This news helped drive industrials higher early on. According to companies doing business in China, they have seen a bigger impact of stimulus spending than they have in the U.S. If we started to see the same kind of activity in this country, it would certainly be a big lift to the Market.

The Dow Jones Industrial Average enjoyed a strong session until the last hour of the session brought some selling. Even with this pull-back at the end of the trading day, the large cap index still closed up 168 points at 8,185. It is also hitting up against resistance from last February. However, if it makes it through this barrier, it could be another nice move to the upside.

The S&P 500 also ran into some resistance from last January and February on the chart, but not before it gained 18 points. This 2% advance took the index up to 873 points at the closing bell. Similar to the Dow, if the S&P can make it through this resistance, it should have some room to run.

The Nasdaq Composite also turned in a nice performance today when it advanced 38.13 points, finishing the session at 1,711. Unlike the other two indices, the Nasdaq remains well above the highs from January and February. Instead, the tech-laden index is pushing towards its 200-day moving average (black line) on the chart. This area is likely to be the next big test for the Nasdaq.

After running up to the 40 point level on Monday and Tuesday, the VIX has been turned back once again. The "fear index" took a beating in today's session. It fell 1.87 points and finished the day at 36.08 points.

Earlier this week we had some after hours and pre-market trading that was extremely volatile. Due to this, we decided the best action was to take a wait and see approach. A lot of the nerves swirling around the swine flu continues to be out there, but hasn't been able to hold stocks down. However, a pandemic would certainly be a huge blow to stocks with the economy already in a fragile state.

While we would like to use the rest of the cash sitting in our accounts, we are apprehensive about adding any new positions after a big run-up in the Market like we had today. The good news about today's move is that it moves our put spreads a little more out of reach. However, it prevents us from adding any new spreads for tomorrow. But if we do see any new opportunities pop up during tomorrow's session, we'll send out a separate trade alert on Thursday night. For now, let's sit tight and not force any new positions.

CURRENT MAY SPREADS

RUT 390-380 MAY BULL PUT SPREAD (15 Contracts entered on 04/20/09)

Profit potential of $65.00 per contract

Contingent Stop Order set at $395.00

The RUT might have started the week a little slow, but the small-cap index has turned it on during the last two sessions. It turned the bearish tide in yesterday's trading and then rocketed 16 points higher in today's trading. The RUT's 3.38% advance in today's action took the index up to $488.56. This gives us nearly100 points of breathing room in our put spread, which should allow us to sit back and relax in this one....for now.

MNX 120-115 MAY BULL PUT SPREAD (15 Contracts entered on 04/20/09)

Profit potential of $51.00 per contract

Contingent Stop Order set at $122.50

The MNX wasn't quite as strong as the small-cap index today, but we'll take the 1.28% advance with open arms. The tech index climbed $1.74 in today's session, taking the MNX up to $137.93 at the close. The index was higher intraday, but appeared to run into some strong resistance on the chart at its 200-day moving average (black line). It's going to take one heck of a move for the index to make it above this barrier. But even with it still below this line, we're in very good shape in this spread with nearly 18 points separating the MNX from our "short" strike price.

AZO 145-140 MAY BULL PUT SPREAD (15 Contracts entered on 04/xx/09)

Profit potential of $45.00 per contract

Contingent Stop Order set at $147.50

AZO was a rare red stock in today's session. The stock was higher during the day, but it finished the day down $1.45 at $163.74. Despite its poor performance in today's trading, the stock is coming off two straight gains on Monday and Tuesday and is still sitting in decent shape as far as our put spread is concerned. We currently have a cushion of almost 19 points and plenty of strong support levels on our side.

As always, Trade Happy and Trade Smart

Stocks appeared stress-free on Friday as they raced higher, but two of the indices saw their winning streaks come to an end. The government finally unveiled the parameters on its stress-test, which didn't have much effect on the Market. Instead, financials and tech stocks continued to rally on the session. However, Friday's surge to the upside wasn't enough to push all three indices back into positive territory on the week. While the Nasdaq was able to keep its streak alive, the Dow Jones Industrial Average and S&P 500 couldn't overcome last Monday's tumultuous session. Although the effort came up shy for these two on Friday, the indexes still enjoyed a very strong trading day that kept traders optimistic heading into the weekend.

There was plenty of anxiety Friday morning with the government ready to release its parameters for its stress-test of the 19 largest banks. While the government announced its intention to stress-test the banks back in February, it wasn't transparent about the methodology of its test. On Friday, the Fed discussed the framework of how it's evaluating the banks. However, to the dismay of most on the Street, the test lacked many of the details that analysts were hoping for.

The government is scheduled to release the actual results of the test during the week of May 4. At that time, we should find out which banks were tested and their capitalization. According to leaks out of the government, all 19 banks are believed to be well capitalized for the current environment. However, the test was supposedly designed to help institutions prepare for a worsening environment with additional losses. While the government believed that the test should help ease fears of investors, some believe that we might get the opposite effect when the true results are released. At this time, we would have to put ourselves in the same camp as the skeptics.

In economic news on Friday, the March durable goods orders dropped 0.8%. While a decline is usually not positive news, Friday's report was much better than consensus expectations. The Street was looking for a decline of 1.5% last month. Perhaps its biggest impact is when analysts are attempting to figure the first quarter GDP (Gross Domestic Product) number. With Friday's durable goods orders remaining in negative territory, it won't bode well for the first quarter GDP. The chart below shows just how far the orders have fallen on a yearly basis.

Graphic from Briefing.com

Meanwhile, there was also a bit of good news in the housing sector on Friday when the New Home Sales number was better-than-expected. For March, sales came in at a seasonally adjusted number of 356,000. This was above expectations of 337,000. At the same time, February was revised up to 358,000 from an earlier reported number of 337,000.

Oil continued to climb on Friday, making its way back above $50 a barrel. While U.S. supplies remain at historic highs, traders are betting that we'll see a reduction from that level heading into the summer driving season. Crude finished the day up $1.93 at $51.55 a barrel on the New York Mercantile Exchange.

Friday's Economic Reports

The Dow Jones Industrial Average made a strong move to the upside on Friday, but it wasn't enough to extend its six-week winning streak. The index climbed 119 points on the final session of the week, leaving the Dow at 8,076 points. This meant that the large-cap index actually fell 55 points on the week, thanks to last Monday's huge sell-off. While its winning steak came to an end, its upward momentum on Friday put the index back above its 20-day moving average (light blue line) and the 8,000 point mark.

The S&P 500 also got its stretch of six consecutive gains snapped last week when the index gave back 3 points over the five day stretch. But it came close to overcoming this on Friday when the S&P gained 14 points and finished the session at 866 points. The index gave us a nice reversal at its 20-day moving average (light blue line) last week and nearly made its way back to un-changed on the week. Let's see if it can start a new streak this week.    

The Nasdaq continued to lead the way last week and kept its winning streak alive. The tech-heavy index gained 42 points on Friday, which put it back into positive territory for the week. It finished the five-day stretch up 21 points at 1,694. This increased its streak to seven weeks, which is its best stretch since late 2005. With the Nasdaq breaking through another resistance level last week, it appears ready to continue moving higher this week.        

The VIX (Chicago Board Options Exchange Volatility Index) continued to fall on Friday when it shed 0.33 points and finished the week at 36.82. If it continues to drift lower this week, it would be a very good sign for the bulls.

We came close to getting filled in our second RUT spread on Thursday morning, but the pull-back wasn't quite enough. Unfortunately, Friday wasn't even close. While the surge higher wasn't conducive for another put spread entry, it did help increase the cushions in our index spreads. That's the bright side. With three positions underway for May, we've increased our profit potential to $2,415 and should be able to add another thousand to that if we get two more spreads.

With our current three sitting in great shape, we'd like to add more spreads for tomorrow. However, futures are down huge tonight. Due to this, we want to take a wait and see approach for tomorrow's session. Just keep an eye on your email tomorrow night or Tuesday night for a trade alert if we see a good opportunity. Until then, let's sit tight and see what unfolds.

CURRENT MAY SPREADS

RUT 390-380 MAY BULL PUT SPREAD (15 Contracts entered on 04/20/09)

Profit potential of $65.00 per contract

Contingent Stop Order set at $395.00

Friday's strong rally in the RUT helped the index make up most of its losses on the week. The small-cap index surged $12.12 on the final session of the week, closing at $478.74. This left the RUT down only 0.1% for the five trading days last week and puts its year-to-date loss at 4.1%. However, the strong finish to last week leaves the index in good shape heading into this one. If the RUT can make it through resistance at $480, we could see another strong move to the upside. With our put spread sitting nearly 90 points below the index, we shouldn't have anything to worry about anytime soon in this one.

MNX 120-115 MAY BULL PUT SPREAD (15 Contracts entered on 04/20/09)

Profit potential of $51.00 per contract

Contingent Stop Order set at $122.50

Tech stocks continued to move higher on Friday, putting the MNX into positive territory for the fourth straight session. The index climbed $2.89 and closed out the week at $137.33. Strong earnings last week continued to push the tech index higher for the past four trading days. If this trend continues this week, we should be in great shape in our put spread. We currently have a comfortable 17 point cushion in this position.

AZO 145-140 MAY BULL PUT SPREAD (15 Contracts entered on 04/xx/09)

Profit potential of $45.00 per contract

Contingent Stop Order set at $147.50

Unfortunately, AutoZone was one of the few stocks that didn't enjoy Friday's move to the upside. The stock was sitting in decent shape until a huge sell-off in the stock during the final fifteen minutes of the day. The intraday chart below shows just how precipitous that move was. By the time the closing bell rang, AZO was down $2.79 at $161.68. While the price action on Friday was certainly bearish, keep in mind that we still have a 16 point cushion in this spread and plenty of solid support levels on our side. For now, let's keep a close eye on it but not get too concerned until we see a break below some of these support levels.

As always, Trade Happy and Trade Smart

We went one for two in our new trades today. While we got the pull-back intraday, we were only able to get filled in the AZO spread. For tomorrow, we're going to keep the RUT spread at the same strike prices and credit just in case we get more volatility during the session. Let's see if we can get paid for using some more patience in this one.

NEW TRADE ALERT (1)

Please Note: This is a Day Order and a Limit Order. This alert applies to both the Regular Newsletter Traders & Professional Traders

RUSSELL 2000 INDEX (RUT)

OPENING 360-350 MAY BULL PUT SPREAD (15 contracts)

Sell 15 May Puts at 360 strike price

Buy 15 May Puts at 350 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 $365.00. For auto traders, we will send in a close-out order if this happens.

As always, Trade Happy and Trade Smart

The indexes were flying high this afternoon, but then General Motors drove them into the ditch. Most stocks were sitting near their highs of the session this afternoon until a report that GM was headed to bankruptcy fueled a sell-off heading into the closing bell. Evidently this possibility was news to someone?

It was late in the trading day when General Motors was back in the news. It was a newsflash by The Wall Street Journal that brought out the bears today. The WSJ reported that the automaker will not make a $1 billion debt payment to bondholders. While it wasn't surprising that the company is teetering and on the verge of collapse, it's the possibility of default that has other lenders or bondholders worrying about possible non-payments from other borrowers. Late tonight, there was more news out of the company. According to reports, GM is planning on temporarily closing most of its U.S. factories for up to nine weeks this summer. This just lends more credence to the possibility that the company is heading into bankruptcy.

While the finish to the session was ugly, things weren't so bad earlier in the day. This morning, earnings were at the forefront with the latest round of heavyweights reporting quarterly earnings. There was a slight concern from traders after Morgan Stanley announced weaker-than-expected results. This comes after other financials were able to come in better-than-expected over the past week and a half. However, traders were encouraged by strong numbers from AT&T, Boeing, McDonalds, Yahoo, and Wells Fargo. This helped stocks move into positive territory Wednesday morning.

The Street was still feeling a sense of relief in the financial sector from yesterday's comment from the Treasury Secretary. On Tuesday, Timothy Geithner said that the majority of banks have sufficient capital and he would welcome the repayment of bailout funds from those strong banks. However, some have debated whether the government will actually allow the early repayment from the banks. At the same time, there is definitely plenty of anxiety over the upcoming release of the government's stress test.

Mid-morning, the government's weekly oil inventory report showed another big increase in supplies. According to the Energy Information Administration, the nation's inventories climbed by 3.9 million barrels last week, taking the stockpile up to 370.6 million barrels. Once more, today's reading was larger than the expected increase of 3 million barrels. Despite another upside surprise, oil continued to surge higher in today's session. It closed up $0.30 at $48.85 a barrel on the New York Mercantile Exchange. Keep in mind this was at the same time that oil demand fell to a 10-year low according to the EIA. This just continues to boggle the mind. Meanwhile, gasoline supplies increased 3.9 million barrels last week to 217.3 million barrels.

There was an update on the housing front when the Federal Housing Financing Agency reported that prices have risen by 0.7% (seasonally adjusted basis) from January to February. This helped give a lift to the beaten-down housing sector.

Friday's Economic Reports

The Dow Jones Industrial Average finished the session heading lower. By the time the closing bell rang, the large-cap index was down 82 points at 7,886. The 1.04% loss took the index down to its 20-day moving average (light blue line). For the uptrend to continue, we'd like to see the Dow remain above this moving average. However, if it continues to fall, we'll be closely monitoring how it deals with its next support level on the chart at 7,800. A drop below this line could take the index down to its 50-day moving average (red line).   

The S&P 500 also finished the session in the red. It dropped 6 points and closed at 843. The troubling part of today's trading is that the index finished just off its low of the session. While today's candle was definitely bearish, let's see what happens if the index reaches Tuesday's low on the chart, which is also at its 20-day moving average (light blue line).   

The Nasdaq was also hit hard at the end of the day, but still managed to lock in a 2 point gain on the session. The .14% advance left the Nasdaq at 1,646. The index appeared to run into some resistance today at its high from last Friday on the chart. Meanwhile, it seems to have a decent support level at yesterday's low, which is also its 20-day moving average (light blue line). Let's watch to see if the index is able to break out of either side of this trading range.        

The VIX (Chicago Board Options Exchange Volatility Index) skyrocketed on Monday's tumble in the Market. While it pulled back a bit yesterday, it climbed another 0.96 points today and closed at 38.10. If we get another downturn in the indices, we could see this index moving back above the 40 point level.

After the closing bell today, we had a couple very good earnings reports from tech companies Apple and Ebay. This helped ignite an after-hours rally, which sent futures climbing. Let's see if this can continue into tomorrow with a number of companies reporting before the opening bell.

It was another tumultuous beginning to the week. Monday's bloodletting worked to our advantage by helping us get filled in our new spreads. As a matter of fact, the gap lower on Monday helped us get a better credit in our MNX spread. This appeared to be perfect timing with the indices bouncing back on Tuesday and then trading mixed in today's session.

While the future direction of this cycle is certainly still up in the air, we are leaning towards more of a sideways direction at this time. Of course, earnings or any drastic economic news could certainly push or pull stocks in either direction. And let's not forget about the impact of Washington D.C. because it seems to be heavily involved in the Market these days.

But let's not dwell on what could, would, or should happen. Instead, let's make the best possible trades for the next three and a half weeks. For now, we want to remain on the put side. However, let's not forget about all our tools in the toolbox if things turn against us. We could always add a layer like we did last month with the RUT or make spreads into iron condors (just to name a few adjustments).

For tomorrow morning, let's take advantage of this week's downturn by pulling one of those tools out of our toolbox. With the RUT pulling back, it's opened the door for another put spread at an even more conservative level than we got into on Monday. We're going to place our strike prices 30 points below our other put spread and drop the credit down to $0.45. We couldn't feel any stronger about the potential success in a spread than we do about this one.

At the same time, we're going back to our favorite over the past year, AutoZone Inc. (AZO). We continue to be extremely bullish on the fundamentals of this company, which we've been touting for the past several months (especially in a recessionary environment). Our only concern with this spread is the same one we had last month, over a possible analyst downgrade. This is because the stock has risen to such a high valuation. However, with the company scheduled to report earnings shortly after the May expiration, we doubt there's going to be too many analysts who want to stick their necks out on such a strong company. At the same time, we wouldn't be surprised to see a nice earnings run-up during this cycle. With that said, we also feel really good about this one, but let's keep our strikes conservative in this environment. 

NEW TRADE ALERT (2)

Please Note: These are Day Orders and Limit Orders.

RUSSELL 2000 INDEX (RUT)

OPENING 360-350 MAY BULL PUT SPREAD (15 contracts)

Sell 15 May Puts at 360 strike price

Buy 15 May Puts at 350 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 $365.00. For auto traders, we will send in a close-out order if this happens.

AutoZone Inc. (AZO)

OPENING 145-140 MAY BULL PUT SPREAD (15 contracts)

Sell 15 May Puts at 145 strike price

Buy 15 May Puts at 140 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 $147.50. For auto traders, we will send in a close-out order if this happens.

AZO DAILY CHART

CURRENT MAY SPREADS

RUT 390-380 MAY BULL PUT SPREAD (15 Contracts entered on 04/20/09)

Profit potential of $65.00 per contract

Contingent Stop Order set at $395.00

The RUT also took a hit at the end of the session, but hung onto a 0.66 gain at the close. This left the small-cap index at $470.71. On the chart, the index appears to be nestled in between a decent resistance level near 480 and a support at 450. However, if it remains drifting between these levels for the next several weeks, that would be fine with us. We currently are sitting in good shape in this spread with an 80 point cushion.

MNX 120-115 MAY BULL PUT SPREAD (15 Contracts entered on 04/20/09)

Profit potential of $51.00 per contract

Contingent Stop Order set at $122.50

The MNX was also able to squeak out a gain today with its $0.66 advance. The index was flying high until the last hour of trading was painful for stocks across the board. Its close of $133.57 leaves the index in the middle of today's trading range. Similar to the other indexes, the MNX is sitting between a decent resistance level and support level on the chart. If it breaks through either one of these levels, it could be a pretty big move. Currently, the index is sitting 13 points above our "short" strike price in this position.

As always, Trade Happy and Trade Smart

Make it six in a row! Friday's expiration capped off the sixth straight weekly gain for the indices while marking our sixth profitable month in a row. While the indexes and our profit weren't the largest, we'll certainly take it.

The Market got a bit of relief on the earnings front with a number of reports coming in better-than-expected. More importantly, there weren't any big surprises to the downside, which has the ability to spook the Street. From tech-giants to the financials to industrials, traders were encouraged by the corporate earnings reports out of Google, Citigroup and General Electric. Keep in mind that it's easy to make it over the bar when expectations are so low. While the figures were sharply lower than one year earlier (averaging 37% lower), it's only the Street's expectations that matter heading into the announcements.

With only 10% of the S&P 500 companies reporting so far, it means that we have a full schedule of corporate earnings coming up. Things get started on Monday with Bank of America before the bell and IBM coming after the close. Not to mention plenty of industrials also reporting on Monday. 

There was good news Friday morning in the latest reading on consumer sentiment. Friday's release of the Reuters/University of Michigan preliminary index climbed to 61.9 in April. This is up from the last reading in March of 57.3 and much better than analysts' expectations of 58.5. The latest increase in sentiment shows that the consumer is starting to feel better about the economy and that the anxiety is starting to ease. The chart below shows the recent bounce from the historic low in the area of 50.

Graphic from Briefing.com

Oil moved back above $50 a barrel on Friday, but finished the week down 3.7%. Last week's EIA inventory report turned up the pressure on crude with stockpiles continuing to climb. But it did bounce back slightly on Friday when it gained $0.35 and finished the session at $50.33 a barrel on the New York Mercantile Exchange.

Friday's Economic Reports

The Dow Jones Industrial Average managed to gain 5.90 points on Friday. The 0.07% advance put the index up 47 points on the week, leaving the large-cap index at 8,131. This put the Dow into positive territory for the sixth straight week, its longest winning streak since the spring of 2007. The next resistance level appears to be in the area of 8,300 on the chart.  

The S&P 500 also made it six weeks in a row with its 13 point gain for the week. On Friday, it rose 4 points and closed at 869. Similar to the Dow, the S&P is also on its longest winning streak since the spring of 2007. However, it's now running up against another resistance level on the chart. If it's able to make it through this line, then it could continue moving higher.    

The Nasdaq enjoyed another strong week with a 1.24% advance over the last five sessions. Not only is it also six straight weeks of gains, the tech-laden index is on its best run since 2005. On Friday, it capped off the week with a 2 point move to the upside. This left the index at 1,673 and well below any significant resistance levels on the chart.       

The VIX (Chicago Board Options Exchange Volatility Index) continued to tumble on Friday. It lost 1.85 points and finished the week at 33.94. Its break below some strong support levels was a very bullish signal for the Market. If it can continue to fall this week, it should give the indices a chance to make it seven in a row.

Friday was our latest Payday with our remaining spreads all expiring worthless, just the way we like it. Remember, the great thing about expiration is that we're not charged any extra commission for our spreads closing out worthless. We've already spent a lot of time over the past few weeks talking about how much better it could have been if it weren't for that one session with OIH, so let's not dwell on it now. Instead, let's be grateful that we increased our winning streak to six months with a profit of $1,505 for April. With that said, let's take a look at the spreads that expired on Friday.

EXPIRED/CLOSED APRIL SPREADS

RUT 350-340 APRIL BULL PUT SPREAD (15 Contracts entered on 03/23/09)

Profit of $60.00 per contract

POT 70-65 APRIL BULL PUT SPREAD (15 Contracts entered on 03/30/09)

Profit of $50.00 per contract

MNX 110-105 APRIL BULL PUT SPREAD (15 Contracts entered on 03/30/09)

Profit of $45.00 per contract

AZO 145-140 APRIL BULL PUT SPREAD (15 Contracts entered on 04/02/09)

Profit of $45.00 per contract

RUT 380-370 APRIL BULL PUT SPREAD (10 Contracts entered on 04/03/09)

Profit of $50.00 per contract

OIH 70-65 APRIL BULL PUT SPREAD (15 Contracts entered on 03/23/09 & closed on 04/01/09)

Original Credit of $50.00 per contract

Close-out Debit of $183.00 per contract

With six straight profitable months now in the book, let's work on the next six. For May, we're starting the cycle with a bulk of the corporate earnings yet to be released. As usual, this could be a tumultuous time for trading. But with the traders looking past any shaky data and instead focusing on the glass half full, it appears that we want to remain on the put side for now.

While we want to remain very conservative in our new spreads, the best place to start in May is with the indexes. We are going back to a put spread on the RUSSELL 2000 INDEX (RUT). Although we are a little concerned that the index hasn't hit any profit-taking yet (during its recent run-up the chart), we find it hard to go against the trend. Let's start with a put spread at very safe levels and leave the door open to making it into an iron condor if the index starts to show us any weakness. However, if it continues to climb north, we could also come back with another layer like we did in the April cycle. The key is to keep an open mind and take whatever the index gives us.

Our second May spread is going with the MINI-NASDAQ 100 INDEX (MNX). Technology continues to lead the way higher and the MNX is a great way to play this momentum. We've had great success the last six months playing this one on the put side and feel this trend will continue in the near-term. Just like the RUT spread, we are coming in at safe strike prices below its 50-day moving average (red line) and several strong support levels. This should help us if the MNX encounters any strong selling this cycle. We're going to start with these two and then add more on Wednesday.

NEW TRADE ALERT (2)

Please Note: These are Day Orders and Limit Orders.

RUSSELL 2000 INDEX (RUT)

OPENING 390-380 MAY BULL PUT SPREAD (15 contracts)

Sell 15 May Puts at 390 strike price

Buy 15 May Puts at 380 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 $395.00. For auto traders, we will send in a close-out order if this happens.

MINI-NASDAQ 100 INDEX (MNX)

OPENING 120-115 MAY BULL PUT SPREAD (15 contracts)

Sell 15 May Puts at 120 strike price

Buy 15 May Puts at 115 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 $122.50. For auto traders, we will send in a close-out order if this happens.

RUT DAILY CHART

MNX DAILY CHART

As always, Trade Happy and Trade Smart

It was another rough start to the week, but stocks bounced back late in today's session. Today's action-packed session had a plethora of economic data that gave trading plenty of twists and turns. But a strong surge in the last 30 minutes of trading pushed the indices into green territory and put our spreads in great shape heading into expiration on Friday.

There was a bit of good news for the consumer this morning when the Consumer Price Index (CPI) showed the fastest descent in prices in over 50 years. This morning's latest reading on inflation showed an unexpected 0.1% drop in March. According to the Labor Department, prices have fallen 0.4% during the past year, which is the largest pull-back since 1955.

Despite this good news, core CPI (which excludes food and energy prices) actually climbed 0.2% last month. This was a bit higher than analysts were expecting and followed two previous months of a rise in core CPI. The good news for consumers is that energy prices declined 3% in March along with gasoline dropping 4%.

Graphic from Briefing.com

In other economic news, the capacity utilization declined to its lowest level since the 1960s. According to the Federal Reserve, production at U.S. factories fell 1.5% (seasonally adjusted) last month, bringing the utilization level to 69.3%. This was slightly worse than the Street was expecting while marking the fifth straight monthly drop. 

The U.S. crude stockpiles continue to climb, but that hasn't really slowed down the price of oil. In today's government report on supplies, the U.S. stockpiles increased to the highest level in 18 years. Although it was another increase in supplies, oil only gave back $0.16 in today's session. It finished the day at $49.25 a barrel on the New York Mercantile Exchange. 

In a bit of good news, the National Association of Home Builders reported the largest one-month jump in over five years this month. The index climbed 5 points to a reading of 14 in April. While the upward movement in the housing market index was certainly a bright spot in the beaten-down housing sector, keep in mind that any reading below 50 indicates negative sentiment. With that in mind, it's hard to get too excited about this report.

There was some more good news this afternoon in the Federal Reserve's beige book, which showed that economic activity is beginning to show signs of life. The survey of 12 regional banks showed that the steep plunge in economic activity has appeared to stabilize while some sectors are beginning to show signs of low level activity. However, overall economic activity remains in a weakened state. 

Wednesday's Economic Reports

In other news, the U.S. government announced that it will unveil its findings of the long-awaited bank stress test after all. The White House is going to release the findings sometime in May. We remain doubtful that there will be anything meaningful in the release. Most on the Street have compared this test to a take-home exam for the banks.

The Securities and Exchange Chairman Mary Schapiro was also in the news today when she said that the SEC will make an intense review of the role that credit-rating firms play in the markets. She mentioned that the SEC may propose additional rules and regulations for the rating companies. The firms have been under fire for failing to forecast the economic meltdown as well as its overly optimistic rating of mortgage-backed securities.

Bank lending to consumers and businesses declined in February according to the Treasury Department. In its latest survey of lending activity, the Treasury reported that lending dropped 2.2%.  

Tech stocks were under some pressure this morning when Intel reported good earnings, but failed to provide any detailed forecasts. Despite this, the company did mention that it believes that computer sales have now bottomed out, which should be good news for the industry. At the same time, International Paper raced higher after the packaging and paper company talked about things turning around.

The Dow Jones Industrial Average hit the gas heading into the final 30 minutes of trading today. The large-cap index was up 109 points by the time the closing bell rang. The 1.38% advance helped the Dow recover a large chunk of its losses on the week and left the index sitting at 8,029.  

The S&P 500 also had a late surge that took the index up 10 points at the close. This 1.25% gain left the index at its high of the session at 852 points. Let's see if it can continue this upward momentum on the final two trading days of the week.    

The Nasdaq made it back into the green by the closing bell, but certainly struggled on the session. It only advanced 1 point and finished the day at 1,626. Heading into this week we expected the index to struggle at 1,650 and so far it hasn't been able to hold above this mark. If the Nasdaq is able to continue climbing on Thursday and Friday, it's likely to test this barrier once again.      

The VIX (Chicago Board Options Exchange Volatility Index) has remained under pressure this week. In today's session, it dropped 1.50 points and finished the day at 36.17 points. If it continues to fall, that's very good news for the bulls.

It was another rough start to the week, but we seem to be sitting in excellent shape after today's session. With just two more trading days left in the April options cycle, we should be able to coast to the finish line in all of our spreads. If it wasn't for the OIH tumble that one morning, it would have been another big Payday for us. But even with one turning against us, we still are coming out of this month with our sixth straight profitable month. With six of them almost under our belt, our goal is to get six more of them.....one month at a time.

We'll figure out how to get the next one in Sunday evening's newsletter. But for tomorrow, keep in mind that things should be interesting with heavyweights Google and JP Morgan reporting earnings. We also have the latest reading on unemployment claims being released before the opening bell. For now, let's take a look at how we're sitting in each of the spreads heading into tomorrow.

CURRENT APRIL SPREADS

RUT 350-340 APRIL BULL PUT SPREAD (15 Contracts entered on 03/23/09)

Profit potential of $60.00 per contract

Contingent Stop Order set at $355.50

After pulling back on Tuesday, the RUT earned most of that loss back today when it climbed 7.91 points and finished the session at $461.13. This leaves us with a 111 point cushion, which leaves us in great shape in this one. Remember, there's only one full day of trading left in this spread. The RUT settles on Friday's open, which is based off of the opening prints of all 2,000 stocks (not the opening price of the index).   

POT 70-65 APRIL BULL PUT SPREAD (15 Contracts entered on 03/30/09)

Profit potential of $50.00 per contract

Contingent Stop Order set at $72.50

POT lost some ground today, but surged higher on the first two trading days of the week. The stock gave up $0.79 by the time the closing bell rang in today's session. This left the stock at $88.23, which is nearly 20 points above our "short" strike price. This should give us smooth sailing heading into expiration on Friday.

MNX 110-105 APRIL BULL PUT SPREAD (15 Contracts entered on 03/30/09)

Profit potential of $45.00 per contract

Contingent Stop Order set at $112.50

The MNX pared most of its loss on the day by the close, but that wasn't enough to get the index back into positive territory. Instead, the MNX shed $0.58 when it closed at $131.65. Regardless, we're still sitting in great shape heading down the home stretch in this spread. With over 20 points of breathing room, we shouldn't have anything to worry about in this position.  

AZO 145-140 APRIL BULL PUT SPREAD (15 Contracts entered on 04/02/09)

Profit potential of $45.00 per contract

Contingent Stop Order set at $147.50

AZO was our prime concern after Monday's tumble. However, the stock rebounded nicely yesterday and then climbed another $2.16 in today's session. The 1.36% advance this afternoon puts the stock at $161.09 and leaves the stock 16 points above our put spread. With only two more trading days before Payday, we shouldn't have to worry about this one either. Let's just sit back and enjoy the ride on Thursday and Friday.   

RUT 380-370 APRIL BULL PUT SPREAD (10 Contracts entered on 04/03/09)

Profit potential of $50.00 per contract

Contingent Stop Order set at $385.00

While our cushion in this position isn't as large as the other RUT put spread, we still are sitting pretty well in this one. With only one full trading session left and over 70 points separating the index from our spread, we shouldn't have any stress in this one.

CLOSED APRIL SPREADS

OIH 70-65 APRIL BULL PUT SPREAD (15 Contracts entered on 03/23/09 & closed on 04/01/09)

Original Credit of $50.00 per contract

Close-out Debit of $183.00 per contract

As always, Trade Happy and Trade Smart

Make it 5 in a row! A stronger-than-expected earnings report from Wells Fargo on Thursday helped light a fire under the indices, pushing them back into positive territory for the fifth week in a row. Heading into the session, it looked as if the winning streak was going to run out this week, but a strong finish to the holiday-shortened week helped make it five straight.  

The financial sector led the way on Thursday with Wells Fargo climbing 32% after its surprising earnings announcement. The bank reported net income of $3 billion for the first quarter. This news was combined with the rumors that all of the banks were going to pass the government stress test helped thrust stocks higher Thursday morning. After all, who would want to be short heading into a lot of earnings reports next week when Wells Fargo blew away analysts' expectations?

On Friday, the International Energy Agency lowered its estimate for global oil demand in 2009. It stated the low economic growth as a reason for its cut in forecast. The IEA cut its previous expectations by 1 million barrels a day, which is a reduction of 2.8% from last year's level. The agency also mentioned that the pace of the contraction is close to levels we encountered in the early 1980s.

The latest company talking about repaying the TARP early was Goldman Sachs. In Friday's Wall Street Journal, the paper reported that the company is considering a multibillion dollar share offering that will allow it to repay a $10 billion government loan. The paper said that an announcement could come early next week. Keep in mind that Goldman Sachs will report its quarterly earnings on Tuesday.

Thursday's Economic Reports

While there are plenty of economic reports on the schedule for this week, most of the focus will be on corporate earnings. There will be plenty more banks slated to report this week along with some tech heavyweights and consumer discretionary and nondiscretionary companies. With so much on the plate for this week, we'll be expecting a week of high volatility.

The Dow Jones Industrial Average climbed 246 points on Friday's session. The 3.14% gain took the Dow above last week's high and left the large-cap index back above 8,000 at 8,083 points.

The S&P 500 put in nearly a 4% advance on Friday when it rocketed 31 points higher. The index closed the day at 856 points and appears headed towards the next resistance level in the area of 870 points.   

The Nasdaq gapped higher on Friday's open and continued to fly up until the closing bell. The tech-laden index gained 61 points on the day and finished at 1,652. This left the index at an old resistance level on the chart. If it doesn't make it through this line, it will likely encounter some profit-taking that could cause a pull-back in the index.    

The VIX (Chicago Board Options Exchange Volatility Index) continued to fall on Friday when it dropped 2.32 points and closed at 36.53. If this continues to fall, it should be good news for the bulls.  

We got exactly what we were hoping the Easter Bunny would bring us on Thursday. One massive rally that should put our spreads out of reach heading into the final week of the April options cycle. Although we still have five more trading sessions left, Friday's strong session helped expand our already large margins in all of our spreads. But as we've seen over the past year, nothing is guaranteed until the closing bell rings on expiration Friday. With that in mind, let's take a look at how we're sitting in each spread heading into Monday's open.

CURRENT APRIL SPREADS

RUT 350-340 APRIL BULL PUT SPREAD (15 Contracts entered on 03/23/09)

Profit potential of $60.00 per contract

Contingent Stop Order set at $355.50

The RUT raced higher on Thursday, climbing 26 points on the day. The 5.90% rally took the index through another resistance level on the chart and left the small-cap index at $468.20. This leaves us in very good shape with a 118 point cushion heading into the final week of the April options cycle.  

POT 70-65 APRIL BULL PUT SPREAD (15 Contracts entered on 03/30/09)

Profit potential of $50.00 per contract

Contingent Stop Order set at $72.50

POT also enjoyed Friday's rally when the stock gapped higher on the open and then continued to rise. It finished the session up 3 points at $85.50. This increased our safety net to over 15 points in this spread. With time running out, we're sitting right where we want to be.

MNX 110-105 APRIL BULL PUT SPREAD (15 Contracts entered on 03/30/09)

Profit potential of $45.00 per contract

Contingent Stop Order set at $112.50

The MNX continued Wednesday's turnaround with a 3.96 point move to the upside on Thursday. That amounted to a 3.04% gain that took the index up to $134.03. This leaves the index almost 25 points above our "short" strike price heading into the final week. Let's just sit back and enjoy the ride in this one.

AZO 145-140 APRIL BULL PUT SPREAD (15 Contracts entered on 04/02/09)

Profit potential of $45.00 per contract

Contingent Stop Order set at $147.50

AZO wasn't left out on Thursday. While it wasn't as strong as our other positions, the stock still managed to climb 1.60%. This meant that the stock moved up 2.54 points, taking it up to $161.72. That move took AZO back above its 20-day moving average, giving us a cushion of over 16 points heading down the home stretch. Let's keep a close eye on it, but right now it's sitting in decent shape.  

RUT 380-370 APRIL BULL PUT SPREAD (10 Contracts entered on 04/03/09)

Profit potential of $50.00 per contract

Contingent Stop Order set at $385.00

The RUT's strong move on Thursday helped take any pressure off this spread. With 88 points now separating the index from our "short" strike price, we should have plenty of breathing room in this spread.

CLOSED APRIL SPREADS

OIH 70-65 APRIL BULL PUT SPREAD (15 Contracts entered on 03/23/09 & closed on 04/01/09)

Original Credit of $50.00 per contract

Close-out Debit of $183.00 per contract

As always, Trade Happy and Trade Smart

Insurers and retailers helped turn the tide in today's session. Stronger-than-expected earnings reports on the retail front helped give the Market a boost in today's trading. Traders also were encouraged this morning in an expansion of the TARP to insurance subsidiaries along with some encouraging economic data. This renewed sense of optimism helped stocks pare some of the losses from two days of selling and took the indices into the green for the first time this week. With only one more session left in the week, it'll be interesting to see if we can continue this run into Thursday's session.

The optimism on the earnings front came from retailers Family Dollar Stores and Bed, Bath & Beyond, when each surged higher after excellent earnings announcements. However, the Street will be closely dissecting the March same-store sales data that comes out tomorrow morning.

The Market got a jump-start this morning from news that the Treasury was going to extend its TARP (Troubled Asset Relief Program) to insurers. While it wasn't going to allow it directly to the holding company, it was going to allow subsidiaries such as insurance company thrifts and banks to have access to the funds. This news gave a big boost in insurance company stocks early Wednesday morning.

There was some optimistic news in today's wholesale inventories number this morning. The Commerce Department reported that inventories in February dropped by the largest amount in 17 years. The 1.5% drop was not only double what analysts expected, it was also the largest ever recorded (dating back to 1992). At the same time, sales climbed for the first time since last summer. These two items combined were very good signs for the economy. It not only shows that companies are getting their inventories under control, but businesses might be starting to run out of supplies, which will spur an uptick in purchasing. This is especially important with the data showing an increase in sales of 0.6% for February. It certainly was an encouraging report this morning.

Oil got a boost this morning after the EIA inventory report showed a smaller increase than analysts were expecting. According to government data, crude stockpiles increased by 1.7 million barrels last week. While the 361.1 million barrel stockpile is over 15% above last year's level, today's increase wasn't as large as the Street had feared. Analysts had predicted a jump of 2.3 million barrels last week. The release sent oil back over $50 a barrel this morning, even through the U.S. inventories are sitting at 16-year highs. However, it wasn't able to hold above the $50 mark. Oil finished the day at $49.38 a barrel on the New York Mercantile Exchange. Meanwhile, gasoline supplies increased this morning by 600,000 to 217.4 million barrels. Ahead of the report, analysts had predicted a drop of 1.5 million barrels. Gold was able to climb another $2.60 a troy ounce today, finishing the session up 0.29% at $884.80.

Late this afternoon, the Federal Reserve released its meeting minutes from its most recent policy meeting in March. This is the same meeting where policymakers decided to pump $1.2 trillion into the economy and push down interest rates by purchasing long-term government debt and mortgage backed securities. During the meeting, most policymakers believed that the economy was still facing downside risks in the near term. At the same time, the committee's projections for economic activity in the second half of 2009 and into 2010 were both revised downward. In all, there wasn't anything surprising in today's release of the meeting minutes.

Wednesday's Economic Reports

There was consolidation talk this morning in the housing sector when one troubled home builder, Pulte Homes, announced that it was going to acquire another beaten-down home builder, Centex, for $1.3 billion in stock. This announcement was seen as a positive step in the housing recovery process because many feel that there needs to be a reduction in the number of builders, which should help reduce future supply.

Perhaps the biggest news of the day was the announcement that the SEC is considering reinstituting the "uptick rule." In today's meeting, the Securities and Exchange Commission advanced five options for new short-selling rules. Regulators are allowing a 60-day comment period before deciding on the new restrictions.

The Dow Jones Industrial Average bounced back today after giving up over 200 points in the first two trading sessions of the week. In today's rally, the large-cap index gained 47 points. The 0.61% climb took the blue chips up to 7,837.

The S&P 500 had a sold close today when it climbed 1.18%. That amounted to a 9.61-point gain, taking the index up to 825 points.  

The Nasdaq was the strongest index on the session with its 1.86% advance on Wednesday. It rose 29 points and finished the day at 1,590.   

The VIX (Chicago Board Options Exchange Volatility Index) moved back below the 40-point mark today when it tumbled 3.81%. Its 1.54-point drop took the "fear index" down to 38.85 points and moving closer to January's low on the chart.

In last weekend's Professional Trader newsletter, we talked about our belief that a pullback was coming. Unfortunately, that's exactly what we got on Monday and Tuesday of this week. We're not sure if that's done yet, but today's reversal to the upside was definitely an encouraging sign. There's nothing more that we'd like to see than another strong rally to wrap up the trading week tomorrow. Keep in mind that we'll get a trading break on Friday with the Market being closed due to the religious holiday. Let's enjoy it because spread trading is just like a paid holiday due to the time-decay effect. For now, let's take a look at how we're sitting in our spreads heading into the final trading session of the week. 

CURRENT APRIL SPREADS

RUT 350-340 APRIL BULL PUT SPREAD (15 Contracts entered on 03/23/09)

Profit potential of $60.00 per contract

Contingent Stop Order set at $355.50

The RUT took a tough tumble in yesterday's session but bounced back strong today. The small-cap index climbed 10.42 points and finished the day at $442.12. This leaves us with a little over a 90-point cushion in this put spread with just over a week left to go. While nothing is a given in today's Market, we do like how we're sitting in this one.

POT 70-65 APRIL BULL PUT SPREAD (15 Contracts entered on 03/30/09)

Profit potential of $50.00 per contract

Contingent Stop Order set at $72.50

Fertilizer stocks took some heat this morning when Mosaic reported a very disappointing earnings report. It announced an 89% drop in profit with sales down 36%. Potash was able to overcome this and move up $2.82 in today's trading. Its 3.54% advance took the stock up to $82.50. This leaves the stock 12.50 points above our "short" strike price with six sessions until expiration. If we can keep the stock above its 50-day moving average (red line) then we should be in good shape.

MNX 110-105 APRIL BULL PUT SPREAD (15 Contracts entered on 03/30/09)

Profit potential of $45.00 per contract

Contingent Stop Order set at $112.50

The MNX got back most of its loss from yesterday's session when the index advanced 2.53 points today. This 1.98% rise took the Mini-Nasdaq 100 up to $130.07. That move gives us a safety net of 20 points in our put spread. With plenty of strong support levels between the index and our put spread, we should be able to coast to the finish line in this position.

AZO 145-140 APRIL BULL PUT SPREAD (15 Contracts entered on 04/02/09)

Profit potential of $45.00 per contract

Contingent Stop Order set at $147.50

AZO also took a thrashing in Tuesday's trading but reclaimed some of that with today's 3.71-point gain. This 2.39% bounce-back took the stock up to $159.18 at the closing bell. This puts the stock a little over 14 points above our put spread. While that would normally be a very safe place, we'd like to see that increase heading into the weekend. Let's see if we can get another strong session in tomorrow's trading.

RUT 380-370 APRIL BULL PUT SPREAD (10 Contracts entered on 04/03/09)

Profit potential of $50.00 per contract

Contingent Stop Order set at $385.00

The start of the week was certainly not advantageous to this put spread. However, today's strong session in the RUT was definitely welcomed with open arms. We currently have 62 points of breathing room in this spread and not a lot of time until expiration. This makes us feel very good about how we're sitting in this one.

CLOSED APRIL SPREADS

OIH 70-65 APRIL BULL PUT SPREAD (15 Contracts entered on 03/23/09 & closed on 04/01/09)

Original Credit of $50.00 per contract

Close-out Debit of $183.00 per contract

As always, Trade Happy and Trade Smart

Make it Four in a row! Traders continued to look past troubling economic reports as the major indexes made it four straight winning weeks. While the economic data continued to show trouble, traders have been able to shake off any disappointing news over the last several weeks while pushing the indices higher. This has us questioning if this move is more than just a Bear Market Rally. It certainly wouldn't disappoint us if it were.

Pre-market futures took a nosedive Friday morning when the nation's payrolls took another setback. According to the non-farm payroll figures, employers cut 663,000 jobs in March. While that number was only slightly above expectations, the report also revised the employment numbers for February and January. Unfortunately, there was a big upward revision in January with the new job loss tally showing 741,000 compared to the earlier reporting of 655,000. This also made it into the history books with the biggest loss since the year 1949. Meanwhile, February stayed in the same neighborhood at a loss of 651,000 jobs. The chart below shows just how sharp the job-loss has been.

Graphic from Briefing.com

There was more bad news Friday morning when the country's unemployment rate hit the highest level since the early 1980s. While the number was in-line with consensus, the 8.5% unemployment rate didn't show any signs of bottoming out on Friday. As a matter of fact, if discouraged workers and part-time employees would have been included in this number, it would have been over 15% for March.

Graphic from Briefing.com

In other economic news, the ISM Service number stayed with the pessimistic trend on Friday. Its reading of 40.8 came in weaker-than-expected and re-iterated the weakness in the overall economy. This was down from 41.6 in February. Keep in mind that any reading below 50.0 indicates contraction in the service industry. 

Friday's reports show that we truly haven't seen a bottoming in the economy just yet. However, it's important to remember that the reports are certainly lagging indicators because they are collecting data from the past. This is why the stock market usually bottoms out ahead of the economy by six to 12 months. While it's too early to tell if that's what's taking place right now in the market, keep in mind that the three major indices are now up over 20% from their lows, which is a good start.

Friday's Economic Reports

Oil made it seven straight weekly advances on Friday. While this week was not much of a gain, it did climb 0.25%. Crude finished the session at $52.51 a barrel on the New York Mercantile Exchange. This has given oil its longest weekly winning streak since the summer of 2007. Meanwhile, gold wasn't as lucky last week. It fell $27.60 an ounce over the last five sessions and finished the week at $895.60. It was its second consecutive losing week.

The Dow Jones Industrial Average did it again. The large-cap index advanced for the fourth straight week, giving the Dow its longest winning steak since 2007. Over this time frame, the index is up nearly 21%. The index continued to blow right past old resistance levels on the chart and was able to hold above the 8,000-point mark on Friday. It moved up 39 points and finished the week at 8,017.

The S&P 500 also continued its upward march last week. With its fourth consecutive winning week, the index is also on its longest advancing stretch since October of 2007. Over this time, the S&P 500 has climbed over 23%. On Friday, it gained 8 points and finished the week at 842 points. The next resistance level appears to be in the area of 870 on the chart.

The Nasdaq made it four weeks in a row on Friday with its 4.96% rally last week. The tech-laden index is up over 25% in this time frame and hasn't shown any signs of slowing down. On Friday, it rose 19 points and finished the session at 1,621. Next stop for the index appears to be in the area of 1,650 on the chart.  

The VIX (Chicago Board Options Exchange Volatility Index) finally broke through the 40-point support level on Friday when it fell 2.34 points. Its 5.57% tumble took the "fear index" down to a closing level of 39.70. If the VIX continues to fall, it would be a very bullish sign for the Market. It's kind of amazing what a four-week rally can do to the fear.

It was another interesting week for us over the last five sessions. In our OIH spread alone, it brought out some of the toughest emotions that traders have to deal with. There's nothing more painful than closing out a spread early, at the low. Then we have to sit back and watch it take off like a rocket over the next few sessions. It's extremely tough to be correct in your analysis, but unable to profit from it.

However, the discipline that we've turned to after the big losses last summer have led us to five straight profitable months and we aren't about to change them now. Instead, we removed the risk of a big loss at the time and moved on. Remember, after the Market turmoil over the past year, our number one goal is capital preservation. We think that we did the prudent thing last week by closing down the spread early and then working to still have a decent profit potential capability this month.

We got into a very conservative new spread in AZO on Thursday and then took advantage of the Friday morning volatility to get into another put spread on the RUT. After getting a nice rally at the end of the week, all of our spreads are sitting in fairly good shape with just two weeks left in the April options cycle. However, after four straight weeks of gains, we're almost sure that there's going to be some type of pull-back across the board. The only question is how big will it be and how long will it last? While this is only our gut feeling, the important thing is to be ready for it. Let's keep a close eye on the internals next week for any signs of weakness. For now, let's take a look at all of our spreads in a little more detail. 

CURRENT APRIL SPREADS

RUT 350-340 APRIL BULL PUT SPREAD (15 Contracts entered on 03/23/09)

Profit potential of $60.00 per contract

Contingent Stop Order set at $355.50

After bouncing off its 50-day moving average (red line) last week, the RUT has found plenty of upward momentum. On Friday, the small-cap index moved up another $5.94 and finished the session at $456.13. This gives us over a hundred point cushion in this position with just two weeks to go. Let's sit back and enjoy this rally as long as it lasts.

POT 70-65 APRIL BULL PUT SPREAD (15 Contracts entered on 03/30/09)

Profit potential of $50.00 per contract

Contingent Stop Order set at $72.50

We thought Potash might be under pressure on Friday after Monsanto had an earnings miss that caused some downgrades in the Agri-business sector. But it showed no signs of slowing down with a $0.95 advance, taking the stock up to $85.71. This leaves the stock over 15 points above our "short" strike price and above several key support levels on the chart. We like where we're sitting in this one.

MNX 110-105 APRIL BULL PUT SPREAD (15 Contracts entered on 03/30/09)

Profit potential of $45.00 per contract

Contingent Stop Order set at $112.50

We were considering adding another put spread in this index for Friday, but it looks like we wouldn't have had a chance to get filled anyway. The index gained $2.19 on Friday's session and finished the week at $131.62. The Mini-Nasdaq 100 continued to break through old resistance levels on the chart last week and doesn't show any signs of slowing down. We now have a safety net of over 21 points in this spread, which leaves us in great shape with only two weeks until Payday.

AZO 145-140 APRIL BULL PUT SPREAD (15 Contracts entered on 04/02/09)

Profit potential of $45.00 per contract

Contingent Stop Order set at $147.50

We've been bulls on AZO since the economic downturn started and it's certainly evident that we weren't alone. But after its huge run-up we were getting a little hesitant about coming back with a put spread this cycle for the exact reason we spelled out when we did the trade alert. With the stock flying so high, we were expecting a few analysts to start cutting their ratings on the stock due to a high valuation at these levels. It's kind of funny how that happened on the exact day we were trying to get into our new spread.

Of course, this is why we were so conservative with our strike prices and credit. After taking the beating on Thursday, the stock got some of those losses back on Friday with a $2.06 advance. The 1.30% gain left AZO at $160.30 heading into the weekend. This gives us a 15 point cushion heading into Monday. While we're a long ways from being out of the woods, we like where we're sitting in this one.

RUT 380-370 APRIL BULL PUT SPREAD (10 Contracts entered on 04/03/09)

Profit potential of $50.00 per contract

Contingent Stop Order set at $385.00

There's nothing like early morning volatility when you're trying to get a fill. It worked out perfectly for our new put spread on the RUT. After getting filled, we got to sit back and watch the index climb right into the closing bell. With two weeks and a 76-point cushion, we feel very good about this one.

CLOSED APRIL SPREADS

OIH 70-65 APRIL BULL PUT SPREAD (15 Contracts entered on 03/23/09 & closed on 04/01/09)

Original Credit of $50.00 per contract

Close-out Debit of $183.00 per contract

As always, Trade Happy and Trade Smart

Today's huge rally prevented us from getting filled in both of our new spreads, but we were able to get into one of them. In the Wednesday night newsletter we talked about the possibility of a downgrade in AZO, and that's exactly what happened this morning. An analyst at Citigroup downgraded it due to its recent run-up. This caused the stock to take a nosedive in today's session. But that was ok with us because it was the only way we were going to get filled in this spread. But now that we're in, it's all right with us if the stock decides to start moving higher once again.

Our other new trade was heading back into OIH, but that wasn't successful. OIH gapped higher at the open and didn't look back. With this one now out of our comfort range, we are going to switch gears and go with another put spread on the RUT. With the index moving drastically higher over the last week, our current spread in the small-cap index has lost most of its value. With just two weeks left to go before expiration, we can still get a decent premium in the index while still going 70 points out of the money. However, we will probably need a decline in the index tomorrow in order to get filled. But it isn't that uncommon for a pullback after such a strong session (like the one we had today). One thing different about this spread is that we are going to lower the number of contracts that we are trading to 10 instead of 15. This won't use up as much margin/maintenance and not put too many of our eggs in one basket (pardon the Easter pun). With this in mind, let's see if a little patience will pay off tomorrow.

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

NEW TRADE ALERT (1)

RUSSELL 2000 INDEX (RUT)

OPENING 380-370 APRIL BULL PUT SPREAD (10 contracts)

Sell 10 April Puts at 380 strike price

Buy 10 April Puts at 370 strike price

Total Credit 0.50 per contract

Potential Profit $500.00

Once Filled, Use a Conditional Order: Use a Stop or Buy Market if Touched Order if stock reaches $385.00. For auto traders, we will send in a close-out order if this happens.

RUT DAILY CHART

As always, Trade Happy and Trade Smart