A late-day surge turned everything green on Friday, capping off another excellent month for the major indices. Stocks spent the session all over the place on Friday, but a strong rally in the final thirty minutes of the trading day took everything higher into the closing bell. Traders spent the day digesting key economic data, which certainly wasn't the most optimistic, on Friday.

It started with the first quarter GDP (Gross Domestic Product) number that showed a shrinking economy. According to the government, first quarter GDP declined by 5.7%. This was a little bit better than the initial reporting but was still one of the worst declines in quite some time. The good news was that it was improved from last quarter's drop of 6.1%. However, it was worse than the 5.5% that the Street was expecting. The graphic below shows just how steep the drop-off has been.   

Graphic from Briefing.com

The bad news was that it was the worst decline since the 1980's (not counting the fourth quarter of 2008). The good news or more optimistic slant is that economists expect the number to improve in the second quarter. This is why everyone is paying very close attention to business inventory levels and consumer spending numbers. With inventories at historically low levels, once consumers start spending we should see an uptick in production as businesses need to restock inventories. This could help the GDP improve in upcoming quarters. As of now, predictions call for a reading of negative 2% for the next report. The bar chart below shows the last three years of data.

 Graphic from Briefing.com

Speaking of manufacturing, Friday's report on Chicago area production took a larger than expected drop this month. This kept the pressure on the Market because of its weak number, which showed a cut in new orders and backlogs. This is a precursor to the more-important ISM manufacturing survey that comes out tomorrow. Friday's data dampens our expectations for this report.

There was a bit of good news on Friday when the University of Michigan reading on consumer sentiment showed an improved mood out there. While this report isn't usually that accurate in regards to predicting consumer spending, there's no doubt the two are linked. If sentiment continues to improve, many believe that spending will be coming soon. The problem we see is that gasoline prices weigh heavily on consumers' minds, which could bring down this number if the price at the pump continues to rise.

 Graphic from Briefing.com

The dollar remained under pressure on Friday with traders betting against the greenback due to inflation fears from a ballooning U.S. deficit. It lost over 6% against the euro in the month of May alone and will probably continue sliding in June. Of course, this just fuels the rally in crude.

Oil shot up another $1.23 a barrel on Friday and settled at $66.31 a barrel on the New York Mercantile Exchange. This capped off a 30% rise for the month of May, marking the largest monthly gain since 1999. With the dollar crumbling and signs of an economic recovery, oil will probably continue to move higher in the short-term.

The month of May was very good to nearly every commodity as silver posted its largest monthly gain in well over 20 years. At the same time, gold gained everything back from its recent pull-back, hitting a three month high with its rise of nearly 10% during the month of May. It closed on Friday at $978.80 an ounce on the New York Mercantile Exchange.

Friday's Economic Reports

The Dow Jones Industrial Average made it three months in a row with May's 4.07% rise. This marked the large-cap index's best three-month performance since 1998. On Friday, the Dow gained 96 points and finished the holiday-shortened week up 2.69%. On the chart, it moved back above its 20-day moving average (light blue line) and appears headed towards resistance at 8,600. How it handles this level will tell us a lot about how much gas is left in the tank for the bulls.

The S&P 500 also capped off an amazing month for the index. It is now up over 25% for the last three months, marking its best performance since the 1930's. On the week, the S&P moved up 3.62%. Friday's late-day advance put the index up 12 points to 919. Similar to the Dow, the S&P is also moving in towards a strong resistance level on the chart at 930 points. Let's keep a very close eye on the index once it reaches this territory.  

The Nasdaq Composite once again found its strong bullish momentum last week, climbing nearly 5% over the four sessions. Friday's gain of 22 points moved the index up to 1,774 and locked in its three straight winning month. This also meant an historic performance for the tech-laden index. Its recent three month stretch was the index's best in eight years. The Nasdaq closed at a fairly strong resistance level on Friday, but if it starts the new week the way it finished on Friday, it should break right through this level. The pre-market trading on Monday should give us a hint of this possibility.

The VIX (CBOE VOLATILITY INDEX) took a nice turn for the worse on Friday when it tumbled 2.75 points. Its 8.68% tumble on Friday took the "fear index" down to 28.92. If stocks continue to rally into this week, the VIX should keep on slicing lower.  

If you throw out last Wednesday's wicked sell-off, the rest of the week was nothing but green with the bulls in firm control. This helped us extend the cushions in our put spreads across the board. Because this is an extra long options cycle, we might just need that extra breathing room down the home stretch.

This week will certainly be interesting with the jobs numbers back front and center. We'll get the private employment numbers from ADP on Wednesday, which should give us an indication of where Friday's all-important non-farm payrolls might come in. Analysts are predicting a drop of 550,000 jobs in the month of May.

Heading into the final three weeks, we haven't ruled out another spread this month. But with the Market fairly well extended to the upside, now is not the time to come in with a new spread. Instead, let's just sit back and see where things go from here. After all, we have a nice profit potential going already. We'll keep that extra maintenance in our back pocket just in case we get a high probability trade over the next few weeks. For now, let's take a look at how each spread is sitting heading into the new week.

CURRENT JUNE SPREADS

RUT 390-380 JUNE BULL PUT SPREAD (15 Contracts entered on 05/21/09)

Profit potential of $50.00 per contract

Contingent Stop Order set at $395.00

The late-day surge pushed the RUT much higher on the session Friday. By the time the closing bell rang, the small-cap index was up $9.37. That amounted to a 1.90% advance that took the index up to $501.58. This move also kept the RUT above its 20-day moving average (light blue line) on the chart. Last week's rally in the RUT leaves it 111 points above our put spread, which is a huge safety net in this one. Let's just sit back and enjoy the ride for now.

MNX 125-120 JUNE BULL PUT SPREAD (15 Contracts entered on 05/21/09)

Profit potential of $45.00 per contract

Contingent Stop Order set at $127.50

The MNX kept its bullish momentum going on Friday when it surged $1.53. A late session run took the index up 1.08% on the day and left the tech-laden index at $143.56. It also left the MNX at a resistance level from early May. But with a strong momentum behind the MNX, we wouldn't bet on a reversal just yet. Let's keep a close eye on its action on Monday but not get too concerned about any profit-taking. After all, we're sitting great in this position with almost 20 points of breathing room.

POT 95-90 JUNE BULL PUT SPREAD (15 Contracts entered on 05/21/09)

Profit potential of $60.00 per contract

Contingent Stop Order set at $97.50

POT spent last week drifting sideways, but was able to hold onto a gain of $1.07 at Friday's close. We certainly weren't surprised to see this play out on the chart considering the huge run the stock has been on since the end of April. As long as crop prices continue to hold up, we don't see this one dropping very much. But even if it gives a little back, don't forget that our put spread is over 20 points below Friday's closing price of $115.84.   

PCLN 85-80 JUNE BULL PUT SPREAD (15 Contracts entered on 05/21/09)

Profit potential of $45.00 per contract

Contingent Stop Order set at $87.50

We really like the way this one has been trading. It has shown us a great deal of relative strength intraday, which has translated into some strong trading days last week. On Friday, the stock advanced another $2.33. This took PCLN up to a resistance level on the chart near $110. But we certainly wouldn't bet against this stock anytime soon. With a cushion of 15 points and very strong momentum on our side, we like where we're sitting in this spread.  

As always, Trade Happy and Trade Smart

Today's session seemed innocent enough until an ugly afternoon took stocks sharply lower. While the news early in the day wasn't overly bearish, the afternoon was a different story. Everywhere we looked there was plenty of pessimism this afternoon, which kept stocks under selling pressure until the final bell rang.

The selling picked up this afternoon after the Treasury auction of $35 billion in five-year notes caused other bond prices to drop. While the government auction appeared to find plenty of demand, traders seemed to think that investors' appetite for more debt might dry up due to the massive amounts coming down the pipeline. The U.S. is bringing $101 billion to the market this week alone.

One thing that wasn't under pressure today was the price of crude. The black gold continued to skyrocket after a Saudi Arabian official declared that the world economy was strong enough to support a price of $75 to $80 a barrel. This comes on the eve of OPEC's meeting in Vienna where the cartel is expected to cut 4.2 million barrels a day out of production. Obviously, these remarks pushed oil higher in today's session. It settled up $1 at $63.45 a barrel on the New York Mercantile Exchange.

It appears that a General Motors bankruptcy is pretty much a foregone conclusion after the bondholders turned down a swap of debt for equity. Unlike the Chrysler bondholders, the GM lenders weren't going to sit back and take pennies on the dollar while everyone else made off far better. However, they are unlikely to make out any better in a bankruptcy filing, which is expected to take place early next week. Meanwhile, Chrysler appeared in bankruptcy court today to ask a judge for permission to sell a majority of its assets to Fiat. It appears that the Chrysler restructuring is progressing much faster than anyone expected. This is an encouraging sign for GM's future; however, analysts warn that the future will be much more challenging.

There was a bit of good news on the housing front today when the National Association of Realtors reported that home sales rose over the past month. Sales of previously occupied houses climbed 2.9% last month to an annual rate of 4.68 million. While that was an encouraging sign, the group also reported that unsold homes on the market increased by 9% in April. The new tally of 4 million unsold homes brings the U.S. inventory up to a 10-month supply. That was not encouraging at all.

Meanwhile, the Federal Deposit Insurance Corp. (FDIC) announced that banks earned $7.68 billion in the first quarter. This was very good news considering that the same financial institutions combined for a loss of $36.9 billion during the fourth quarter of last year. However, the FDIC also reported that the gains were due to higher trading revenues instead of profits from increased lending. At the same time, the number of troubled institutions rose to the highest level since the savings and loan crisis, with 305 banks now on the FDIC's watch list.

There was some relief on the Street today when Moody's announced that it was not planning on downgrading its rating on the U.S. government. The company said that its rating of "Aaa" remains stable. Last week, Standard & Poor's raised concerns that the U.S. could lose its "AAA" rating along with a possible downgrade for the U.K. Keep in mind that a downgrade would certainly crush the currency and increase borrowing costs.

Today's Economic Reports

It was another wild ride for the Dow Jones Industrial Average today as it tumbled 173 points. While it didn't wipe out all of yesterday's gain, it did come close with its 2.05% decline. Its closing price of 8,300 also took the large-cap index back below its 20-day moving average (light blue line) and appears to be headed towards the 8,200 support level. Let's keep a close eye on this level the rest of the week.

The S&P 500 was also all over the place during the first two trading days of the week. After yesterday's blast off, the index fell 17 points in today's session, finishing at 893. Today's bloodletting took the S&P 500 back below its 20-day moving average (light blue line) on the chart and has it moving towards the next support level (at 880). Just as in the Dow, let's keep a close eye on this level if there's more selling in tomorrow's session.

The Nasdaq Composite had a rough session, but it was nowhere as bad as the other two indices. Perhaps this is the silver lining in today's action. Of course, it still fell by 19 points. The 1.11% drop takes the tech-heavy index down to 1,731 on the chart. Let's see if this index can hold onto its strength over the next two sessions.

The VIX (CBOE VOLATILITY INDEX) certainly had a crazy ride in yesterday's session, but finished the day back below its 20-day moving average (light blue line). But it made up some of that lost ground in today's trading when it climbed 1.74 points and finished at 32.36. Let's keep a close eye on the VIX for any indication of elevated fear in this Market.

Everywhere we look there is plenty of red in today's session. But we don't appear to come away with any bruises. Of course, a large part of that was due to yesterday's bull-run that helped increase our cushions across the board. From the indexes to the equities, we got a big help in yesterday's session. Now, we just don't want to give it all back in two sessions. It's only been two trading days since our last newsletter, but our positions sure have moved around a lot. Let's take a look at how they're sitting heading into the second half of the week.

CURRENT JUNE SPREADS

RUT 390-380 JUNE BULL PUT SPREAD (15 Contracts entered on 05/21/09)

Profit potential of $50.00 per contract

Contingent Stop Order set at $395.00

The RUT wasn't able to avoid the selling in today's action, but it did hold onto a lot of yesterday's advance. However, it still gave back 10.45 points today, closing at $489.86. But even with this loss, we're still sitting better today than we were at the start of the week. Heading into the final two trading days of the week, we're sitting in great shape with almost a 100 point cushion in this spread.

MNX 125-120 JUNE BULL PUT SPREAD (15 Contracts entered on 05/21/09)

Profit potential of $45.00 per contract

Contingent Stop Order set at $127.50

The MNX also fared much better than most in today's session. It lost a mere 0.76% in today's trading, which amounted to a $1.07 loss. This takes the index down to $140.19, but leaves it above its 20-day moving average (light blue line) on the chart. The MNX appears to have run into a resistance level above the $142 mark on the chart. For now, we like where we're sitting in this position with over 15 points of breathing room between the index and our "short" strike price.

POT 95-90 JUNE BULL PUT SPREAD (15 Contracts entered on 05/21/09)

Profit potential of $60.00 per contract

Contingent Stop Order set at $97.50

POT was definitely on fire yesterday, but cooled off in today's session. The stock was hit especially hard when it fell $4.58. The 3.90% decline took POT down to $112.87 and leaves it just above where it started the week. Let's see if it can stabilize in this region over the next two trading days.

PCLN 85-80 JUNE BULL PUT SPREAD (15 Contracts entered on 05/21/09)

Profit potential of $45.00 per contract

Contingent Stop Order set at $87.50

We thought this one was going to hold in positive territory until the late selling wiped out that optimism. But even with the red at the end of the session, PCLN only shed $0.45 on the day. The mere 0.43% loss took the stock down to $104.83. While that was very encouraging, the shape of today's candle does have us slightly concerned because it points to a bearish move on the horizon. But even with the ugly shape of today's candle, we are still in good shape in this one with a 20 point safety net.

As always, Trade Happy and Trade Smart

After a strong start to the week, stocks skid all the way to Friday's closing bell. Despite the strong selling last week, the indices were still able to squeak out a gain over the five sessions, thanks to Monday's massive rally. While the bears lightened up on Friday, it still was a finish in the red for most stocks. Financials appeared to lead the way down while some surprises in the retail sector helped cool the bears ahead of the three-day weekend.  

We weren't too surprised with Friday's action. Anytime we're headed into a long weekend, we're going to see light volume that can make the trading a little volatile. At the same time, those traders that didn't take an early vacation want to head into the weekend flat so you're not going to see any big bets in either direction.

There was some surprising news on Friday morning with Sears posting a first-quarter profit. We have to admit that this took us by surprise because we've been bears on this stock for quite a while. It appears that cost reductions and inventory controls helped the company beat expectations by nearly $1.26. This helped push the stock up 10% on the day.

But Sears wasn't the only retailer to beat expectations on Friday. Both Gap and Aeropostale exceeded analysts' expectations with strong first quarter sales. Perhaps this goes back to extremely low expectations heading into this year? Regardless, it's certainly a positive sign for the economy, even if it's just a handful of companies.

Meanwhile, the dollar remained under selling pressure on Friday. It fell last week to its lowest level against the euro since the first days of January. The selling intensified for the dollar after the U.K. received a credit rating downgrade. While normally this wouldn't hurt the dollar, the problem is that the Street is worried that the U.S. is next in line due to its heavy borrowing.

Of course, this was bullish news for oil. The falling dollar only pushes the price of crude higher. Oil finished Friday's session up $0.62 at $61.67 a barrel on the New York Mercantile Exchange. Over the past five sessions, oil was up 8.2% and appears to be headed higher. At the same time, gasoline moved up ahead of the long holiday weekend. This also wasn't too surprising and will probably continue moving higher through the July 4th holiday.

Friday's Economic Reports

It was certainly a wild ride for the Dow Jones Industrial Average last week. After a massive surge on Monday, the index fell over the next four trading days. However, it was still able to climb 8 points on the week and has remained positive three out of the past four weeks. On the chart, Thursday's reversal took place near our 8,200 support level. This is the line we'll continue to watch closely this week. With the large-cap index closing at 8,277 on Friday, it appears that it's headed down to this level for another test. If it breaks through this line, the next support will probably come from its rising 50-day moving average (red line).

It was quite a week for the S&P 500. It appeared to test resistance on the chart Wednesday, and then do the same with support on Thursday. We wouldn't mind seeing the same thing this week as long as it remains in the middle of these two lines on Friday. Over the past five sessions, the index was able to squeak out a 4 point gain, which left the S&P 500 sitting at 887 on Friday's close. Similar to the Dow, let's watch these next support levels very closely over the next few sessions and hope that they hold.

The Nasdaq Composite also struggled at the end of the week, which cut into its gain over the five sessions. Despite the selling, the Nasdaq still managed to rise 11 points last week and close at 1,692. This puts the tech-laden index up 10 out of the last 11 weeks. However, just like the other indexes, we are concerned that the Nasdaq will try to test some support levels on the chart this week. Let's keep a close eye on how the index handles these levels.

The strong selling during the second half of the week was good news for the VIX (CBOE VOLATILITY INDEX). It climbed for three straight sessions. On Friday, it jumped 1.28 points and finished the week back above 30 points at 32.63. If there's more selling across the board this week, the VIX is likely headed back above its 20-day moving average (light blue line).  

After struggling to get filled in our new spreads this cycle, we got four of them in one day. Of course, it always helps when we combine entries on put spreads with a strong sell-off in the Market. Despite the continued selling last week, we appear to be sitting fine in our spreads with plenty of time left in the June options cycle.

However, sitting here on Monday, we don't believe that the selling is done just yet. But we knew we were likely to see a pull-back during this cycle. After the run that we've been on, it was inevitable for us to hit some profit-taking.

If it continues this week, we are likely to add a layer on one or two of our put spreads. At the same time, we still have the option of making several spreads into iron condors. But right now, we still believe that there's too much risk on the upside during this cycle. If this doesn't pan out, then we will make them into iron condors (which won't require any additional funds). For now, let's take a look at how we're sitting heading into the four-day week of trading.

CURRENT JUNE SPREADS

RUT 390-380 JUNE BULL PUT SPREAD (15 Contracts entered on 05/21/09)

Profit potential of $50.00 per contract

Contingent Stop Order set at $395.00

It was a rough second half of the week for the Russell 2000 index. However, it looked as if it was going to bounce-back on Friday until a late session sell-off took the RUT down 3.60 points at the close. This fractional loss put the small-cap closing price at $477.62. On the chart, we have two support lines drawn (at $472 and $465). These are the two levels we'll be watching closely over the next four trading days. If the index breaks below either of these lines, we'd expect its rising 50-day moving average (red line) to put an end to the selling. For now, we still feel very good about this position and would be willing to add another put spread on this index if we get more selling this week.

MNX 125-120 JUNE BULL PUT SPREAD (15 Contracts entered on 05/21/09)

Profit potential of $45.00 per contract

Contingent Stop Order set at $127.50

The MNX also got hit with some late-day selling on Friday, which left the tech-heavy index down $0.42 at the closing bell. It appeared to find some support at Thursday's low on the chart. The index reversed at this level and appeared to be headed higher on the day before the bearish close took the MNX down to $136.32 at the bell. Despite the red candle on Friday, we still feel very confident in this spread with a cushion of 11 points heading into the final four weeks of this cycle.

POT 95-90 JUNE BULL PUT SPREAD (15 Contracts entered on 05/21/09)

Profit potential of $60.00 per contract

Contingent Stop Order set at $97.50

After gapping lower on Thursday, which was perfect for our entry point in this spread, the stock surged $4.95 higher on Friday. POT was helped when Citigroup upgraded the stock due to rising grain prices and seasonal factors that should help increase profits for several fertilizer companies. This helped push the stock up to $114.50 on Friday, which is almost 20 points above our put spread. Let's see if the stock can keep the bullish momentum going this week.

PCLN 85-80 JUNE BULL PUT SPREAD (15 Contracts entered on 05/21/09)

Profit potential of $45.00 per contract

Contingent Stop Order set at $87.50

It was kind of a wild ride for Priceline's stock on Friday, but it was able to finish the session up $0.80 at $101.25. It dipped below its 20-day moving average (light blue line) during the trading day, but reversed nicely at our support level on the chart. As long as it's able to hold above both of these levels, we don't have anything to worry about. Let's keep a watchful eye on this spread, but not get too concerned until it starts breaking support levels on the chart.

As always, Trade Happy and Trade Smart

Stocks start fast but fade heading into the close. More positive news in the financial sector got the Market started on the right foot this morning, but a late sell-off wiped out any gains across the board. Of course, it didn't help matters that the indices ran up against tough resistance levels on the charts, which usually brings a round of profit-taking.

Stocks got a boost this morning from news that Bank of America was able to raise $13.47 billion. The troubled financial institution did this by selling 1.25 billion shares of stock. With the combination of this offering and sale of assets in Asia, the bank is more than half way to its required $33.9 billion in additional capital. Of course, this is the number that the government set after its so-called "stress test" of the country's largest 19 banks. This move by BofA also could go a long ways towards keeping the embattled CEO Ken Lewis in his current position. The Market has been rallying as banks and insurance companies have been successfully raising additional capital through stock offerings instead of heading back to the government trough. Any way you look at this, it has to be a positive compared to where we were just a few months back.

While the ability of BofA to raise private capital was definitely a positive for the Market this morning, the Treasury Secretary was signaling that the public might need to cough up more funds for the beleaguered insurance giant AIG. In Timothy Geithner's testimony on Capitol Hill, he did not rule out more aid for AIG while saying that the untangling of the company has been much more difficult than the Treasury originally anticipated. It sounds a lot like what we heard last month. As of today, the taxpayers own 80% of the company due to its $70 billion TARP injection.

Geithner also said that he expects that the government will be paid back $25 billion by the end of the year from financial companies that took funds through the TARP program. Meanwhile, in reference to the long-anticipated public-private partnership (purchasing of toxic assets), the Treasury Secretary expects the program to start within six weeks. Of course, this is the same toxic asset program that was anticipated months ago. With that said, we won't be holding our breath on the start time or the effectiveness of the program. We find ourselves in-line with those critics that believe the government has been just postponing the start of this program with the hope that the Market will recover to the point that these assets will recover some of their value.

Trading this afternoon got a little volatile after the Fed released the minutes from the recent FOMC meeting. The minutes themselves came across with mixed reviews. The policymakers mentioned an improving economy in upcoming months, but also downgraded the outlook for the remainder of 2009. Committee members anticipated that the housing market might finally be hitting a bottom. However, they also revised their projections for GDP downward to a negative 1.3% to 2% for this year. At the same time, they also revised the unemployment up to a 9.6% for 2009. The Market took a dive right after the release, but then was able to bounce-back in short order. Of course, the selling came back in the final hour of trading.

Perhaps the most notable point made in the minutes was that the government is open to raising the amount of mortgage and Treasury securities that it's willing to purchase. The members had already committed to purchasing $1.75 trillion, but now seem ready to increase this amount significantly.

Crude jumped back above $60 a barrel this morning after the government's weekly inventory report showed a decline for the second straight week. This caused oil to reach its highest mark in over six months with the summer driving season just around the corner. Crude settled up $1.94 at $62.04 a barrel on the New York Mercantile Exchange. According to the Energy Information Agency, U.S. stockpiles fell by 2.1 million barrels last week while gasoline supplies also declined by 4.3 million barrels. Besides the drop in supplies, investors have returned to commodities due to signs of an improving economy. This has helped commodity related stocks rise particularly fast.

The SEC chairman, Mary Schapiro, was in the news today when she said that there's no need to create a new financial watchdog. Evidently, the Obama administration is considering a new regulatory agency to protect consumers. According to Schapiro, this would reduce the SEC's authority and damage government protection of investors. Of course, we all know how successful the SEC has been in the past. After all, Madoff was only able to pass SEC inspections for well over 20 years.

Today's Economic Reports

In other corporate news, Deere & Co. reported a 38% drop in its second quarter earnings. The company claimed that the demand for new farm equipment has fallen off sharply due to the global recession.

After Monday's strong start to the week, the Dow Jones Industrial Average has taken a breather. The index followed yesterday's small loss with a 52 point decline in today's trading. The large-cap index struggled over the final hour of trading and finished the session down 0.62% at 8,422. On the chart, it appears that the index ran into a resistance area at 8,500 in today's session before pulling back. Based on this, it looks like the index might be headed to its 20-day moving average (light blue line) or 8,200 on the chart.  

The S&P 500 also was climbing fast this morning before bumping up against a resistance level on the chart. Then the index rolled over and finished the day down 4 points at 903. Similar to the Dow's chart, it looks like the S&P could be headed for its rising 20-day moving average (light blue line) or its next support level at 880 points. We will be watching both of these levels carefully for the next two sessions.

The Nasdaq Composite looks the same as the other indexes with it running into a resistance line today before retreating and finishing the session down 6 points at 1,727. Similar to the other two indices, it appears that the tech-laden Nasdaq is headed to its 20-day moving average (light blue line) or next support level above the 1,650 mark. Let's keep a close eye on both of these markers the rest of the week.

The VIX was falling sharply before an afternoon rally in the "fear index" took it up 0.23 points on the day. Its closing price of 29.03 is still its lowest point on the week. The trend for the VIX is definitely lower; however, it could rally over the next two sessions if there's more selling in the Market.

It's been a little tough so far this week for getting filled in new spreads. We've tried to hold steady with our strike prices, but the Market just insists on moving higher. The main reason why we've been reluctant to move those strikes up is because we figured the indices were going to hit some stiff resistance levels on the chart. Then when you add in all of the time left in this cycle, we really don't need to be in a hurry. While it's impossible to know how much of a retracement we're going to get, we like the chances of getting filled yet this week.

For tomorrow, we're going to have to move up the strike prices in order to get filled in the RUT and MNX spreads. We're going to keep the spreads very conservative by taking in less credit, which means less risk. At the same time, we are going to need the downdraft in the Market to continue tomorrow morning in order to get filled.

At the same time, we are going forward with two more spreads for tomorrow. The first new spread is going to be on a stock that used to be a regular in our arsenal, Potash Corp. of Saskatchewan, Inc. (POT). We stayed away from this one when commodities took a dive over the past several months, but with their resurgence we think it's a great time to do a put spread in this stock. We've long been bullish on the fundamentals of POT but now like the new found momentum the company has on the chart. Let's stay conservative in this one by coming in nearly 20 points out of the money.

Our last new spread for tomorrow is also on another reoccurring stock in our portfolio, Priceline.com Inc. (PCLN). We believe this company is a best of breed in the online travel sector and like its action on the chart over the past two months. However, we wouldn't be surprised to see some sideways action during the next several weeks. For now, we're going to come in with a put spread below some very strong technical levels on the chart. However, if we get the consolidation that we're expecting, we might add a call spread down the road to make it into an iron condor.   

NEW TRADE ALERT (4)

Please Note: These are Day Orders and Limit Orders.

RUSSELL 2000 INDEX (RUT)

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

Sell 15 June Puts at 390 strike price

Buy 15 June Puts at 380 strike price

Total Credit 0.50 per contract

Potential Profit $750.00

Once Filled, Use a Conditional Order: Use a Stop or Buy Market if Touched Order if stock reaches $395.00. For auto traders, we will send in a close-out order if this happens.

MINI-NASDAQ 100 INDEX (MNX)

OPENING 125-120 JUNE BULL PUT SPREAD (15 contracts)

Sell 15 June Puts at 125 strike price

Buy 15 June Puts at 120 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 $127.50. For auto traders, we will send in a close-out order if this happens.

Potash Corp. of Saskatchewan, Inc. (POT)

OPENING 95-90 JUNE BULL PUT SPREAD (15 contracts)

Sell 15 June Puts at 95 strike price

Buy 15 June Puts at 90 strike price

Total Credit 0.60 per contract

Potential Profit $900.00

Once Filled, Use a Conditional Order: Use a Stop or Buy Market if Touched Order if stock reaches $97.50. For auto traders, we will send in a close-out order if this happens.

Priceline.com Inc. (PCLN)

OPENING 85-80 JUNE BULL PUT SPREAD (15 contracts)

Sell 15 June Puts at 85 strike price

Buy 15 June Puts at 80 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 $87.50. For auto traders, we will send in a close-out order if this happens.

RUT DAILY CHART

MNX DAILY CHART

POT DAILY CHART

PCLN DAILY CHART

As always, Trade Happy and Trade Smart

It was another tough session for any new fills. However, like we said last night, we have plenty of time left in this cycle. Let's continue to use patience for our entries and not chase any new spreads. For tomorrow, we're going to leave the trade alerts the same as yesterday and see what happens. While it might be a long shot, we all know that stranger things have happened in this Market.

NEW TRADE ALERT (2)

Please Note: These are Day Orders and Limit Orders.

RUSSELL 2000 INDEX (RUT)

OPENING 370-360 JUNE BULL PUT SPREAD (15 contracts)

Sell 15 June Puts at 370 strike price

Buy 15 June Puts at 360 strike price

Total Credit 0.55 per contract

Potential Profit $825.00

Once Filled, Use a Conditional Order: Use a Stop or Buy Market if Touched Order if stock reaches $375.00. For auto traders, we will send in a close-out order if this happens.

MINI-NASDAQ 100 INDEX (MNX)

OPENING 117.50-112.50 JUNE BULL PUT SPREAD (15 contracts)

Sell 15 June Puts at 117.50 strike price

Buy 15 June Puts at 112.50 strike price

Total Credit 0.35 per contract

Potential Profit $525.00

Once Filled, Use a Conditional Order: Use a Stop or Buy Market if Touched Order if stock reaches $120.00. For auto traders, we will send in a close-out order if this happens.

RUT DAILY CHART

MNX DAILY CHART

The strong start this morning left our new spreads in the dust. But as we said in Sunday's newsletter, we have plenty of time in this five week option cycle. Due to this, let's continue to use patience in our entries. For tomorrow, we're going to make an adjustment in the credit for the RUT spread, but leave it at the same strike prices. For the MNX, we're going to leave the order the same. Let's see if we get some volatility that helps us get filled in these spreads.

NEW TRADE ALERT (2)

Please Note: These are Day Orders and Limit Orders.

RUSSELL 2000 INDEX (RUT)

OPENING 370-360 JUNE BULL PUT SPREAD (15 contracts)

Sell 15 June Puts at 370 strike price

Buy 15 June Puts at 360 strike price

Total Credit 0.55 per contract

Potential Profit $825.00

Once Filled, Use a Conditional Order: Use a Stop or Buy Market if Touched Order if stock reaches $375.00. For auto traders, we will send in a close-out order if this happens.

MINI-NASDAQ 100 INDEX (MNX)

OPENING 117.50-112.50 JUNE BULL PUT SPREAD (15 contracts)

Sell 15 June Puts at 117.50 strike price

Buy 15 June Puts at 112.50 strike price

Total Credit 0.35 per contract

Potential Profit $525.00

Once Filled, Use a Conditional Order: Use a Stop or Buy Market if Touched Order if stock reaches $120.00. For auto traders, we will send in a close-out order if this happens.

RUT DAILY CHART

MNX DAILY CHART

Stocks took another dive on Friday, but it didn't prevent us from locking in our seventh profitable month in a row! The selling last week turned up the heat slightly on one of our spreads (AZO), but it turned out to be another relatively easy cycle as expiration week rolled through without any hiccups. Despite the Market finishing the week on a sour note with the indices rolling over, we were able to coast to the finish line and lock up another profitable month along the way.

In economic news, the latest reading on inflation certainly gave economists something to think about Friday morning. The Consumer Price Index remained unchanged from March to April, which was in-line with expectations. However, there was a surprising uptick in the Core CPI (excludes the volatile food and energy prices), which showed a 0.3% spike in April. This was the largest increase since last summer when the core prices were at much higher levels. Friday's move upward was also quite a bit higher than expectations. The latest reading certainly makes the case against any possible deflation worries. The Federal Reserve has been on edge over any possible deflation because that is nearly impossible to fight against. On the other hand, the Fed has tools to deal with inflationary pressures. Keep in mind that consumer prices are down over 0.7% from one year earlier, which is the largest one-year decrease since the 1950s.

Consumers appear to be feeling better these days according to the latest Reuters/University of Michigan index of consumer sentiment. Friday's release showed a rising index that hit an eight month high in May. The chart below shows the bounce in the index, the question now is whether the increased sentiment will translate into increased spending. This is what the economy needs in order to rebound.

Graphic from Briefing.com

The latest bailout news on Friday revolved around the insurance companies. According to the Treasury Department, the government has agreed to provide billions more to six of the country's biggest insurance companies. While the cash infusion should keep them afloat, this move certainly shows that there's still plenty of systematic risk still out there. However, not all of the companies have committed to tapping the funds and this is seen as somewhat encouraging. We'll have to wait to see how this plays out and if they can really avoid going to the federal funds.

Friday's Economic Reports

Oil continued to struggle at the end of the week with the front month contract dropping 3.9%. After rising to over $60 a barrel earlier in the week, crude finished on Friday at $56.34 a barrel on the New York Mercantile Exchange. This was oil's first weekly decline in over three weeks.

The Dow Jones Industrial Average had another rough performance last week and turned in its second losing week out of the last three. However, its loss on Friday wasn't too bad with only a 62 point decline on the session. Its closing price of 8,268 leaves the large-cap index up 1.2% on the month with it sitting just above its 20-day moving average (light blue line) on the chart. If it falls below this line, the next stop is likely to be at the 8,000 point mark. However, if it decides to turn in the other direction, then it could be headed back towards resistance at 8,600.  

The S&P 500 also struggled last week, dropping nearly 5% over the past five sessions. Although it remains up on the month (1.14%), last week's pullback took a big chunk out of that gain. In Friday's session, the index shed 10 points and closed at 882 points, which is also at its 20-day moving average (light blue line) on the chart. If the index holds above this mark, then the bulls should be in good shape. If not, then we'll have to keep a close eye on our next support levels on the chart.  

Unlike the other two indices, the Nasdaq Composite broke below its 20-day moving average (light blue line) and continued moving south. It appears that the index has given up its leadership role and has encountered quite a bit of selling over the past week and a half. On Friday, it dropped 9 points and closed at 1,680. If there's continued selling on Monday and Tuesday, we could see the tech-laden index test the next support level at 1,650. After this level, it's the 50-day moving average (red line) that will be a true test for the Nasdaq. However, if there's a push to the upside, we'd like to see the index hold above its 20-day moving average once again.  

The VIX got a bump on Friday with all of the selling in the Market. The "fear index" popped 1.75 points on the day and finished the week at 33.12 points. Keep in mind that any move up in the VIX is bad news for the bulls. It showed us a sense of anxiety on Friday, but it still remains well below levels that we've become accustomed to over the past year. Let's keep a close eye on this index for an indication of Market direction.     

It was fairly smooth sailing for us again this month until we had the drop in AZO towards the end of the cycle. But a lift in that stock mid-week helped us finish the month with a decent profit, despite only getting filled in three spreads this month. Our only regret was not getting filled in that second RUT spread, but then again, that's the way it goes with trading. With the Market racing higher during the May cycle, we didn't feel comfortable adding any additional spreads because we were concerned about a possible pull-back. As it turned out, the decision to sit with three spreads wasn't a bad choice after all. Let's take a quick look at the spreads that expired worthless on Friday.

EXPIRED MAY SPREADS

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

Profit of $65.00 per contract

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

Profit of $51.00 per contract

AZO 145-140 MAY BULL PUT SPREAD (15 Contracts entered on 04/23/09)

Profit of $45.00 per contract

While we always like to pat ourselves on the back after a profitable month, there's not a lot of time for celebration because we need to get things going for the June options cycle. But let's not lose sight of our long term goal of 12 profitable months in a row. How are we doing so far? Well, the end of the May cycle brings our winning streak up to seven months! But with month number seven now in the bank, let's get started on number eight.

The June options cycle is five weeks long, which means we have plenty of time to get filled in all of our new spreads. With this in mind, we don't want to rush into a bunch of new spreads with the indices appearing to roll over a bit last week. Our plan is to ease into it with a couple new spreads for tomorrow and then see how things play out over the next few sessions before coming back with additional positions.

There's not a much better place to start then with our sure-fire index over the past seven months, the RUSSELL 2000 INDEX (RUT). The recent pull-back gives us more confidence because it allows us to come back with a spread at a level even below our June spread. Of course, the five week cycle also pumps up the premium in this spread. Our plan is to take the conservative strike prices at 370-360 and pick up a decent credit along with the way. As with the last several months, let's not rule out adding an extra layer (another put spread) down the road on this index if we get some volatility.

Our second spread is also going with an index to start off June. We are going back to the MINI-NASDAQ 100 INDEX (MNX) and similar to the RUT, we are coming in with lower strike prices this month. We are placing our strikes below very strong support levels on the chart, which includes its 50-day moving average (red line). While we weren't surprised to see the profit taking last week, we find it very unlikely that the index would fall down to the levels that we are placing our put spread. Let's use any additional selling on Monday to get filled in our put spread. If the index continues to sell off, then we'll make our put spread into an iron condor and profit on both sides.  

NEW TRADE ALERT (2)

Please Note: These are Day Orders and Limit Orders.

RUSSELL 2000 INDEX (RUT)

OPENING 370-360 JUNE BULL PUT SPREAD (15 contracts)

Sell 15 June Puts at 370 strike price

Buy 15 June Puts at 360 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 $375.00. For auto traders, we will send in a close-out order if this happens.

MINI-NASDAQ 100 INDEX (MNX)

OPENING 117.50-112.50 JUNE BULL PUT SPREAD (15 contracts)

Sell 15 June Puts at 117.50 strike price

Buy 15 June Puts at 112.50 strike price

Total Credit 0.35 per contract

Potential Profit $525.00

Once Filled, Use a Conditional Order: Use a Stop or Buy Market if Touched Order if stock reaches $120.00. 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

What happened to the "green shoots?" After all the positive economic data over the past few weeks, the Street got a cold shower of reality this morning with surprising decline in the retail sales numbers. Evidently, consumers are still keeping a strong hold on the purse strings. This pessimism got the trading started with a sour mood and left stocks retreating throughout the session. The result was an ugly day of trading across the board.

This morning's report from the Commerce Department left traders deeply disappointed before the opening bell. According to the government, retail sales declined for the second straight month in April. Heading into the report, economists were predicting a flat reading. However, the actual number showed a drop of 0.4% in April. This comes after a 1.3% decline one month earlier in March. The chart below shows the bounce that we got in retail sales during January and February, which left most thinking that we had reversed the sharp downtrend. However, the last two months have once again sent the chart lower.

Graphic from Briefing.com

The reason why these numbers were so disheartening is because consumer spending makes up over two-thirds of the U.S. economy. Without an uptick in consumer activity, the recession is likely to drag along and keep the GDP number in negative territory.

In the latest housing news, April foreclosures ticked up slightly from the March. Today's release of the RealtyTrac report showed that more than 342,000 homes received a foreclosure notice last month. This was up from the March number of 340,000 households. Not surprising, the rate was 32% over last year's number. At the same time, nearly 64,000 homes were repossessed by banks in April. Similar to consumer spending, until we see some relief in these numbers, it's unlikely we see a bottom in the overall economy.

The oil bulls got a piece of good news today when the U.S. crude inventories actually declined for the first time since February. This comes after the supply level had hit the highest point since 1990 just a week earlier. According to the Energy Information Agency, domestic supplies shrank 4.7 million barrels last week to a new level of 370.6 million barrels. However, oil wasn't able to hold onto the bullish momentum at the end of the day. Crude closed down $0.83 at $58.02 a barrel on the New York Mercantile Exchange. At the same time, gasoline supplies also dropped by 4.1 million barrels last week, which should keep the pressure on the price at the pump.

In today's latest bailout news, the Treasury Secretary said that the government will use funds returned by large banks to help out smaller institutions. While the administration has been attempting to prevent repayment of these funds by most banks, this statement by Timothy Geithner could mean an easing in this policy. At the same time, it could slowdown the trend of smaller banks being taken over by the FDIC, which we have become accustomed to on the weekends. According to Geithner, this capital infusion program would help smaller banks with assets under $500 million.

Today's Economic Reports

In corporate news this morning, the European Union fined Intel a record amount for its sales tactics. The fine translated into $1.45 billion for the computer chip maker. The ruling was handed down for Intel's actions of deliberately keeping competitors out of the European market over the past five years. According to the EU Competition Commissioner, Intel did not compete fairly, which reduced consumer welfare. This kept the selling pressure on semiconductors from the start this morning.

The Dow Jones Industrial Average had a rough session, with the selling intensifying this afternoon. By the time the closing bell rang, the large-cap index was down 184 points to 8,284. It appears that the index is ready to test the next support level on the chart at 8,200, which is also its 20-day moving average (light blue line). If this line doesn't hold, we're likely headed back to 8,000 for the next stop. However, if we get a bounce, we could head back to last week's resistance level on the chart.

The S&P 500 also took a beating in today's session. It gave back 24 points and finished the day at 883. It closed just above its 20-day moving average (light blue line) on the chart, but could easily test this support in tomorrow's session. Let's see if this line or its next support level at 870 can hold.

The Nasdaq Composite gapped lower at the open and didn't look back. The tech-laden index was hit with selling pressure throughout the day, taking the index down 51 points to 1,664. This leaves the index below its 20-day moving average (light blue line) on the chart and has it headed towards the 1,650 support level. Let's see if we see an ease in the selling pressure tomorrow.

The VIX moved up 1.85 points in today's action. The heavy selling in the Market caused a little fear to creep back in, which pushed the index up to 33.65 points. If the selling continues, we're probably going to see the VIX keep moving higher. This might not be a bad thing for entering new spreads next month. Remember, as option sellers, we want high volatility when we enter spreads. Then we want the volatility to dry up, which will cause the premiums to disappear and turn our spreads profitable even faster.   

What are the odds that AZO behaves for two more sessions? That's the same odds that we finish May with a $2,415 profit. We've made it this far with relative ease, but the volatility in AZO has kicked up several notches over the past week. This is causing us a little heart burn, but nothing that can't be resolved with a couple quiet sessions over the next two days. Our other spreads seem like a lock at this point. We just don't want to see a loss in AZO wipe out that nice profit.

As we said in Sunday's newsletter, we have our stops in place so let's stick to our game plan heading down the stretch. This way, even if AZO misbehaves, we shouldn't take on a very large loss if we need to shut down the spread.

We have been thinking about adding a new spread or two this week because we have plenty of funds sitting in cash. But with the recent downturn, we are somewhat concerned that we might see a few more sessions like today. After all, the indices have enjoyed a nice run and are now due for some profit taking. Let's sit tight until Sunday night for any new spreads so that we can see how the rest of this week shakes out. For now, let's take a look at how our spreads are sitting heading into the finish line.

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

It has been a rough start to the week for the small-cap index. In three days, the RUT has given us three red candles with today's being the largest. The index dropped 23.36 points in today's trading and finished the session below its 20-day moving average (light blue line) at $471.82. While this was certainly an ugly session for the RUT, we appear to be in extremely safe ground in our put spread with over 80 points separating the index from our position. Let's just sit back and coast to the finish line 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

Although the MNX held up fine on Monday, the next two sessions were difficult for the tech-heavy index. The index broke sharply below its 20-day moving average (light blue line) in today's session when it tumbled 3.76 points and closed at $133.98. While the selling has certainly intensified in this index, we should be fine in our put spread. The MNX is still almost 14 points above our position with not much time left in the May option cycle.

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

We knew that if AZO broke below its 50-day moving average (red line) it wasn't going to be an easy week for us in our put spread. After bouncing off the 155 point level the last two sessions, the stock wasn't able to do the same in today's trading. Instead of reversing at this line and then closing well off it, the stock finished near its low of the day. The end result of today's trading was a decline of $2.50, taking AZO down to $154.48. With a cushion of nearly 10 points and only two trading days until expiration, normally, we'd feel very secure. However, it's the downward velocity that has us slightly concerned in this one. But as we said earlier, we have our trading plan in place, so let's not get too concerned unless we need to make a quick exit. Until then, let's sit back and see how things play out over the next two sessions.

As always, Trade Happy and Trade Smart

Stocks climb after jobs number wasn't as painful as expected. Friday's rally felt like a relief rally after the all-important non-farm payroll report showed the first improvement in six months. This coming just a day after the same sort of relief was displayed when the government's financial "stress test" results weren't nearly as painful as some on the Street had feared. But it's not the cause that really matters to us, it's the result that counts and Friday's surge helped the bull-run continue into the weekend.

Even before the pre-market release of the non-farm payrolls Friday morning, the futures were pointing dramatically higher. The Dow was well over a hundred points in the positive column and the S&P 500 and Nasdaq Composite were both flying up the charts as well. We felt this bullish trading was because of Wednesday's ADP private-sector employment report coming in much better than expected. This helped lay the groundwork for more of an optimistic tone coming into Friday's release with traders betting on a better number even before the report was announced.

The actual release didn't disappoint traders that were betting for a better-than-expected result. According to the Labor Department, the number of job losses decreased to 539,000 jobs last month. While still a historically high number, it was definitely much better than the loss of 620,000 jobs that economists had forecasted.

While the headline number was definitely something to celebrate, there was some concern about who was adding the jobs last month. Over 72,000 jobs came from the U.S. government, who is on a hiring frenzy. According to officials, this is in preparation for the 2010 Census. If it wasn't for this hiring, the actual number would have been very close to what the Street was expecting. But even with the good number, the economy has now lost 5.7 million jobs since the recession began. As far as we're concerned, it's very hard to sugar coat that number.

For traders looking for an improvement in the employment data, it was a triple with the ADP, non-farm payrolls and Thursday's initial claims report all showing what the Fed describes as "green shoots." Thursday's initial claims data was just as encouraging with the government reporting that new applications for unemployment benefits fell last week to the lowest level in 14 weeks. For those looking for signs of a bottom, these three reports gave them a chance to say we might have the worst economic data behind us.

However, for the skeptics, it wasn't the best news on Friday with the release of the latest unemployment rate, which showed an increase to 8.9%. Not only is this up from the last report of 8.5% but it was also the highest level since 1983. For us, this number is more meaningful than the non-farm payroll data because this is a percentage of the total workforce and is much more meaningful on a historical basis. With the working population so much larger than in the past, we believe it is much more accurate to use a percentage as in the unemployment rate rather than figures like the non-farm payrolls.

But one very important thing to keep in mind when viewing these figures is that all of these reports are lagging indicators. This means that they'll finally be showing us optimistic numbers after the economy has already bottomed out. This is why we think the Market has caught a bid of late and is certainly betting on us now being on the upswing. Let's see if we can keep that mojo going.

While Friday's non-farm payroll report was definitely highly anticipated, there was also the equally anxiety ridden government "stress test" that came out one day earlier. As we said earlier, the findings were certainly not as dire as some were anticipating. We definitely were not surprised because as we said earlier in the week, the officials had already leaked out almost all of the findings as a way to let the Market absorb the information slowly. So that when the results showed that 10 of the 19 banks will need to raise an additional $75 billion, the bank shares of a lot of those companies actually moved higher on the news. Now that was impressive.

There was very good news today for some of those banks that are being forced to raise additional capital. Morgan Stanley sold $4 billion in stock Friday morning while Wells Fargo sold $7.5 billion. This proves that things are definitely improving for those companies that need to raise capital and perhaps we're getting beyond the time when it was only government willing to step up and provide the funds. Of course, with institutions now aware of all the strings attached with public funds, maybe the government will once again become of the lender of last resort instead of the cash infusion machine that we've become accustomed to.

The optimism about a recovery in the economy helped fuel another rally in crude on Friday. The June contract climbed $1.92 to $58.63 a barrel on the New York Mercantile Exchange. Meanwhile, gasoline surged to its highest mark since last fall, which is not a good sign for consumers at the pump.

Friday's Economic Reports

The Dow Jones Industrial Average turned in another solid performance on Friday. It was the bank stocks and some large industrials that helped lead the way to a 164 point rally on the final trading day of the week. The 2% surge helped the large-cap index finish the week at 8,574.

The S&P 500 also enjoyed another strong session on Friday. It rose 21 points on the trading day, closing at 929 points. This also helped the index cap off another positive week, moving higher for the eighth time in the last nine weeks.

Tech continued its bullish trend last week with the Nasdaq Composite adding to its string of consecutive weekly gains, bringing it up to nine. The index jumped 22 points on Friday, taking the tech-laden index up to 1,739 and pushing its 200-day moving average (black line).

The VIX gave up more ground on Friday when it shed 1.39 points and finished the session at 32.05. If the index continues to fall this week it should be good news for the bulls.  

With last week's conclusion, it leaves just five more trading days until the May options cycle is in the book. The strong rally last week helped increase the safety net in our index spreads and probably puts our positions out of reach, which is exactly where we like them to be. The only concern was the weakness in AutoZone at the end of the week. With not a lot of time left until we reach the finish line, the last thing we want is to have this spread ruin our good month.

For now, let's not get too worried about it until we see how it starts out this week. If we can make it a couple more sessions without another big sell-off in the stock then we should be able to make it to Friday with our strike prices intact. Let's keep a close eye on its intraday movement and make sure our contingency close-out orders are locked and loaded. We have our plan in place and we intend on using it if things fall apart in this spread. With that said, let's take a look at all of our spreads in more detail.

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 capped off last week's trading with a strong 18.88 point advance on Friday. This amounted to a 3.83% gain for the small-cap index, taking it up to 511 points and another resistance level on the chart. However, if its bullish momentum continues this week, it's likely to just be another broken line on the chart, similar to the several others we seen over the last two-plus months. Last week's move in the RUT leaves our put spread sitting in great shape heading into the final weeks in the May cycle. 

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 struggled over the final two sessions of the week, but was still able to climb on Friday. The tech-heavy index moved up 0.44 points on the session, taking it up to $139.42. While it was up much higher earlier in the week, we won't complain about a cushion of nearly 20 points heading into the final five trading days. We should be able to just sit back and enjoy the ride in this one.

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

It's been a while since we've had a problem child, but AZO is trying to make up for it this cycle. After some smooth sailing in this spread, the stock rolled over hard on Friday. It dropped $5.55 on a very good day for the Market. This is never a good sign. The 3.40% tumble took the stock below its 50-day moving average (red line) on the chart, which is also not a good sign for our put spread. As we said earlier in the newsletter, we're going to monitor this position closely over the next few sessions but don't want to jump the gun just yet. Instead, let's keep a close eye on its internals. At the same time, we have our close-out order ready to go and will exit the spread if it falls another ten points. Until then, let's see if our patience pays off in this one.

As always, Trade Happy and Trade Smart

Stocks move higher after job loss less troubling than expected. This morning's private-sector jobs report came in quite a bit better than the Street was expecting, which helped give a boost to the Market. Meanwhile, continued leaks from the government's stress-test helped to alleviate worst-case fears and relieve some of the pent up anxiety surrounding the country's largest financial institutions. By the time the closing bell rang, it was green across the board for the major indices with many of them finishing at their highs of the session.

There was a huge sigh of relief this morning when the ADP report showed a much smaller loss of private-sector jobs than the Street was expecting. After some brutal numbers over the past few months, analysts were bracing for another massive number of job cuts in this morning's ADP report. While the number of 491,000 job losses was definitely still large, it wasn't nearly the loss of 650,000 that economists had predicted. The new number was also well below the revised 708,000 jobs lost a month earlier in March.

The graphic below from the ADP shows just how fast and furious the fall has been in private-sector jobs. The real descent appeared to take shape last spring and only intensified through the summer and into the fall of 2008.

Graphic from ADP

While this was only one report, it does give the indication that perhaps the job market could be bottoming out. Keep in mind that the ADP is not nearly as important as Friday's big enchilada, the non-farm payrolls. The Street is expecting this report to show a loss of 620,000 jobs along with a rise in unemployment to 8.9%. If we get the kind of surprise that we did this morning, it could be a big move to the upside on Friday.

Oil surged higher once again this morning, but this time, it actually had some fundamentals behind the move.....kind of. After weeks of increasing inventory levels beyond analysts' expectations, the government's EIA report showed a smaller increase than the Street was expecting. The U.S. supply increased 600,000 barrels last week to a new level of 375.3 million barrels. Heading into the release, the Street was expecting a gain of 2.2 million barrels. We threw in that disclaimer about kind of having fundamentals on the side of the bulls because the number was under expectations. But lets not forget that the U.S. supply remains at nearly a 19-year high with demand remaining at depressed levels. You would think that would be a drag on prices, but that's not the world we live in. Instead, traders bid up the price of crude, taking it up to its highest level of the year at $56.34 a barrel on the New York Mercantile Exchange.

At the same time, gasoline supplies fell last week by 200,000 barrels. This drop was not by increased consumer demand, but because of a decline in the refining process. Refineries have cut back on production due to the dropping demand from consumers and high levels of crude supplies. These two things have helped keep the price at the pump higher than it should be based on the economics of supply and demand. Keep in mind that gasoline demand in the U.S. is down one-percent from last year at this time.

Today's Economic Reports

For months the Street has been anxiety-ridden over the government's stress test of the largest 19 financial institutions. After the latest delay, it appears that tomorrow will be D-day for those on the list. However, we've seen plenty of leaks over the past week, which have helped to dampen the findings from the report. We believe this was done on purpose to slowly let the Street adjust expectations and deal with the government's findings. According to the latest tidbits being reported today, it appears that the big four under the most fire are Citigroup, Bank of America, Regions Financial and Wells Fargo. While the first three really weren't a surprise to many on the Street, the last caused some to do a double take earlier this week.

Keep in mind that Warren Buffet was just in the news this weekend for saying that he invested heavily into Wells Fargo because it wasn't affected like the rest of the financial institutions and it passed his own style of stress test. Of course, keep in mind that the government's test uses the scenario of housing prices dropping another 22% and unemployment climbing to 10.3%.

The head of the FDIC Sheila Bair was back in the news today when she was calling for more oversight power for government regulators. She told the Senate Banking Committee said that regulators need new expanded authority to oversee companies that pose systematic risk for the economy.

Resistance--what resistance? The Dow Jones Industrial Average continued to slice right through old resistance levels on the chart this week as it continues its march up the chart. The Dow climbed another 101 points in today's session while busting through another resistance level on the daily chart. Today's 1.21% gain took the large-cap index up to 8,512 points.

The S&P 500 also showed plenty of strength this afternoon as it catapulted 15 points higher at the closing bell. This 1.74% advance on the session takes the index up to 919 points and right through another barrier on the chart. This move leaves the S&P 500 plenty more room on the upside before it should run into another barrier near 950 points.

The Nasdaq Composite was struggling for most of today's trading. But a rally late in the session helped take the index back into positive territory by the closing bell. It finished the trading day up almost five points at 1,759. This move leaves the index above its 200-day moving average (black line) on the chart, but below a resistance level near 1,780. But the way it's been breaking through resistance levels, we wouldn't be too concerned about this one.

The VIX continued to fall this week. It shed another 0.90 of a point in today's session, taking the "fear index" down to 32.45 points at the close. If the Market continues to climb, we'll probably see the VIX keep on falling.  

This week's trading has been exactly what we had hoped for heading into the week. We got a big pop on Monday and then the next two trading days were fairly uneventful. That's not to say there wasn't plenty of movement intraday, but the closing prices were nothing to get excited about in either direction. While we would have liked to add another spread or two this month, we just haven't gotten the confirmation that we needed over the past week and now there's just not enough time premium left in order to get into another high probability trade. While that's the bad news, the good news is that it appears that the spreads that we do have working this month seem to be sitting in great shape. As long as this continues over the next week and a half, we should be able to keep our winning streak alive with another decent profit for the month of May. For now, let's take a look at how we're sitting in our current spreads.

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 has turned in a very good performance so far this week. The small-cap index didn't keep pace with some of the other indices today, but it still managed to climb 0.51%. This amounted to a 2.54 point advance that took the RUT up to $505.09. This leaves the index 115 points above our put spread with just a week and a half to go. We should be able to coast to the finish line 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

The MNX turned it on late in the session and managed to get back to the flat-line by the closing bell. It closed up a mere penny at $142.39. While that's nothing to get excited about, that was a fairly substantial move from when the index was deep into the red earlier in the session. Similar to the RUT spread, this one is also sitting comfortably with over 20 points of breathing room and not a lot of time to go.  

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

The AZO spread is our lone concern this month, but even this one has a large safety net at this point in the cycle. The stock was up big early in the day, but as usual of late, it started to fade as the day wore on. However, it still managed to cling to a $1.73 gain at the closing bell. This 1.07% bump to the upside leaves the stock sitting at $163.30. While it's less than a 20 point cushion, it still is sizable enough to keep the heat on us for a while. Let's keep a close eye on it, but not get too concerned until we lose more of our safety net in this one.    

As always, Trade Happy and Trade Smart