Trouble on the earnings front, combined with new anxiety in China, was too much for the Market to overcome today. Stocks tumbled to their worst loss of the year, but were able to rebound this afternoon and pare a good chunk of the losses. Until the rally this afternoon, there was a lot of gloom and doom floating around the Street. But the surge helped ease this anxiety.

It was the earnings from IBM that spooked traders early on. Although the company announced decent earnings in the fourth quarter, the stock took a beating. This appears to be the new trend of late; announce good earnings and then watch your stock get whacked. It was large-caps that seemed the weakest today, especially ones tied to global sales.

The news out of China, that caught everyone a little off-guard, was word that the government has ordered credit officials to cut back on currency lending. The Chinese appear to be tightening credit as a way to curtail the rapidly growing economy. Tightening credit will definitely help curtail economic growth, especially when combined with the increase in its key reserve requirements (which the country raised last week). While this will help combat inflation, the question is whether or not it will do more damage than good in the long run.

In economic data today, the housing market was front and center. According to numbers released by the Commerce Department, construction of new homes and multifamily properties dropped by 4% last month. Today's report of 557,000 (seasonally adjusted) new homes constructed in December was down from the annual pace of 580,000 that was reported one month prior. This shows a slowing trend in housing construction and might signal a shift back towards contraction in the coming months, especially if we see the credit conditions starting to tighten once again.

In the other big economic report today, the Labor Department announced a rise in wholesale prices. The data showed an increase of 0.2% in the Producer Price Index (PPI), but this is much lower than the rise of 1.8% reported in November. This news helps weaken any argument for near-term inflation and could help the Fed keep interest rates in check for the time being, especially since Core-PPI came in flat. The chart below shows that PPI has been rising over the past few months while Core-PPI has remained steady. Keep in mind that policymakers are more concerned with the Core-PPI because it strips out the volatile food and energy prices.

Graphic from Briefing.com

The new bit information out of China means lower oil consumption. This was the main driver behind the falling price of crude today. It shed $1.40 a barrel to finish the session at $77.62 a barrel on the New York Mercantile Exchange. Of course, traders will be keenly focused on tomorrow's Energy Information Administration's report on inventory levels. These numbers will likely be the driving force behind oil's move on Thursday.

Today's Economic Reports

It was definitely one ugly morning for the Dow Jones Industrial Average. But a nice rise in the afternoon helped the large-cap index erase nearly half of its losses on the day. However, it still finished the session down 122 points at 10,603. It was good to see the Dow close back above its 20-day moving average (light blue line). Let's see if it can continue to close above this line as well as its support at 10,500 on the daily chart.

The S&P 500 also was trading below its 20-day moving average (light blue line) this morning before it was able to reverse and head higher. Despite closing back above this line, it still shed 12 points in today's action, closing at 1,138. On the daily chart, we want to see if it can hold above this level as well as the support at 1,130 points. If so, then our OEX put spread should be in great shape.  

The Nasdaq Composite took an absolute beating this morning. The index sliced right through its 20-day moving average (light blue line) on the daily chart and kept moving south. It wasn't until it hit the 2,270 point area that buyers came back into the index. The good news was that the Nasdaq was able to close well off this level when the bell rang. The bad news was that this still meant a 29 point loss on the day. This led the other major indices to the downside with its 1.26% decline, taking the tech-laden index to 2,291 points. Let's see if the Nasdaq put in its low for the week during today's session.  

All of the selling this morning meant that the VIX (CBOE VOLATILITY INDEX) was moving higher. Although it did close up 1.10 point at 18.68 points, this was well off its high of the session. It was the afternoon rally that took away most of its gains. Let's continue to watch this index closely because if it starts climbing, that means the bears are creeping back into the Market.

That's why we throw the spreads out there everyday....even when it looks like a long shot that our trades might get filled. After yesterday's big move to the upside, it appeared that keeping our spreads the same for Wednesday was going to be a futile effort. Of course, that was until the selling engulfed the Market for a majority of the session. The massive selling this morning played right into our hands and helped us get the fills. Then, as if planned perfectly, we got a round of buying late in the afternoon that helped everything move off the lows of the session.

Sitting here tonight, we feel really good about our entries in each of these spreads. We certainly would like to have at least five spreads working this cycle, but with a few already filled, we can now take our time on the rest of them. After today's wild ride, we want to sit back and see how the rest of the week unfolds before entering additional spreads. Let's save those maintenance dollars in case we want to add layers to our current spreads or come back with positions in new stocks/indexes. For now, let's go ahead and take a look at how we're sitting heading into the rest of the week.

PCLN 170-165 BULL PUT SPREAD (15 Contracts entered on 01/19/10)

PCLN CLOSED AT $206.31 Today (36.31 points away from our put spread)

Profit potential of $40.00 per contract

Contingent Stop Order set at $172.50

PCLN is probably our one position that has shown us quite a bit of weakness this week. We were hoping that it would be able to work its way back above its 50-day moving average (red line) on the chart. However, it has really struggled to do so just yet. Instead, it has given us some very large intraday swings, but we used that to our advantage on our entries. Because we have gone so far out of the money in this one, we shouldn't have to be very concerned about wild sessions like today's action. Instead, let's sit back and see if it can regain its upward momentum later in the week.

RUT 560-550 BULL PUT SPREAD (15 Contracts entered on 01/20/10)

RUT CLOSED AT $639.61 Today (79.61 points away from our put spread)

Profit potential of $40.00 per contract

Contingent Stop Order set at $565.00

The small-cap index wasn't able to avoid all of the pain this morning. Just like the rest of the Market, it was also hit with plenty of selling. The good news was that it was able to take a nice U-turn once it hit some good support on the chart. It finished the session down 9.54 points at $639.61. Despite this loss, we're still sitting with a mammoth cushion in this spread and tons of great support levels on our side. If we get any more selling in this one, we're likely to just come back with another put spread at an even lower level next week.

OEX 480-470 BULL PUT SPREAD (15 Contracts entered on 01/20/10)

OEX CLOSED AT $524.73 Today (44.73 points away from our put spread)

Profit potential of $45.00 per contract

Contingent Stop Order set at $482.50

Similar to the major indices, the OEX fell below its 20-day moving average (light blue line) this morning, but then was able to find some afternoon strength. The index rallied back above this level, leaving a big chunk of its losses by the wayside. The index finished the session down only 5.48 points. This leaves us very comfortable in this spread for now.  

As always, Trade Happy and Trade Smart