The Market skids into expiration on Friday. The red on the final trading day of the week caused the indices to encounter their worst weekly performance of the New Year. It was the financials that struggled on Friday, helping to lead the way lower.

Troubles in the financial sector on Friday stemmed from the troubles in J.P. Morgan Chase's quarterly earnings. Also on the day, chip maker Intel left the Street disappointed and provided plenty of reasons for the traders to hit the "sell" button. It appears that the extremely low expectations that investors had for most of 2009 is finally wearing off. We'll have to see if this continues to be a drag on earnings in the upcoming week when things really start to kick into high gear.  

The session had several economic reports released on the day with the Consumer Price Index probably being the most closely watched. While there was a sizable jump in food prices, there weren't any real surprises on Friday. The index measures the price of goods and services that are purchased by consumers. According to the Department of Labor, the CPI index actually dropped last month with its reading of 0.1%. This was lower than its previous reading of 0.4% last month and was slightly better than what the Street was expecting.

At the same time, core CPI (which excludes volatile food and energy prices) also increased modestly last month. Its reading of 0.1% was as expected and helps the index remain in more of a sideways pattern on the chart. While everyone expected both of these indexes to rise substantially in the future, they both appear to be holding in check for the time being.

Graphic from Briefing.com

In other economic news, the University of Michigan Consumer Sentiment Index came in below expectations on Friday. Ahead of the release, the Street was bracing for a jump to 74.0 in the index. But the actual number came in at only 72.8 for its initial reading in January. This was up just slightly from December's final number of 72.5. While this index rarely translates into actual consumer spending, there's no doubt that the bulls would prefer to see a much higher number, which would mean greater confidence in the economy. The chart below shows the readings have turned to more of a sideways pattern on the chart instead of a rising trend.

Graphic from Briefing.com

While the equities market was closed on Monday, crude still traded. Although it was certainly a quiet session, oil was still able to rise $0.49 on the day to finish the session at $78.49 a barrel on the New York Mercantile Exchange.

Friday's Economic Reports

The Dow Jones Industrial Average suffered its biggest decline of the year on Friday when it tumbled 100 points. The 0.9% loss took the large-cap index off its 15-month high that it hit on Thursday to finish the week at 10,609 points. The index was down much more on Friday before it seemed to find support on the chart and then bounce off an old support area. Let's see if it's able to stabilize this week when the earnings season kicks into high gear.   

The S&P 500 also pulled back from its new 52-week closing high that it reached on Thursday. It tumbled 12 points to finish the week at 1,136 points. The S&P 500 also pulled back to an old support level on Friday before it was able to find some buying come back into the Market. We'll be watching this week to see if it continues to find support from this same level and its rising 20-day moving average (light blue line). These two seem to be sitting in the same area on the daily chart.

The Nasdaq Composite also took a beating in Friday's session when it shed 28 points on the final trading day of the week. The tech-heavy index pulled back to its 20-day moving average (light blue line), but wasn't able to get much of a bounce off this line. This has us a little concerned for Tuesday. Just like the other major indices, we want to see if the Nasdaq is able to hold above this moving average, as well as, its next support level on the daily chart.  

The VIX (CBOE VOLATILITY INDEX) found some strength on Friday, but wasn't able to hold onto most of its gains by the time the closing bell rang. It was able to move up only 0.28 of a point to finish the trading week well below the 20-point barrier at a level of 17.91 points. As long as it stays below the 20-point area, we aren't all that concerned about the selling. Now if it crosses that level, we're going to be a little more interested in a trend change coming.

Well, it looked as if the rest of our traders that were in Google were going to make it to the finish line with the spread intact. That was until the bloodletting on Friday that caused the stops to get dinged. These traders took an average loss of $0.74 per contract. While it was unfortunate to take any loss, this should have allowed these traders to still make a profit on the month. We just wish all of us could have fit into that category.

As we said on Wednesday's newsletter, unfortunately the craziness of that stock last week caused some of us to take some unusually large losses due to wild volatility on the open when some of our stop got hit. Not only that, but the wild price swings also caused our auto traders to get filled at all sorts of different prices. As we always do, we're using the average close-out prices from the brokers to fill in our month-ending tallies. Those wild swings meant that some traders will have walked away with a profit last month but others will take on an even bigger loss than we are showing.

Keep in mind this is such an unusual month, one that we've never quite seen before, where the close-out debits are so wildly varied. Usually, these prices only vary slightly. Of course, nothing about last month was very typical as far as Google was concerned.

PCLN 200-190 BULL PUT SPREAD

Profit of $35.00 per contract

RUT 580-570 BULL PUT SPREAD

Profit of $40.00 per contract

OEX 490-480 BULL PUT SPREAD

Profit of $35.00 per contract

GOOG 580-570 BULL PUT SPREAD

Original credit of $35.00 per contract

Close-out debit of $337.00 per contract

Total loss of $302.00

As we said last week, the crazy headlines concerning the problems in China and the drastic drop in the stock overnight is something that rarely happens. Unfortunately for us, it happened at a time that we were sitting with only a 10 point cushion. If you've been with us during the past year, you know that we've traded this stock quite often during our streak of profitable months with ease. It seemed like every month we had nearly a 40 to 50 point cushion in that stock without any worries, month after month. Obviously, that wasn't the case last month.

But enough about reliving the pain and suffering from January. It's time to start focusing on how we get that money back and get a new 12 month winning streak going. We're going to go back to our bread and butter with a couple of index spreads. With these spreads, we don't have to worry about one stock's specific news causing a huge overnight drop like we did last month.

But even with this in mind, we still have to be a little concerned about the red we saw at the end of last week. We also have plenty of concerns heading into the heart of the new earnings season during this holiday-shortened week. So let's be conservative in our put spreads and place our strike prices well out of the money this month.

We're going back to our bread and butter spreads, the RUT and OEX to get things started. We can't remember the last time we ran into any trouble in these spreads from the put side. At the same time, we're able to come in with strike prices that are below several strong support levels on the chart, which should help us in the event that there's any continued selling during the February cycle.

We're also coming back with another put spread in Priceline.com Incorporated (PCLN). Although the stock has rolled over on the chart and fallen through its 50-day moving average (red line), this has increased the premiums in the put spreads. We doubt that all of the selling is done in this stock, but we believe that with our strike prices being nearly 40 points out of the money, it is more than enough to get us to another profit in this one. Let's place the trade for tomorrow and see if we get a little selling to help us get filled.

NEW TRADE ALERT (3)

Please Note: These are Day Orders and Limit Orders.

RUSSELL 2000 INDEX (RUT)

OPENING 560-550 FEBRUARY BULL PUT SPREAD (15 contracts)

Sell 15 February Puts at 560 strike price

Buy 15 February Puts at 550 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 $565.00.

S&P 100 INDEX (OEX)

OPENING 480-470 FEBRUARY BULL PUT SPREAD (15 contracts)

Sell 15 February Puts at 480 strike price

Buy 15 February Puts at 470 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 $482.50.

Priceline.com Incorporated (PCLN)

OPENING 170-165 FEBRUARY BULL PUT SPREAD (15 contracts)

Sell 15 February Puts at 170 strike price

Buy 15 February Puts at 165 strike price

Total Credit 0.4 per contract

Potential Profit $600

Once Filled, Use a Conditional Order: Use a Stop or Buy Market if Touched Order if stock reaches $172.50.

RUT DAILY CHART

OEX DAILY CHART

PCLN DAILY CHART

As always, Trade Happy and Trade Smart