It just kept getting uglier. It started on Wednesday and then got worse as the week went on. With politics back front and center in the Market, news out of Washington D.C. caused shockwaves over the final two trading days of the week. From the administration taking on the big banks to the uncertainty surrounding the re-appointment of Fed Chairman Bernanke, the news caused traders to sell fast and sell hard heading into the weekend. All of the political news came on the same week that earnings were supposed to be the driving force behind the Market’s move. From financials like American Express to big cap names like Google, there was a trend of topping expectations last week but still getting hit hard by heavy selling.  The President’s strong warning to Wall Street on Thursday sent shockwaves across the trading floors and certainly stirred things up in a hurry. He threatened to limit risk-taking by banks and to let the government decide what type of investing these financial institutions will be able to do in the future. This ignited the selling on Thursday, which didn’t let up on Friday. Adding to the concerns from Thursday, the final trading day of the week was rocked by news that Congressional leaders are ready to vote against the re-confirmation of the Fed Chairman. Uncertainty is never good for the Market, and we got a good dose of this last week. While we haven’t been the biggest supporters of Bernanke over the past year, we also believe that if he is not confirmed, we’re likely headed to a period where there’s much less independence at the Federal Reserve. The independence and non-political voice of the Fed is something that is certainly in doubt if he is not confirmed. Of course, some of his actions over the past two years have given his critics plenty of ammunition in this area, questioning his objectivity and independence already. Some have questioned whether his support of the Treasury bailouts was because he was trying to get reappointed for a second term. We tend to side with some of these critics, of course it’s always easy to second-guess his actions. But even with this said, we don’t like the political grandstanding that’s going on either. Increased doubts in the economy caused crude to dip for the third straight session on Friday. A struggling economy means less demand for crude. This caused oil to slide another $1.54 on Friday to $74.54 a barrel on the New York Mercantile Exchange. Over the past two weeks, oilshed 10% and appears to be headed lower unless we get something unexpected this week. Let’s keep a close eye on the $70 mark over the next five sessions. Crude followed suit on Friday, but was able to recover some of its losses at the end of the day. Despite this bounce, it still gave up $13.50 an ounce on Friday to finish the week at $1,089 a troy ounce. Friday’s Economic Reports

Date	ET	Release	For	Actual	Consensus	Prior	Revised From
		None.

The Dow Jones Industrial Average suffered its largest loss since the end of October on Friday when the large-cap index tumbled 216 points. This 2.09% loss took the Dow down to 10,172 points and wiped away its gain for the year. This also marked the Dow’s largest three-session drop in over a year. On the daily chart last week, the index broke below its 20-day moving average (light blue line) and its 50-day moving average (red line). While it did close just above another support level on Friday, it’s going to take a sentiment change on Monday to keep this thing from falling farther. 

  The S&P 500 also took a beating last week with all ten sectors falling on the day. While there were only four trading days last week, this didn’t prevent the S&P 500 from taking a 3.9% tumble. It shed 44 points for the four trading days, which included a 24 point drop on Friday that left the index at 1,091 points. The troubling thing on Friday was that the index broke below its 50-day moving average (red line) and then kept moving lower. This week, let’s watch to see if the index can take a break from the selling and retrace.
    The Nasdaq Composite held up the best out of the three major indices last week, but still had a 3.6% drop over the four trading days. It declined 60 points on Friday, falling below its 50-day moving average (red line) to close at 2,205. Similar to the S&P 500’s daily chart, it looks like the next resting stop for the tech-laden index might be from a support level from back in November and December.       
  The wild selling at the end of the week caused the VIX (CBOE VOLATILITY INDEX) to spike by 30%. It jumped 5.04 points on Friday to finish the week back above both its 50-day moving average (red line) and its 200-day moving average (black line) at 27.31 points. If this index keeps moving north, it could mean a lot more trouble for the Market.

Unfortunately, we’re back on political watch instead of watching fundamentals or technicals. We can even throw earnings out the window because who really cares about results or guidance in this type of trading environment. It almost feels like we’re back to a year and a half ago when one eye was on the Market and the other was on Congress. Let’s buckle our seat belts tightly and pick up a case of Dramamine at Sam’s Club because we’re probably going to need quite a bit of it if this type of news cycle continues. The last time we saw this dramatic a move in the VIX was late October (during the November option cycle) when we made most of our put spreads into iron condors. Of course, after a week of selling, the Market quickly reversed and caused us nothing but pain in our new call spreads, giving us our first losing month in a year. Although it feels different this time, we’re very cautious about making the same type of play this month. At this point in time, we’re considering another tactic of adding layers to some of our put spreads. We’ve done this numerous times in the past, especially in the RUT, with plenty of success. This gives us some extra premium and plenty of safety with new spreads at even lower strike prices. For tomorrow, let’s add two layers, one in the RUT and the other in the OEX. We’re going to cut down the number of contracts to 10, but this should help us add some nice premium without much risk. NEW TRADE ALERT (2) Please Note: These are Day Orders and Limit Orders. RUSSELL 2000 INDEX (RUT) OPENING 530-520 FEBRUARY BULL PUT SPREAD (10 contracts) Sell 10 February Puts at 530 strike price Buy 10 February Puts at 520 strike price Total Credit 0.40 per contract Potential Profit $400.00 Once Filled, Use a Conditional Order: Use a Stop or Buy Market if Touched Order if stock reaches $535.00. S&P 100 INDEX (OEX) OPENING 425-415 FEBRUARY BULL PUT SPREAD (10 contracts) Sell 10 February Puts at 425 strike price Buy 10 February Puts at 415 strike price Total Credit 0.40 per contract Potential Profit $400.00 Once Filled, Use a Conditional Order: Use a Stop or Buy Market if Touched Order if stock reaches $427.50.

STOCK	TYPE		STRIKES	CONTRACTS	CREDIT	CLOSE/DEBIT
PCLN	Bull Put	170-165		15	0.40
RUT	Bull Put	560-550		15	0.40
OEX	Bull Put	480-470		15	0.45

POTENTIAL PROFIT

$1,875.00

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 The movement in Priceline last week was a little ironic. When the Market was strong early in the week, PCLN lagged behind. But when the indices were selling like there wasn’t any tomorrow, PCLN was able to hold its own. The stock was holding up extremely well on Friday until the last hour of trading when it wasn’t able to defy the massive selling across the board. The stock finished the session down $3.84 at $204.20. While we don’t like to see the red finish on Friday, we still like how we’re sitting in this spread with over 35 points separating the stock from our “short” strike price. But even with this said, we still need to monitor the situation very closelyover the next week because the volatility has ticked up dramatically.
RUT 560-550 BULL PUT SPREAD (15 Contracts entered on 01/20/10) RUT CLOSED AT $617.12 Today (57.12 points away from our put spread) Profit potential of $40.00 per contract Contingent Stop Order set at $565.00 On Wednesday night, it was quite remarkable just how large our cushion was in this put spread. But with two straight sessions of heavy selling, we’ve lost a big chunk of that. On Thursday, the small-cap index broke below its 20-day moving average (light blue line) and then continued heading south on Friday. On the final trading day of the week, the RUT shed 11.24 points to finish the week just above its 50-day moving average (red line) at $617.12. Although we still have a lot of breathing room in our put spread, we want to see the index hold above its 50-day moving average this week. This is the area we’ll be watching extremely closely.

OEX 480-470 BULL PUT SPREAD (15 Contracts entered on 01/20/10) OEX CLOSED AT $502.35 Today (22.35 points away from our put spread) Profit potential of $45.00 per contract Contingent Stop Order set at $482.50 We handled the selling on Wednesday without any concerns, but two more sessions of heavy selling have done some technical damage on the daily chart. The S&P 100 index tumbled through its 20-day moving average (light blue line) on Thursday and then sliced through its 50-day moving average (red line) on Friday. On Friday alone, it tumbled 11.78 points to finish the week at $502.35. While we’re still sitting with a 22 point cushion in our put spread, we certainly don’t like the massive selling momentum that we’ve seen over the past three days. Let’s see if we get some kind of bounce at the start of the new week.

As always, Trade Happy and Trade Smart