Short week....big gains. There might have been only four trading days last week, but each of them pushed the Market higher. Four trading days and four green finishes. With nothing but put spreads in our portfolio, it's hard to ask for anything better than what we got last week.

Friday's session wasn't a big gain, but there was a nice recovery late in the session that helped extend the winning streak for the indices. Early in afternoon, there was some turmoil when the President started talking about increased bank regulations and healthcare reform. These two issues caused a brief round of selling on Friday, but there was a recovery late in the day that helped get the indices back into positive territory by the time the bell rang.

Of course, there was already some concern lingering from the Federal Reserves talk of increasing the discount rate. This is the rate that the Fed charges banks for overnight lending in a short-term funding basis.

The only other real news on Friday was the release of the Consumer Price Index, which came in less than expected. According to the Labor Department, the index climbed by 0.2% in January. This was up slightly from December's reading of 0.1% while also being under the 0.3% that the Street was expecting. At the same time, core CPI (which excludes food and energy prices) actually slipped to a -0.1% last month. This was also much less than the positive 0.1% that analysts had forecasted.

These readings should help take the pressure off the Fed to raise the federal funds rate in the near-term. The chart below shows that core CPI remains drifting sideways while the CPI continues moving higher, but at a manageable pace. It's hard to see any trouble in these numbers.

Graphic from Briefing.com

The surprising move by the Central Bank last week helped crude move higher on Friday. It suffered briefly after the CPI report was released, but finished the session up 0.9% at $79.81 a barrel on the New York Mercantile Exchange. While the strengthening of the dollar usually means trouble for commodities like oil, this wasn't the case on Friday. Let's watch to see if this continues or if we see movements in opposite directions this week.

Friday's Economic Reports

The Dow Jones Industrial Average made it four straight green sessions on Friday when it held on to a 9 point gain at the close. The large-cap index had a bigger gain working on the session, but the afternoon sell-off wiped this away. But even with the struggles on the session, the Dow still made it into positive territory at the close every day last week. This amounted to a 303 point climb for the large-cap index, but more importantly, this helped the Dow make it back above its 50-day moving average (red line) on the chart when it closed at 10,402 on Friday. This is a very good sign for the bulls. However, we'll be watching to see if it's able to hold above this mark in the near term. 

The S&P 500 also posted a solid gain last week. But similar to the Dow, it was able to climb only 2 points on Friday's session, taking the S&P 500 up to 1,109 points. But unlike the large-cap index, the S&P 500 wasn't able to make it back above its 50-day moving average (red line) on the chart. Instead, it closed just above this line at Friday's close. Despite not making it above this line, it still managed to gain 33 points over the past four trading days, which was a solid move to the upside for the index.  

The Nasdaq Composite wasn't able to lead the way last week, but still turned in a very good performance over the past four trading days. On Friday, it traded similar to the S&P 500 with its 2 point gain. However, on the week, the tech-laden index surged 60 points, taking it up to 2,243 points. This 2.76% gain helped the index move back above its 50-day moving average (red line) and hold well above it on the close Friday afternoon. Let's see if it's able to stay there this week.

Perhaps the best news last week was the deterioration of the VIX (CBOE VOLATILITY INDEX). The strong move in the indices helped erase the anxiety and fear that we were experiencing earlier in the cycle. Although the VIX only shed 0.61 of a point on Friday, this took it down to 20.02 points and left it well below its 50-day moving average (red line). We want to see if it's able to hold below this line in the near-term.  

With the strong gains in the Market over the past few weeks, it's easy to forget the type of trading environment that we were experiencing earlier in the cycle. For several sessions, it appeared that the sky was falling with everything rolling over hard.

Unfortunately, our original OEX put spread took the brunt of this pain when the index fell to just below our close-out trigger price, causing us to close out this spread near the low of the downward tumble.

With the OEX settling on Friday way above both of our put spreads, it's easy to start second guessing the actions we took during those dark days a few weeks ago. But to become good traders, we need to be able to compartmentalize these feeling because we took the best course of action that we could at the time. We minimized the potential loss while adding an additional put spread at lower strike prices. This helped to bring in some extra premium this month and reduce our loss on the OEX close-out.

As we said a few weeks ago when we closed out the spread, the loss normally wouldn't have been so large. However, we had the huge spike in the VIX and the large amount of time value, both working against us. Usually, the loss would have been about one-third of this price and we still could have walked away with a profit for the month. Obviously, that didn't happen. But enough about the problems, let's just add up the totals and then see how we're going to get this amount back next month.

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

Profit of $40.00 per contract

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

Profit of $40.00 per contract

RUT 530-520 BULL PUT SPREAD (10 Contracts entered on 01/25/10)

Profit of $40.00 per contract

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

Original Credit of $45.00 per contract

Close-out Debit of $365.00 per contract

Final Loss on Spread of $320 per contract

OEX 460-450 BULL PUT SPREAD (10 Contracts entered on 01/28/10)

Profit of $45.27 per contract

With the February cycle now behind us, let's get focused on how we're going to make this amount back in March. As usual, we're going to get things started with a spread on the small-cap index for the new cycle. The RUT has been rock solid for us over the past year and a half and we like the strong bounce-back that that the small-cap index has made over the past two weeks. Let's take advantage of this move by placing a put spread at some safe levels below the RUT. Our thought process heading into this cycle is similar to the last one. If we get some selling, let's add a layer to the index and profit twice. At the same time, we're always open to making any spread into an iron condor, but don't want to go into the cycle feeling that we need to force one. Instead, let's just take what the Market gives us.

At the same time, we're going to come back with another put spread on the PCLN. After posting another solid earnings report, the stock has soared. We want go along with the strong trend in this stock and profit with another put spread. With both the fundamentals and technicals on our side, we should be in great shape. However, let's try to be really safe and keep our strike prices below some very strong support levels on the chart.

We're going to also go back to one of our favorite stocks, GOOG. Since bottoming out near $520 in early February, the stock has started to rebound. We wouldn't be surprised to see it continuing to work its way up the chart with several analysts raising their targets for the stock price. Let's continue to be safe in our put spreads by staying well below the stock price and the recent swing lows on the chart. Let's get these three spreads going for us before we add additional positions.

NEW TRADE ALERT (3)

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

RUSSELL 2000 INDEX (RUT)

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

Sell 15 March Puts at 560 strike price

Buy 15 March Puts at 550 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 $565.00.

Priceline.com Incorporated (PCLN)

OPENING 200-190 MARCH BULL PUT SPREAD (15 contracts)

Sell 15 March Puts at 200 strike price

Buy 15 March Puts at 190 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 $202.50.

Google Inc. (GOOG)

OPENING 490-480 MARCH BULL PUT SPREAD (15 contracts)

Sell 15 March Puts at 490 strike price

Buy 15 March Puts at 480 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 $492.50.

RUT DAILY CHART

PCLN DAILY CHART

GOOG DAILY CHART

As always, Trade Happy and Trade Smart