After a red hot start to the trading week, stocks cooled off in today's session. While most stocks finished the session in the red, it wasn't too painful thanks to the huge rally we had on Monday and Tuesday.

After a great start to the trading week, stocks started the session to the downside. It appeared that the disappointment on the earnings from Pfizer and more repayment talk from the financial sector caused traders to lock in some gains from early in the week. While most of the session was in the red, it was encouraging to see the losses stay small thanks to a nice run to the upside this afternoon.

However, there was some very good news from the ADP employment report that was released this morning. According to the company, only 22,000 jobs were cut in January, marking the fewest number of losses in two years. This number was also better than the 30,000 job loss that the Street was bracing for and lays the groundwork for possibly a better reading in Friday's non-farm payrolls. At the same time, ADP revised the prior report of 84,000 jobs losses in December down to only 61,000. These are very good indications heading into Friday's report, in which analysts are currently looking for no change in the non-farm payrolls but a slight increase in the unemployment rate to 10.1%.

In other economic data, the Institute for Supply Management reported that its services index increased to 50.5 in January. This reading was slightly below expectations but up from December's number of 49.8. Today's reading above 50.0 means that there's expansion taking place in the service sector. This followed Monday's ISM report on the manufacturing sector, which showed the most activity taking place in over five years.

Graphic from Briefing.com

Crude has bounced back this week and was helped out today by the weekly Energy Information Administration's inventory report. According to the government, oil inventories rose by 2.3 million barrels last week while gasoline supplies fell by 1.3 million barrels. However, demand remains anemic, over 2% lower than last year at this time. But the real story is that refiners are continuing to slash refining levels. Last week, capacity fell to 77.8% as refiners are attempting to match demand with the huge supply that remains. While crude was up for most of the session, it slipped at the close. It settled down $0.25 a barrel at $76.98 a barrel on the New York Mercantile Exchange.

Today's Economic Reports

The Dow Jones Industrial Average nearly made it three green days in a row this afternoon, but just couldn't quite make it back to positive territory by the time the closing bell rang. The large-cap index finished the session down only 26 points at 10,270. Despite the loss, it was encouraging to see the Dow finish near its high of the session. Let's see if it can keep moving higher the rest of the week and keep closing in on its 50-day moving average (red line).

The S&P 500 also gave us two strong sessions to start the week on Monday and Tuesday. However, it just couldn't keep that trend going in today's trading. The index slipped 5.08 points to finish the day at 1,098. But similar to the Dow, it was a good sign to see the index finish well off its low of the session and close to its high. Let's also watch to see if it's able to make its way back towards its 50-day moving average (red line) over the next two sessions.  

The Nasdaq Composite was definitely the strongest of the three major indices today as it surged higher for the third straight day. The tech laden index advanced 0.85 of a point today to push the index up to 2,190 points. Although it wasn't as big a gain as we saw on Monday and Tuesday, we'll certainly take it. Let's see if the tech stocks can help pull the Market higher over the rest of the week.  

All of the bullishness in the Market on Monday and Tuesday caused the VIX (CBOE VOLATILITY INDEX) to take a nose-dive. The "fear" index tumbled on the first two trading days but then increased a 0.16 of a point in today's trading. This leaves the VIX just above its 50-day moving average (red line) at 21.65 points. We'll be watching to see if it holds above this line or slips back below it.   

We finally got the bounce that we had been waiting for. With the Market reversing its recent downtrend on Monday, we saw our cushions start to build back up again, especially with two big green days working in our favor. While we might not be convinced that the ugliness is over just yet, the extra breathing room sure makes our spreads look a whole lot better this week.

Remember, the key with our style of trading (this month) is that we don't want to see several days in a row of selling. We usually don't mind even the big down days, as long as we get a few sideways days in between or even a small retracement. Of course, we went several days in a row this cycle with nothing but selling and we're still sitting just fine. Actually, it's quite remarkable how well we're sitting in all our positions when we consider how far the Market dropped this cycle. Other than our original OEX put spread, we aren't feeling much pressure from any of our spreads.

However, we got a taste a few weeks ago of just how fast this thing can turn, so let's be prepared for anything. Let's make sure our contingency stops are set and working just in case we need them this month. In the meantime, let's hope for some sideways action the rest of the week and for an uneventful session on Friday with the release of the unemployment rate and the non-farm payrolls.

Of course, if we get a surprisingly good report, this could fuel a nice rally that would leave us in great shape heading into the final two weeks of the February cycle. But with this out of our control, let's just focus on how our spreads are sitting heading into the final two trading days of this week.

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

PCLN CLOSED AT $208.53 Today (38.53 points away from our put spread)

Profit potential of $40.00 per contract

Contingent Stop Order set at $172.50

After a tumultuous finish to last week, PCLN has turned around that momentum pretty quickly. The stock has pushed higher in each of the past three sessions and advanced $4.11 in today's trading alone. The stock was helped by a mention in the Wall Street Journal online addition, which helped give the stock plenty of relative strength on a day that wasn't too eventful for the rest of the Market. Its closing price of $208.53 leaves our put spread in great shape as the stock is now sitting just below its 20-day moving average (light blue line) on the chart. Let's see if it can make it back above this barrier and then test its 50-day moving average (red line).

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

RUT CLOSED AT $610.66 Today (50.66 points away from our put spread)

Profit potential of $40.00 per contract

Contingent Stop Order set at $565.00

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

RUT CLOSED AT $610.66 Today (80.66 points away from our put spread)

Profit potential of $40.00 per contract

Contingent Stop Order set at $535.00

The small cap index started the week on fire, but then cooled down once it hit its 50-day moving average (red line) on the chart. The index made it back up to this line in today's trading but then retraced. It finished the day down 3.39 points at 610.66. While we'd like to see it make it back above this barrier. Both of our put spreads are sitting in excellent shape for the time being.

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

OEX CLOSED AT $505.99 Today (25.99 points away from our put spread)

Profit potential of $45.00 per contract

Contingent Stop Order set at $482.50

OEX 425-415 BULL PUT SPREAD (10 Contracts entered on 01/28/10)

OEX CLOSED AT $505.99 Today (80.99 points away from our put spread)

Profit potential of $45.00 per contract

Contingent Stop Order set at $427.50

The OEX was our main concern heading into this week, but that concern has eased quickly, thanks to the index's big move to the upside. The S&P 100 took off like a rocket on Monday and then continued that move on Tuesday. This pushed our cushion back up in our two OEX put spreads and gave us some immediate relief. The index stalled in today's session with it giving back 2.38 points when it closed at 505.19. But even with this small pull-back, we like how we're sitting heading into the rest of the week. We have our breathing room built back up in these put spreads and like the newfound bullish momentum. Let's see if this push to the upside can continue for us.

As always, Trade Happy and Trade Smart