Stock Index Bulls Run for Cover as Banking Plan is Announced
Fundamentals
Last week was tough for those long U.S. stock index futures. First, we get news from China that the government is taking steps, such as raising interest rates and putting the brakes on its domestic lending in order to prevent its economy from overheating and causing what some fear could be a mammoth speculative bubble; then last Thursday, President Obama announced a plan to force U.S. banking institutions to end proprietary trading and restrict the ownership of hedge funds by these institutions. Although the proposal did not mention a time frame for banks to divest of their speculative businesses and exact details on how the proposal would be implemented were sparse, traders feared that any uncertainly would not encourage banks to loosen-up the purse strings for lending, which would be a key factor in helping the fledgling economic recovery along. These policy changes could be viewed as the catalyst for a correction in the U.S. equity markets, which have surged upward since the major lows were made back in March of last year. Although it is still too early to know if a good earnings season can calm jittery investors' nerves and the recent sell-off will be viewed as just another buying opportunity, it certainly looks like traders and investors will need some really good economic news to once again jump back on the bullish equities bandwagon.
Trading Ideas
Given the nearly 9-month-long bullish trend in equities without a major correction, the equities markets look to be overdue for some profit-taking selling. Buying bear put spreads in the E-mini S&P 500 options would be one way traders could possibly position themselves to take advantage of a stock market correction. An example of such a trade would be buying the February E-mini S&P 1100 puts and selling the February 1000 puts. With the March E-mini's trading at 1103.00 as of this writing, the spread could be purchased for about 15.00 points, or $750 per spread, not including commissions. The premium paid would be the maximum risk on the trade, with a potential profit of $5,000 minus the premium paid if the March E-mini S&P futures are trading below 1000 at the option expiration in February.
Technicals
Looking at the daily continuation chart for the E-mini S&P futures, we notice the uptrend line drawn from the March 2009 lows has been broken, sparking a fresh round of selling as long liquidation sell-stops were triggered and short-term momentum turns bearish. Prices are now below the 20-day moving average and are looking to test the longer term 100-day moving average, currently near the 1080.00 area. The 200-day moving average, which is widely used by longer-term traders as the benchmark for whether a market is bullish or bearish, does not come into play until near the 1000.00 level, which is also a major psychological support point. The 14-day RSI has turned lower, with a current reading of 41.40, having fallen from the high sixties just 1 week ago. Looking longer-term, we notice the market running into stiff resistance just above the 50% Fibonacci retracement level, from the 2007 highs to the March 2009 lows. 1080.00 is seen as the next support point, with resistance found at last week's highs of 1147.25.
Mike Zarembski, Senior Commodity Analyst
