If trading stock index futures were compared to riding in a boat, participants would be reporting choppy seas ahead, as the market struggles to find calming economic data to restore smooth sailing higher. Since the last half of May, the S&P 500 has treaded water, with the index trading within about a 100-point range, finding support near the 1000 level and running into stormy seas above the 1100 area. Few could blame corporate earnings for the S&P's struggles, as the majority of companies reporting earnings beat analysts' expectations. However, the improvement in the corporate bottom line has yet to trickle down to the employment sector, which has kept the unemployment rate stubbornly high despite signs of an economic recovery. The so-called "jobless recovery" has consumers feeling a bit timid about spending or borrowing, which has sparked a savings boom, with the paying-down of debt taking precedence over new spending. If one were to look at the possible bright side to the new-found frugality from both corporate and individual consumers, it is the potentially huge amount of cash being built-up that is currently being held in low yielding investments such as money markets. Not even government bonds look that attractive, with 10-year note yields hovering below 3%. This scenario could lead to a potentially large influx into the equities markets once both corporate and individuals feel more secure about their financial situations and begin looking for a place to invest that will hopefully provide much higher returns than they are now receiving in their "safe haven" investments. What is needed now to restore investors' confidence is some sense of clarity from government officials on issues such as taxes, health care and financial regulation, so both businesses and consumers can make sound investment plans for the future, without the fear that new regulations will emerge that could alter current investment decisions and prevent the economic recovery from leaving the dock until calming seas are in the forecast.
With the September E-mini S&P 500 futures currently hovering right around the 200-day moving average and the psychologically important 1100.00 area, it appears that either bulls or bears should eventually break the recent stalemate, trigging a potentially large move in prices once the losing side capitulates. Some traders looking for a potentially big move in the S&P futures but who are not sure of the direction of the move may wish to explore the purchase of a strangle in the E-mini S&P futures options. One example of this trade would be buying the August E-mini S&P 1120 calls and at the same time buying the August 1080 puts. With the September E-mini's trading around the 1098 area as of this writing, this strangle could be purchased for about 25.00 points, or $1250 per spread, not including commissions. The premium paid would be the maximum potential risk on the trade, with the trade profitable at option expiration in August should the September futures be trading above 1145.00 or below 1055.00.
Looking at the daily chart for the September E-mini S&P 500 futures, we notice bulls holding a bit of an upper hand, as prices have moved over 100 points higher since recent lows were made back in early July. However, before one gets too optimistic, we should note that the market has struggled to hold above the 200-day moving average. In addition, the July highs of 1118.75 failed to come even close to the June highs of 1129.50, giving some technicians reason to see a potential double-top formation playing out. The 14-day RSI remains in neutral territory, with a current reading of 55.26. Support is now seen at the 20-day moving average, currently near the 1082.00 area. Resistance is seen at the July 27th highs of 1118.75.
Mike Zarembski, Senior Commodity Analyst