The Dow Jones Industrial Average went to a lower low today since the November low. It shows that the large caps are not doing as well as the small caps are right now. This could be the start of a turning point in the market. Also notice how the two trendlines are going at about the same slope downward. Also the recent Fibonacci numbers show we have retraced to 23% of the swing. Tomorrow will tell if we turn or continue down. The next support will be at 12,700.
The Nasdaq shows that we are in a consolidation phase. This downtrend needs to break 2,580 and then we may see it go on down to the November low. Not much support after that. We also see that OBV is down to where it was at the end of November so we are seeing that it is still looking like we have a weak market.
The Russell 2000 stochastics shows how oversold the Russell is right now. If we have another down day tomorrow, it may be a good time to sell a put vertical. I would probably look at selling a 680 put and buying a 670 put. There would have to be another 10% lose in the next 43 calendar days and the probability of closing below 680 would only be 68%. I will be watching the stochastics closely in the evenings for the next few days as well as some of my other indicators to see when to put on this vertical.
The next chart shows the support and resistance lines. There is a lot of support from the short term right around 740. The next support will be at 668. That is the green line at the bottom that is supported by the July 2006 low. Doing a look at the 68% probability of expiring on February 2008 Russell 2000 options, the point is right at the 670 mark. Based on that, it appears that the setup that I mentioned yesterday would be good. Sell a 670 Put and buy a 660 put. The vertical spread yields about $125 and if it goes a month and I buy it back for 20 would give about a $95 after paying commissions while tying up about $900. I will monitor the position carefully. If it drops too much and I lose $100, I will be out of the trade.
