note: click the graph for a bigger pictureDo you believe the recent rally will continue? Well, it is a tough question and everybody can only guess. The Fed cut the interest by 0.75% last week and quickly saved Bear & Sterns from deep trouble by merging the company with JP Morgan.
The collapse of venerable firm Bear Stearns has been dazzling. The company was supposed to be worth a bare minimum of $80 per share. It turns out to have been worth one-fortieth of that -- a catastrophe for its employees, whose fortunes lay largely in Bear's stock (a super-good lesson in diversification for everyone).
The $2/share bid price was very ridiculous and unreasonable, made many investors/shareholders irritated. A week before the company collapsed, the CEO ensured to shareholders that everything was in course, and many of them stayed and even add exposures to the company. This negative reaction can dampen down the market further, so Fed took critical steps by increasing the bid price higher to $10/share (the Fed bailed out Bern & Sterns at the amount of approximately $29 bio using tax payer money...). This action made the market rallied on Monday and Tuesday……
SPY passed the 30 dma and tested 50 dma. The downtrend line showed resistance point around SPY 135. If the market can passed this downtrend line resistance, it would be tested again on SPY 140. I was quite in doubt that market will surpass 140 level in the short time as subprime mortgage problem is still big. We still do not know which financial institution would be in trouble following Bear & Sterns. Currently, the Fed was making huge steps on saving the market, but only for short term approach. It was just like putting band aid on huge wound…..
If you look at the chart, there was trading ranges around a strong support line of SPY 125/126 and a resistance line of SPY 140. I am expecting choppy price action for the following weeks/months. Looking at this situation, what are the opportunities for Writing Options? Well……any rally to SPY 140, there is opportunity to Sell Credit Call Spread, and any decline to SPY 125, there is opportunity to Sell Credit Put Spread. However, be careful with strong false rally that usually happen for a short period of time due to good news that disseminated by analysts…..
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