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Mixed Signals
Author: Ravi Prakash (info)
Website: http://www.optionstradinglessons.com/
Posted: October 15th, 2007 at 10:58 am EST
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The latest PPI came in slightly high, but hold it - the core PPI was just fine. Recently that has been the same story for the CPI. Earnings for this quarter are now expected to be low. Yet the DOW and the S&P 500 are at brand new highs. The US Dollar is very weak, metals and commodities are at new highs. I suspect that the intrinsic value of US coins probably exceed the face value of those coins these days. Oil is over $83 a barrel. Housing seems to be in a solid decline. I was an economics student and I remember that this is a clear signal that inflation is a big concern. But the government provided statistics tell us that inflation is low and under control. Then the latest retail numbers show that the masses are still spending. All these mixed signals add up to continued volatility.
Regardless of what is happening economically the question for us traders is - how do you navigate and exploit current market conditions in order to make money? I know my goal is very clear. Make money trading options while having fun doing it. I suspect your trading goals are close to or similar to mine. As an options trader I am speculating. I have no illusions about what I do. Trading options is not investing for the long term. Market direction and current sentiment should dictate your trades. I also constantly remind myself that the Market does not care what I think should happen. Reading the market charts well is the best way to decipher what may happen tomorrow or in the next few weeks. So although there are a lot of mixed signals out there, pay attention to the common rule “the trend is your friend”. The overall trend right now is up. My point is - do not let all the news and bulletin board gossip cloud your better judgment. Stick to your plan of action.
What is worth watching closely is Gold and Oil. These commodities continue to gain strength and are also telling us a story. Gold is around $750 an ounce and Oil is around $83 a barrel. Both at high levels that could threaten the Stock Market and the economy if it they get too high. I suspect we will definitely see some kind of altercation between the USA and Iran before the current administration ends its term in office. I also hope I am terribly wrong. A conflict with Iran can only have a negative impact on the Stock Market and our economy. Things are already fragile in that area and we do not need anything that will not just rock the economic boat but topple it.
You may be tempted to punt during earnings season. I am of course talking about Google. They come out with earnings this week. If you feel you “have to” trade it, then consider a spread trade. An outright CALL or PUT could put a big dent in your trading cash flow. Dealing with a windfall profit is easy but coping with a large loss is not.
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