C.J. Mendes Trading Options For Income 8770 Sunset Drive 201 Miami Florida 33143 305-631-2239 www.tradingoptionsforincome.

com

Wednesday, April 25, 2012

The correction, notwithstanding the Apple induced rally today, should continue for a bit longer and as I mentioned before, is a normal part of a sustainable advance. I have mentioned that anywhere from 1340 to 1300 SPX would more than likely serve as a natural support level for the broad market with 1392 serving as initial resistance and 1425, (the recent highs) as a major level of resistance through the next couple of months. The argument for a continued move lower is made by several strong indications from some very often accurate gauges. One of these is the action in the high beta Semiconductor index (SOX) which has broken below the March lows indicating less appetite for the risk on trade. Sector rotation into the defensive sectors also points to increased risk aversion as does the real world indicator, the Dow Jones transports, which have also failed to make new highs in the rally. Several momentum and volume studies also suggest that appetite for risk has pared back substantially. The recent short term oversold stochastic readings have failed to elicit a strong response and the intermediate term stochastic studies are off overbought territory increasing the probability of a somewhat deeper pullback in the S&P 500. Another strong indicator for weakening momentum is the NYSE advance and decline line (stocks only). The A/D line has failed to break to the upside and has continued to diverge from the price action. The take away here is that for a sustainable breakout, we would expect to see it on a broader basis with more stocks participating in the advance and not the other way around. The financial sector is also providing another bearish catalyst. The banks have traded very poorly of late and because of their weighing in the broader indices, we will need for the sector to make further incursions to the upside to support any major advance. The bullish thesis is made primarily on the back of several familiar themes. Liquidity (Fed easy money, QE3 etc.), earnings and the improving domestic economy (inclusive of the jobs picture). These themes are not complimentary of one another and therein lies a problem. If the easy Fed/liquidity/QE3 is to continue, we would expect that either the economy takes a turn south (pick up in unemployment?) or that corporate profits sour. If we go along with the improving economy and stronger than expected corporate earnings then we can also expect less input from the Fed . Either way, the dynamic that has made this rally possible is going to begin to be put to the test. The elixir of easy money is, as we have seen, very powerful and we cannot discount or underestimate the resolve of the Fed when they say they will stand and support the economy with ample liquidity if needed. The issue is, if the economy does not call for more easing measures (based on the parameters set forth by the Fed), can the stock market, based on its own fundamental merits, make substantial further advances? I am not sold just yet. While corporate profits have been OK, they have been just OK, not greatThe economy seems to be improving but not at the pace wanted or anticipated by the Fed. It is neither too weak nor too strong keeping the Fed on the sidelines. I am not sure that will change unless the economy shows a much steeper decline than we have seen recently. The other factor to consider is the risk presented by the global economy. Europe related credit issues keep popping up with sovereign bond yields spiking, emerging markets clearly slowing down with China and Brazil leading the way and the political mess (from both our own elections and elections in Europe) which the second half of this year promises to bring forth, will all add to the unwillingness of participants to pay historical multiples for stocks. So I am more and more inclined to say that we will settle into a somewhat narrower trading range in the S&P 500 for the remainder of this year or at least until after the elections. The range could be between 1320/1420 +- on the broad market with bulls and bears fading rallies and selloffs as we trade near these support and resistance points. Seasonality favors the bears, but a drop in the probability of a major negative catalyst (Europe) could catch the market by surprise leaning too bearish based on the trading action of summer 2011 and we could get a strong rally over the summer months particularly if we selloff to the bottom of the range during the early to mid-May period. I still like Gold at these major long term support levels primarily because I believe the Fed will have to be involved for a while longer and because I believe the ECB will have to eventually provide more support to stave off a meltdown in Europe. I also favor the Mega Cap Dow names over the Small Caps into the summer as I do the defensive sectors over the higher beta materials and commodity sectors. Technology is extended but Apple should really exert its might in keeping the Nasdaq 100 strong and contained to only minor corrective oscillations (it is responsible for 60% of the NDX advance today!)

CJ Mendes

No statement in this web site is to be construed as a recommendation by Madeira Investments LLC. , Madeira Trading Newsletter and/or Trading Options For Income to purchase or sell a security, or to provide investment advice. Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options . Copies of this document may be obtained from your broker, from any exchange on which options are traded or by contacting The Options Clearing Corporation, One North Wacker Dr., Suite 500 Chicago, IL 60606 (1-800-678-4667).

Page 1