Market Analysis for S&P Iron Condor

There was no post on Friday because I had an appointment that had me leaving the house early. I missed Friday's sell-off since I was without computer access until after market close. After assessing the accounts, I have one position that I will close on Monday but nothing major.

Sunday is usually the day I take some time to assess the week's market activity. My family and I usually have things planned on Saturday and we all need some time to decompress after a busy week. Sunday tends to be a bit quiet for us and I can take extra time to read and consider events.

The S&P 500, the overall market in fact, has been in a sustained bull market rally since July of 2006. The larger bull market trend dates back to March of 2003. Rallies and bull markets can last for significant periods of time, but nothing lasts forever. When you have a sustained rally, you need to start questioning whether it is due for a correction.

Friday's sell-off begs that very question. Is the S&P 500 poised for a correction? Well, of course no one knows the answer to that question with any certainty. Pundits on CNBC, cranks on Internet discussion boards, and many of the gurus will no doubt have their opinions. Nonetheless, not one of them knows with any degree of reliability as to whether this latest rally is ready to roll over.

Here is what I know, however. I know that we've been in a nice strong upward trend since breaking out last July. I know that eventually the market will correct at some point, changing its trend. That change in trend may be a sideways consolidation, but more likely it will involve a pull-back in price. I also know that when the market corrects it is then that my credit spread strategy is most likely to result in a loss or require a costly position adjustment.

Here are my current market opinions. These are opinions, not factual recitations. My opinion is that if the market corrects, I expect to see a pull-back to a price level in the range of 1,400 to 1,365. That's not to say that we'll see those levels in an immediate sell-off, and I would expect to see the market pause along the way at various levels of support. On the other hand, if the market continues in its trend I do not expect to see an acceleration taking the SPX outside of its current trend channel, absent a short-term climax run.

Those opinions are the basis upon which I will construct my next round of credit spreads. My goal will be to sell spreads at price levels that I believe have a low probability of being reached by the SPX between now and March expiration, while still producing an adequate credit to justify my risk.

I will have to wait until the market is open to truly assess option premiums, but based upon my preliminary analysis today I will be looking to sell a bull put spread and a bear call spread for a combined credit of $1.20 to $1.70. If I can accomplish that at appropriate strikes, we should have a good chance of adding to our year-to-date gains.

Good trading!

Christopher Smith
TheOptionClub.com