Pre-market analysis for November 21, 2008

[caption id="attachment_823" align="aligncenter" width="500" caption="e-mini S&P 500"][e-mini S&P 500][][/caption]

Option expiration Friday is finally here! After yesterday's horrific day, everyone is expecting a reversal today. Indeed, the market futures are up overnight. S&P futures broke 780 overnight and is holding at around 765. We are probably going to open with a gap up in the market and make an intraday rally from there. However, I wouldn't be chasing this rally just yet. As you can see from Figure 1, we are merely retracing the recent plunge back to the downtrend from earlier in the week. S&P 500 at 780 will be a resistance for today. 750 will be its support. At 765, notice that we have 15 more upside points versus 15 down. This is not a good risk/reward at all.

Based on the option pricing estimation method, the S&P is expected to move within 40 points today.

One indicator to watch for a rally with follow through is the US Dollar Index. As Bill opined (yes, I read his blog religiously), \$USD will fall if the sideline money are moving into equity. That will be the source of a good rally. From Figure 2 below, you can see that the US Dollar Index has dropped a bit. Yet, it is holding on at the 200 hour bar moving average and a minor support from the recent trend. I would like to see it breaks below 87.5 and stays there for at least an hour before proclaiming a hold-able rally.

[caption id="attachment_824" align="aligncenter" width="500" caption="US Dollar Index"][US Dollar Index][][/caption]

Another item of note is the rise of the precious metals. Gold has broken the month-long triangle to the upside. That's a good sign. Figure 4 shows that it has broken its hourly resistance too. We'll see if gold can hold that gain or would this be a fake breakout of the triangle.

I am leaning towards nibbling at the market today on the long side with small positions. If we see confirmation, then add slowly to the bullish positions.

[caption id="attachment_826" align="aligncenter" width="500" caption="Gold and Silver"][Gold and Silver][][/caption]

[caption id="attachment_825" align="aligncenter" width="500" caption="Gold"][Gold][][/caption]

[e-mini S&P 500]: http://traderpau.files.wordpress.com/2008/11/2008-11-21-es.png [US Dollar Index]: http://traderpau.files.wordpress.com/2008/11/2008-11-21-dx.png [Gold and Silver]: http://traderpau.files.wordpress.com/2008/11/2008-11-21-gold-silver.png [Gold]: http://traderpau.files.wordpress.com/2008/11/2008-11-21-zg.png