The Dow reached a new high after the last pullback. It gained more than 150 points in intraday trading before retreating to just 66 points at closing. In other words, the bulls were courageous in the opening but cowardly in the end. There may not be follow-through of this bullishness for the next trading day. The market is still uncertain at this time. The Dow remains in a tight trading range. But, there may not be much time left for the Dow. It has to go somewhere.

As good traders, we should just stay sideline and watch for development and bet on the winner upon breakout. I suspect that the breakout can be earth-shattering strong. This is because the sophisticated, big market players are also waiting for the breakout to decide where to put their money in. Everyone is holding on for the moment.

The Dow chart shows a very narrow trading range (the grey lines). I have also checked the Bollinger Bands which show a consolidation pattern (narrowing of bands). This led me to believe that the breakout of the range can be very strong. Certainly, this can be fantastic news to speculators. As options trader, I am ready to deploy a strategy called straddle when breakout occurs.

Since the Dow had stalled, I look to the Nasdaq for direction. Unfortunately this time, the Nasdaq is not especially telling at this time, too. It is bullish but a retracement seemed imminent. We better stay until a retracement occurs to avoid buying into an overbought market.

STOCKS TO WATCH:

GM – long or short, still developing
LEH – long

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