I believe we may have finally found the tipping point for oil and the economy. I must admit I expected both consumer and business demand for petroleum products to decrease long before the $135 barrel of oil. But the Consumers just shrugged it off and pushed on until this week. It seems the upward pressure at the pump finally caught up with the market and it is apparent this market is too fragile to withstand a rapidly increasing surcharge on most transactions. The market reacted by shedding a good chunk of its two month recovery this week as is displayed in the chart of the S&P below. Move over financials, oil is the new villain.

I think the most important aspect of the market to be cognizant of is what the overall market is watching. As I just described above and we discovered last week, the market is watching oil. Sure we all have been feeling the pinch but it seems we only recently let it change our behavior. Why is this important? Because it will dictate the success of your strategies so you need to be aware of the price of oil and understand at what points it dictates market gyrations. On Tuesday oil plunged $3 a barrel and the market had a moderate rally. The more relationships between asset classes you understand the better the chance of profitability. Market goes down, VIX goes up.........Learn to understand these and become aware of what is front and center on the market radar and you are much less likely to be shocked by moves. Remember this though, the market is dynamic and its obsessions can change quickly. I cannot count how many things have been the focal point for the past twenty years I have actively traded: Trade Deficits, Employment Data, Currency, Iraq War (twice), Elections, Terrorism....Just keep your sights on the most important market catalyst and be ready when it dictates changes in your trades.

How can we apply this to our trading? As I have stated in previous articles here I still believe we are stuck in a range-bound market at least through the summer. Barring a significant collapse in the price of oil I think we will not see anything above 1440 in the S&P and a decent level of support around 1360. An effective risk-defined method of profiting from this movement is selling vertical call spreads as we approach the higher end of the scale, and selling vertical put spreads as we retrace toward support. Warning, patience is required for this strategy and you cannot beat yourself up for not selling the top or bottom of the range.

I typically have the best results when I sell them over time and add positions as we continue rallying and repeat the process as we sell off. Good luck and keep your eye on the Pump!

thinkorswim, Inc. and its registered employee, Steve Quirk, do not solicit or recommend any form of trading in the individual stocks (or their derivatives) mentioned above. Please do careful, independent research before investing any money as well as weigh the possible consequences on your particular financial situation before doing so. The risk of loss may be substantial.