Big picture look at the SPX and VIX

I’ll follow up on my last post on the Dollar strength soon.  But for now, a big picture look at “The Market” is long overdue.

We all know that the turnaround off the March low was fast and furious.  Then we had some very constructive consolidation during the summer until July kicked off a rally of further conviction which gradually lost momentum until finally topping out in January.  All things considered, it has been a fairly orderly run.  Likewise, despite the general public feeling of nausea related to all things financial and market-related, the recent pullback appears to be just that and can be seen as orderly and even healthy to the big picture.  After all, healthy markets need to go in both directions in the shorter term to reach their destinations in the longer term.

The S&P 500 is currently in a somewhat precarious spot of being between the 200 and 50 daily moving averages.  The positive is that the 200 MA is now steadily rising after turning upward following the July rally.  Though the 50 MA is beginning to roll over, the rising 200 MA holds more significance as the longer term representative.  This is a likely area of support in the near term.  Notice that the 200 MA is just entering the 1020s, an area that served as resistance in late August and then twice as support in early October and early November.  Also noteworthy is that the recent low three weeks ago, almost to a T, hit the key 38.2% fibonacci retracement of the recent long term rally from the swing low in June to the January high.  Fans of technical patterns might also like to see the recent action and resulting descending channel as simply a bull flag on the long term, a likely setup for bullish continuation.  Bullish divergences between Price(lower lows) and the MACD historgram and Stochastics (higher lows) would support that perspective.

The take-away from this view for me is that, a bounce of some kind can be expected soon, but the market is pulling back at the moment and will continue doing so until it isn’t.  The objective ways of determining when it stops falling are to see a cessation of lower lows and lower highs in price or a flattening or turning upward of a short term moving average (I like the 8 day exponential moving average).  Obviously, I’m looking for that to happen somewhere at or before the 200 MA.  The potential bounce or resumption of the bullish movement would be signaled by the emergence of a higher high and backed up by higher lows, a break of the downward trending resistance line, and of course, the turning up of your favorite short term moving average.  The main point of all this is to keep it objective and not emotional or an attempt at predicting the future.

Now to look at things on a bigger, longer scale.  I’ll forgo any attempt at macro economic speak other than to say that the unemployment situation seems horrible and unlikely to provide any substantial catalyst for optimism any time soon.  Friday’s report of a decrease in the unemployment rate to 9.7% from 10% coupled with another 20,000 jobs lost defies my application of logic to the subject.  What’s worse, this article shows evidence of a much higher real unemployment number at 18%.  (Mommy, make it stop!)

Back to the chart.  The SPX long term weekly chart shows a failure to successfully overcome the 50% retracement from the top in 2007.  Notice how long it took for that market top to unfold.  A good 8 months or so before it finally broke down.  We have hardly put in any type of meaningful topping structure in the last few months.  One could argue, of course, that we’re now finally getting back in sync with the long term bear market, as is supported by the resistance line across the long term swing highs which we recently peaked above before falling back.  Indeed, after the relentless upward march since March (sorry, couldn’t resist), it seems this market may just be a bit over-baked.  However, as one last argument for attempted strength in the short term, notice that the MACD lines are still on the bullish side of the zero line and the Histogram shows only a small degree of downward momentum.  Furthermore, the faster Stochastic line is oversold and looks to want to turn upward out of that zone(Notice the last time that was the case).  Finally, it is noteworthy that on the weekly view, despite the last few weeks of ugliness, we still see higher highs and higher lows.  A weekly close at 1030 or below will change that with an equal or lower low.

Speaking of Fibonacci levels, the 61.8% level is said to be the “Golden Ratio.”  A move up to that level, a full 160 points higher, would still fit within the context of a big bear market and not upset the momentum, ratio-wise.

Meanwhile, for all you true market heads, the VIX has given us a few warning cannon shots across the bow in recent weeks, and for the first time in quite a while, put in a higher low on the daily chart (higher high too, but only using intra-day action. No daily close higher.).    But we are still just above the middle of the range set from the big spike in volatility during the late October swoon.  One would think, comparing the sell-off since mid January with that of late October, that we should be higher on the VIX if the market was really that perilous.  We’re talking about a top to bottom move recently of just over 9% versus about 6.5% in October.  A sustained move above 30 is when it’s time to really start sweating about the long term nature of things.

I had thought for a while back in early ’07 when the VIX was dancing with the 10 level that perhaps the indicator was becoming obsolete.  The influence of advancements in trading technology, high frequency trading, ever more types and uses of derivatives, whatever, might be turning the VIX into a relic from another market of days gone by.  (LOL – way back when, into the ’90s!)  But with the market meltdown of Fall ’08 sending the VIX to levels that many never thought conceivable, I am inclined to think that it’s still as relevant as ever.  In the end, the most important and useful aspect of the VIX is not so much the actual number it currently shows, but where it is relative to its recent range.

Judging from this chart of the VIX as far back as I can get data for, we are now just about in the middle of what seems like a “normal” range.  To me, this signifies a somewhat healthy level of fear and indecision among market participants, where the bulls and bears are equally confused and therefore more likely to have an orderly struggle.  I hope that make sense.  What I mean to say is that up or down is fine, but all-out panic-selling or buying out of “irrational exuberance” is no good for a functional and healthy, trustworthy market, regardless of its direction.

In conclusion, I don’t like the smell of things at all.  Obama’s promise of “Change” has seemingly brought little more than an overly optimistic if not ignorant degree of “Hope.”  (Ever heard of “Hope-ium?”)  He sure talks good (cue scary Deliverance music).  It’s the doing part…What IS he doing?  The government seems as dysfunctional as ever, the unemployment picture looks terrible, we’ve been hearing about commercial real estate being the second shoe still yet to drop for months, and the nation’s deficit seems to be building like a tower of Jenga that will inevitably bring the game to a crashing conclusion.  That said, the market is a forward looking mechanism and seems to defy reason more often than not.  There is, perhaps, a healthy level of fear among the crowd.  Judging from this surface-level look at the US markets as represented by the SPX, barring a clear disaster or some catastrophic catalyst in the global markets, I would think stocks may float a touch lower in the near term, but nothing drastic.  The picture from the daily chart shows the potential for a move higher, but my guess is that we’ll find selling pressure in the 1110 area and that will be the true test.  A failure there and we’ll talk.

My best prediction is that we’ll be in a range between 1030 and 1150 for months to come.  Stock-pickers, start your engines!

Lagniappe:  Bullish Sentiment Drops to Lowest Levels since March

Continuation of dollar strength? Looking short the EUR/USD

I’ll try to keep it to charts. Click them to see them larger.

Weekly chart.

Daily chart.  Notice the bear flag here right at the 200 MA.  Let’s call it coincidence.

And a closer look at the bear flag, the inspiration for this post.

Two Hour Chart.

Hourly chart

15 minute chart – Sloppy head and shoulders pattern

And the short entry I just made.

Short at 1.439      Buy stop at 1.4403

It’d be nice if I don’t get whipsawed for a change. 

(As of the last minutes before posting this, it’s looking good so far on the follow through.  But I’ll feel a lot better once it can get through the congestion from Wednesday in the 1.436 area.  I will expect a retest of the bottom of the little sloppy Head and Shoulders Pattern.) Target for the time being is 1.43.

Dollar weakness at an end?

It’s been a long and relentless beat-down for the dollar. But it looks like it may finally have found a footing and some relief from the pressure. Today we have the first higher high in quite some time, as we moved above the high from late October. This doesn’t necessarily mean it’s time to pile into dollar plays, particularly with the speed of the most recent move off the bottom. But it does seem a strong and significant sign to be aware of in the days and weeks going forward. I’ll expect some consolidation to go on in this range between 75 and 77, but who knows…..

(Click on chart to see it bigger)

Gold, though still a very real long term good idea, seems to be more and more of a “play” these days. SO much talk about gold in recent months and this last downdraft since early December doesn’t look like a particularly healthy one. It seems there are great expectations for inflation already built into this one. Today the Producer Price Index came out much higher than expected. The consensus was for an increase of 1%, but the actual number was 1.8%. This is almost double! And gold was actually down at the open, though more or less unchanged at the moment. Even a complete novice economist would think that higher prices tends to mean inflation which tends to mean gold goes up. Not this time, apparently.

I’m not a seller of gold at this point, by any stretch. But I’m also reluctant to buy it at the moment. But as for the connection to the dollar, I’d say this chart makes the potential dollar strength more believable. And the dollar chart makes the gold chart look all the more worth questioning.

One can also take a hint from Silver, the less popular sibling of Gold.  It has already fallen below its 50 MA and the recent highs from October.  Considerably weaker than the gold chart.

Copper, looks surprisingly stable perched at this loft, particularly considering how far it’s come in the last year. It is comfortably sitting just above the 50 MA. A break of this could mean a quite substantial drop back toward the 200, but for the time being, it looks good.

My TGB play has been doing even better than expected. It blew right through that $3.50 level, so I’m trying to give it a loose leash to run further. I’ve got a standing limit order to sell half at $5.20 in case of any quick intraday spikes. Stop on the rest just below $3.50

The real commodity to watch for its correlation to the dollar, in my opinion, will be Crude oil. After moving decisively above the 50 MA and to new year highs in Oct., it tried to hold the level but just drifted until it broke down into its old range. This 35 level on USO seems to be likely support and also coincides with the 200 MA which is seemingly providing an upward push. This is actually a pretty interesting long term entry.

Note that agricultural commodity prices look pretty subdued. They’ve been in a range here for quite a while. When it breaks, I’m thinking the upward movement could be fast and strong. However, if the dollar does find further strength, it’s likely this won’t happen concurrently.

Tomorrow the FED puts out the announcement regarding any rate changes or language coloring at 2:15 PM ET. Any hint of raising the rates in the near future and I suspect the Dollar will surge and the market will get crushed. I’m long SDS.

Getting on board with Dr. Copper

They say Copper has a PHD in Economics or something like that.  I guess that explains why it busted above its recent range before the stronger than expected GDP report today.  It did dip quickly back below that line yesterday, but today it reclaimed it and left all those sellers yesterday caught with their pants down.

Of course, you could play PCU or FCX, but I’m going with TGB.
It shows the same dip down below the recent breakout level and a nice bullish engulfing candle to reclaim it while also bouncing off the 50 MA.

With a stop just below yesterday’s low, a move to $3.50 makes a nice 2:1 reward/risk setup.

Correction? or More?

So it looks like I had pretty good timing in my last post.  The market has fallen off that 2009 high and the VIX has jumped in just a few short days to the top of that recent range.

It’s noteworthy that we closed below the 50 day MA today.  There is a diagonal trend support line from the lows of the last couple months, which may just hold.  However, with the long, rising wedge formation having been broken to the downside, it would seem only natural to see a move down now, perhaps to the 95 area, the most obvious area of potentially strong support.  Also, look how far above the 200 MA the 50 MA is currently.  Even if the 200 MA is rising, we’re pretty high above it.

After a 50% gain from the March lows, to see a 10-15% correction at this point would be pretty reasonable, regardless of whether we’re in a new bull market or still the big bear market.  Only time will tell, but this does seem a pretty obvious first shot across the bow.

SPX compared to the other big economies. VIX awful quiet.

Here’s a look at the SPX for about two and a half years with some of the major economies plotted for comparison.

(click on the chart to see it larger.)

The rising wedge is a bearish structure where the market is uptrending with higher lows and higher highs, though the new highs are decreasing in their strength/distance/momentum.

And now a look at the last six months.

Despite our very strong rally of about 50% off the March lows, we still seem to be showing relative weakness to the rest of the global stock markets.

Here’s a look at the entire structure of the bear market since 2007 and the major ascending wedge since the March lows. In addition to the convergence of the wedge and what looks like waning momentum to the upside with each new swing, we are also knocking our heads right under the 50% retracement level. $107.37 represents the former high and new would-be support. When this level breaks, it will be a major crack in the foundation for further near term gains. The index is above its upward trending 50 MA. On the down side, there is long term downward resistance from across the highs of ’07-’08 approaching overhead.

Looking at the very long term VIX monthly chart, we do see uptrend line was broken and it would seem likely to see the VIX settle back into a range of roughly 16 on the low side to 40 on the high side.

On closer look, the VIX did just break below a three month range, arguing for continued complacency in the markets, but it does seem awful overdone to the down side here and any uncomfortable developments or negative surprises would bring the VIX up a quick 5-8 percentage points and still be in that recently familiar range in which the market did quite well.

GOLD! Any day now…

Click on the chart to see it larger.

Much delayed May RUT Iron Condor

Hey there.

So sorry for slacking on my promised MAY RUT Iron Condor as mentioned in the previous post.  I’ve been sort of swamped and even went without my computer for a whole week while it was in the shop.  Talk about a HORRIBLE feeling.  Me no likey!

One annoying thing about my erratic life recently is that I didn’t manage to get on that RUT trade I so nicely planned out in the last post.  So far, it’s still looking good.  Pressure is on the call side, of course, but currently the Delta on the June 590 call is about .07, so as for the moment it still looks good.  The index will have to move about 40 points or so higher to get toward the Delta of .25 that warrants defensive action.  Meanwhile, the clock continues to tick, which helps by the day.

So here’s the quick and dirty on the MAY trade I made.  On April 9, I sold the May 550/560 call spread for $.82.

At the time, it had made a strong rally up to a likely resistance area and the MACD and Stochastics were flat-ish after the strong bullishness.  The options chain showed the May 550 with a delta of .10 or so, which is the top end of where you want to sell for this type of WAY out-of-the-money Iron Condor strategy.  On the chart, I saw three potential resistance lines in addition to the downtrending 200 MA over head, so it seemed a pretty reasonable choice.

For the put side, given the fast and steep rally from the March bottom, I was not comfortable putting on that side until waiting for a downdraft of some sort, particularly with five weeks left before expiration.  Even without a major downdraft, I figured I could get a put side on at a better price in the coming week with a new higher low. Alas, that didn’t quite present itself. As the index continued to climb, it became too late to put a bottom side on as the time premium had decayed further as well as the downside risk seeming more and more.  So I never got the put side on, unfortunately.

As for closing out the trade, the relentless climb seemed unstoppable. So with the time decay having done its thing, I decided to close it out early before some complete crazy surge took place. The delta was still okay, as I recall, but I was content to take it off and rid myself off the stress. I bought back half on 5/11 and the other half on 5/12 for a combined average price of $.13 per trade. A profit of $.69 is hardly an exciting gain, but its much preferred to seeing the potentially small profit turn into an even smaller one or even a loss.

I never got on the bottom side of the Iron Condor and took off the top side early when, of course, the next day the index was down would have made it easy to coast out the rest of the trade.  I could kick myself, but hindsight is always easy.
Let me emphasize, however, as I mentioned in the previous post, that I don’t rely on iron condors or spread selling for this account’s gains. This kind of half-application of the strategy would not make for a good year, I’m sure. At least, not a consistent one. But as I said, for some extra profits when it looks more than highly probable, I’m okay with a little bite here or there every now and again.
At the moment, I’m not all that eager to sell volatility. The VIX has come down quite an amazing amount. I figure a pop is inevitable sometime soon, even if it isn’t prolonged. As a result, I would think put Calendar spreads a more appealing strategy, as they benefit from a rise in volatility as well as the time decay. I think a Double diagonal could be a decent substitution for an Iron Condor for the same basic reason, but I don’t know if the experts would agree.

RUT Iron Condor trade for June

I’m not a very regular Iron Condor trader. There was a time when I spent a lot of time doing credit spreads and condors. There is overwhelming logic in using these time selling strategies as you are more likely to make money without having to be as spot on with your trades as with simple long or short directional trading. Simply put, you can make money when the market goes two directions and to some extent three of the three possible directions the market can go. Ultimately, though, I found that despite the logic behind trading from that angle, it doesn’t suit me very well. The very argument for using them, that the probabilities are in your favor and time decay makes things better as the days pass, was also what seemed to consistently confuse my better judgment. Rather than strictly heeding my observations about significant breaks in technical levels and such, I would tend to give a position the benefit of the doubt and watch it slowly but surely get worse and worse. Anyone who trades spreads, knows that there is a point beyond which the Greeks can suddenly start putting the squeeze on your very fast. In short, for me personally, the strategy seemed to make me a bit lazy and over-confident. As most of you know, the trick with credit spreads is that while your win/loss ration should be higher, the profit/loss ratio will not be nearly as high as the potential with directional trading. So taking just that one or few big losses can drastically affect any profits you may already have.
Of course, I learned a lot from the experience and the time at it, and I don’t entirely avoid selling strategies. I am just a lot more selective about using them and try to keep a mind of the much bigger picture. At the moment, one of the things that strikes me is that while volatility has come down significantly from the panic highs of the last 9 months, it is still quite high compared to recent history. As a result, option premiums are still relatively high compared to the days when I was having such frustration with spread trading. Because of the high volatility, we can put on trades that are further away from the money and still find decent premiums to sell.
Take a look at the VIX.  It seems to me the most likely next move on the VIX is a pop higher, but until that happens, it is where it is. The 40 line seems a significant resistance level, we are below all the major MAs and the indicators don’t give much reason to expect a reversal.

Here’s a long term look. Barring some reason for another major panic, I don’t see why this should go back toward 50.

SO, after that long winded into, I’m looking to do a nice, simple far out of the money iron condor for June. One of the reasons I don’t like credit spreads is that you just have to wait and let the time decay do its thing. I’m a little too jumpy while watching the day to day fluctuations of stocks for spread trading stocks. But doing smaller positions on way OTM spreads on the indexes is a nice way to pick up some “easy” money. (Famous last words!)
I tend to stick to options on the Russell 2000, RUT, because it trades electronically and you are not subject to the guess work and luck involved with getting fills in the SPX pit with the open out cry that goes on there. Of course, we can always trade the SPY, QQQQ, IWM, etc., but then you have to trade many more contracts to equal the same money at work with the actual index options and that means more commissions. I know there are reasons that the TOS guys prefer those products anyway….better fills, tighter spreads, whatever. But this is just me.
I’m no Iron Condor expert, but one quick an dirty rule of thumb I’ve learned for the far out of the money IC approach is to sell the short strikes with a delta of around .10 or lower. When and if the delta on those strikes gets to .25 defensive action is needed. Either close out, roll further away, or add something like a calendar spread to balance out your deltas to a more comfortable level.

Here’s what I’ve come up with for RUT June contracts.

As a $10 wide spread, the margin requirement is $1000 for the trade. For every lot, the profit potential is $147 and the max loss potential is $853, not including commissions. Of course, this is using the data after the close on Friday, so it will surely change a bit on Monday morning.

Here’s the Risk Profile using TOS’s snazzy analyze page.
The Green line shows the p/l potential for the trade at expiration in June. The white line shows the theoretical value of the trade at any given price at the current date. As time goes one, it inches toward the green line. I have set price slices at the current price in the center, plus and minus 15% from the current price, and the break-even prices for the position. By adding the probability numbers in red toward the top, we can see that the probability is a bit over 60% that the RUT will be within the range of plus or minus 15% from the current price at June expiration. There is only a 19% chance that the RUT will be on either side of our break even points at expiration. As long as it stays between those two levels, in that big window of just over 210 points, we make money.

High Probability of success, which comes with a lower profit/loss potential. Makes sense.

Now for a look at the chart. We’re right now between the down-trending 200 MA and the 50 day which is turning upward. The 20 MA is below us and firmly headed upward. Considering the action in this area back in the fall, I don’t expect us to surge through here very easily, particularly after the strong run we’re had. Some consolidation or a reasonable pullback would be healthy. The MACD and Stochastic show potential for a bit of a pullback, but also no overwhelming signal for such. I would expect a pullback to no further than the 50 MA, currently at around 425.

Pretty cool how the strikes found with delta around .10 put our spread just outside of the high and low ends of the range from the panic in the fall.
Looks like a pretty good trade. And if you’re really feeling randy, one might try to put on the call spread now and give the index a few days or a week or so to come down some to put on the low side a little further away just for extra safety. This is probably what I will do in actuality.
Next time, I’ll show what I did for May on the RUT using this same basic approach.
Ciao for now.

GOLD long term entry? Day trade example.

Quick look at Gold, long term.  I made a video but got rushed short by a phone call.   Nevertheless, I think you get the gist.  Here’s a link to the video.  http://screencast.com/t/Fcoam1Fo

Meanwhile, for those of you interested in the day trading side of things, I trade the /ES with some frequency.  It’s pretty tough, but I think it’s more about patience and discipline than anything else.  One thing I find very interesting and useful about it is that it shows you the very principles that you should apply to normal daily charts for your investing, but in very fast time.  So there’s lots of information to learn from in a much shorter time.  I can definitely say that it has brought my weaknesses and bad habits into focus and very quickly.

In any case, I don’t use anything fancy.  Same stuff as normal for daily charts.  The normal assortment of MAs, sometimes look at the MACD and Stochastics, but more than anything, Price action in terms of trend and support and resistance.  Patterns are just as useful here as on daily charts too, I find.

Here’s a nice setup from today’s midday action.  After trading down to slightly below yesterday’s lows, a sideways range was established and then it was broken to the upside.  Since it wasn’t on huge volume and in the snoozey noontime hour, I wasn’t all that convinced.  So I waited for a retest and took it.  VERY NICE!  I’m going to try to let it ride as long as it goes, but the absolute sell will be on two closes of the price below the 8 EMA on the 2 minute chart.

(Sorry, the sizing is a bit odd on this capture.  Click it to see it larger.)

Update:  Sold with a Stop sell order dragged up because of the double close below the 8 EMA on the 2 minute chart.