We have been having a good amount of success with our event-driven straddles this year – especially with the pre-earnings straddle buys. We have refined that technique through several modifications since we first began by buying the Qualcomm (QCOM) straddle back in late January. I feel that we have a very workable strategy now, but there is one “hole” in it, which we will address in this article.
Despite a couple of rough days this week, buy signals have emerged from our short-term oversold indicators, and so we have a more bullish outlook for the short term but not necessarily for the intermediate- term.
$SPX has retested the August lows and formed a "W" bottom, so that is support at 1870. A violation of that area would force a retest of the October lows at 1820. A move above 2000 would be bulllish.
The $SPX chart remains bearish. During the oversold rally that failed at the 2000 level, an upward trend line had developed on the $SPX chart, connecting the daily lows since the 1870 bottom. That trend line was broken decisively this week, as $SPX fell back below its 20-day moving average. For now, the $SPX chart is bearish as long as it remains below the broken trend line (see Figure 1).
There are several seasonal trades that we use in the fall of the year – primarily the “October seasonal,” the “Post-Thanksgiving Trade.” and the “Heating Oil – Unleaded Gas Seasonal.” There are some others, too, that we don’t usually trade, such as the “January Effect” (which actually occurs in December), the “Santa Claus Rally,” and other trades surrounding Thanksgiving. As noted, we don’t usually trade the latter three specifically, but we have incorporated them into first set of systems that we do trade.
Now that the Fed meeting is over, and they didn't raise rates (as we have been predicting), what do we really know? Stocks rallied strongly heading into the announcement, and then there was heavy buying right after the announcement. But the party on Thursday didn't end well, with sell programs emerging that knocked $SPX back down and held $VIX up.
Stocks continue to remain in bearish trends. There have been some sharp rallies, but none of them has even reached the now-swiftly-declining 20-day moving average. There is heavy resistance at 1990, with support at 1900 and 1860. Below that, the next target would be 1820.
Put-call ratios have reached extremely high (oversold) levels. The standard equity-only ratio has given a buy signal (Figure 2) But the weighted ratio has not (Figure 3).
Some of the intermediate-term indicators seem ready to capitulate and issue buys, but the overall picture is far from "all clear" at this point. Despite recurring volatility, $SPX has traded in a new range in the last couple of weeks -- 1870 to 1990.
One of the great things about trading is also one of the worst things – the market can spring things on you that you never saw coming. Even if you were bearish, you certainly didn’t expect this kind of reaction (or if you did, I submit you’ve been bearish for a long time). In volatility trading, surprises can occur as well – and they have done so this time, as well.
The relative calm of the stock market trading in a range for six months was shattered in recent days. As recently as August 18th, all was calm. But beginning with a sharp 17-point drop in $SPX on the 19th, the rout was on. The support area at 1980-2000 was blown away, but it may offer some resistance on the way back up. There should also be major resistance at the 2040 level. Meanwhile, Monday's lows at 1870 represents support. If that is violated, last October's lows at 1820 are the next support area.
The market took a beating yesterday, as $SPX finally got in line with the indicators, most of which had turned bearish in the last week or so. $SPX closed just below 2040, which technically is a violation of the previous trading range (2040-2135). However, as you can see from the chart in Figure 1, it's still in the general area of the low of the range. If prices should rally from here, we would certainly say that the trading range has held.