Things are beginning to deteriorate, somewhat in terms of price, but mostly in terms of our indicators. We've seen this scenario before, though -- most recently in late December, but the market response was subdued and volatility remained low. That combination resulted in a move to higher prices after December, and it could well be that the same is setting up now.
Even with this week's decline, though, $SPX remains in an uptrend. The pullback so far has only tested one support level, and all of the moving averages continue to slope upward. Hence it is a bullish chart.
We usually try to run an article on this subject at least once during tax season. I realize that not everyone is aware of the rules governing Section 1256 contracts. Hence, since tax season is upon us, I thought this review might be of benefit to some of our subscribers – and to options and futures traders, in general. Section 1256 trades include all futures trades, as well as futures options. They also include option trades on cash-based indices ($OEX and $SPX, and especially $VIX), but not SPY or QQQ, for example, for the underlying in those cases is an ETF, not cash.
The $SPX Index has stayed above the +4σ “modified Bollinger Band” since Feb 13th – a total of 13 trading days and counting. This is rather rare, so we thought it might be interesting to see just how unique this is – and to see what happened at similar stages in the past. In the following paragraphs, “days” refers to trading days.
Overall, stocks had another very strong week, although there was certainly some hesitation yesterday. Even so, the trend remains upward for now. $SPX has moved steadily higher in a stair-step fashion all during the month of February. As a result, there are several support levels of interest. The highest is that in the 2350 - 2370 range, and below that is more important support at 2300.
Equity-only put-call ratios continue to bump along at the lowest levels of their charts, as call buying has been quite dominant. So they are in an overbought state, and it would not be hard to roll them over to sell signals if put buying begins to increase.
This article was originally published in The Option Strategist Newsletter Volume 15, No. 2 on January 26, 2006.
After a lengthy delay, the CBOE has announced that $VIX futures will begin trading on Friday, February 24th. We first wrote about these options last March (2005) when it seemed imminent that they would begin trading. However, there was a delay – a delay which is about over. In this article, we’ll lay out the specifications of the contracts once again, and refresh your memories on a few important points about how the contracts might trade.
First and foremost, it should be understood that these are options on the cash $VIX, much as there are options on $SPX or $OEX. These are not options on any of the Volatility or Variance futures. As a cashbased index option, they can be traded in a regular stock option account, with your favorite brokerage firm, just as index options can.
Stocks have continued to move higher across all of the major averages. As might be expected after an advance of this magnitude and length, overbought conditions continue to abound.
One of the foremost things to consider, though, is that the chart of $SPX remains bullish. It continues to trend higher, with all moving averages in sync. The first major support area is at 2300.
Both equity-only put-call ratios continue to decline and thus remain on buy signals.
The past year was another good year for the performance of The Option Strategist Newsletter (TOS). For the year, overall, TOS performance was a gain of 34.6%. The largest area of profit were the futures put ratio spreads, followed by a superior performance from the put-call ratio recommendations. SPY put ratio spreads also performed well, as did event-driven straddle buys. The worst area of performance was the DSI-based recommendations (more about that later).
Exactly a week ago, on February 9th, $SPX broke out over 2300, establishing new all-time highs, accompanied by almost all of the major averages, including finally the small-cap Russell 2000 ($RUT). The chart of $SPX remains bullish as long as $SPX is above 2300.
Both equity-only put-call ratios have turned sharply lower in the past week, as the upside breakout has been accompanied by heavy call buying. Thus they remain on buy signals.
Overall, breadth has been positive so the breadth oscillators remain on buy signals.
$VIX is overbought, too, in that it is at very low levels. But even so, $VIX remains in a bullish state for stocks as long as it is below 15.
The stock market, as measured by most of the major indices, made a breakout move to the upside yesterday and is now trading at new all-time highs once again. $SPX is clearly in an uptrend and holding above all support areas, which is bullish.
Equity-only put-call ratios continue to crawl along the bottom of their charts, moving mostly sideways rather than up or down. This is another overbought indicator, but it won't really become bearish until these ratios begin to trend higher.
Market breadth has been struggling somewhat as it has not kept pace with the strength of the broad market. But the breadth oscillators are on buy signals, nonetheless.
Long-term cycle charts are interesting to look at, but I’m not sure how much they help one’s trading or strategy. In any case, there is a website, www.seasonalcharts.com that has such charts, and one that can be quite interesting is the 10-year cycle chart of the Dow. In other words, the data for the Dow is accumulated by year and then published in a way that you can see the pattern of each year of the decade – going back to 1897 in this case.