It’s that time of the year when reviews and forecasts are prevalent. As most of our subscribers know, for our purposes this is an exercise in theory more than practice, for we don’t take positions that last an entire year or longer. In fact, our longest positions are perhaps three months at most – straddle buys, Total put-call ratio buy signals, or other such positions of intermediate-term length.
The stock market, as measured by the S&P 500 Index ($SPX) has fallen about 40 points since mid-December. Much of this decline has come as the media beats the drum about the fiscal cliff, literally scaring traders into selling. As the decline has taken place, various technical indicators have turned more negative. Our overall take of the $SPX is: continuing closes near or above 1420 are bullish; closes between 1395 and 1420 leave the market in a neutral state, and any close below 1395 turns the $SPX chart bearish.
I guess politicians don't understand that the end of the year is supposed to be a time of holiday celebration and little market movement. Amazingly, this sharp decline today may not actually change the technical picture much -- unless the decline gets worse.
$SPX closed Thursday at 1443.60, with the 20-day moving average at 1420. The 1420 level is also a support level, extending back to October.
Meanwhile, the equity-only put-call charts continue to remain strongly on buy signals.
Stocks continue to work higher. The main cause is the unwinding of previous pessimism (see put-call ratio charts, for example), although the media won’t believe that. They are certain it all has to do with the fiscal cliff. Regardless, we are beginning to see overbought conditions again, and a short-lived pullback might be in order. However, with the holiday period approaching, it is unlikely that there will be much activity after tomorrow, for much of the remainder of this year.
As we all know, Apple (AAPL) is down roughly 25% since its high in September. As one may expect, volatility has subsequently increased, resulting in various option trading opportunities. AAPL recently gave a confirmed put-call ratio buy signal. However one may be hesitant to "catch the falling knife" by purchasing the stock, or even going long calls outright. Instead, he could set up a hedged position and trade the volatility.
The stock market, as measured by the S&P 500 Index ($SPX), moved higher over the past week, overcoming resistance at 1420 and then also at 1430. However, since Fed Chairman Bernanke spoke on Wednesday, the market has pulled back. So far this pullback has caused only minimal damage to the technical indicators, and it would be a relatively simple matter for the bulls to regain control.
Put-call ratios have been strongly bullish and remain so today.
However, market breadth indicators are turning bearish.
At our most recent live seminar, in Las Vegas, a suggestion was made to analyze the performance of the “3 times” ETFs versus the regular underlying ETF. Furthermore, what are the ramifications for option traders? These questions – while simple on the surface – turned out to be rather complex. So, to answer them is going to take more than one feature article. This is the first of those. At this time, we are going to look at the performance of the ETFs and lay out some general trading strategies.
One of most important things an option trader watches is volatility. The daily Volatility History report in The Strategy Zone offers you the data you need to be a well-prepared option trader: three historical volatility levels, plus implied volatility, and the percentile of implied volatility.