In our last issue, the feature article discussed whether it might sometimes be preferable to trade the underlying stock as opposed to buying an at- or slightly in-the-money option. This week’s article is a follow-up to that discussion: we are going to look at various option strategies that are, in effect, almost like owning the underlying stock.
Stocks gapped higher on the open yesterday and just kept going higher all day. $SPX has now closed above its declining 20-day moving average for the first since the market topped out just over a month ago. Oversold rallies – which this still may proved to be (although it seemed stronger than that on Monday) – usually die out at about this level: just beyond the declining 20-day moving average. Chart-wise, $SPX is now at the 1670 resistance area.
At this point, the $SPX chart is still bearish, because it has a sequence of lower highs and lower hows.
The equity-only put-call ratios continue to remain on sell signals. The weighted ratio continues to move higher almost every day, thus confirming its bearishness.
Market breadth is the lone positive area right now. Both breadth indicators improved enough this week to generate buy signals.
The market continues to fluctuate, seemingly with news about Syria. Dovish news is bullish; hawkish news is bearish. However, given the fact that there are intermediate-term sell signals in effect, there is a lot more going on than merely reacting to news about possibly attacking Syria’s chemical weapons delivery systems. $SPX rallied strongly, but failed near 1650.
The stock market has continued lower, after first breaking significant support at 1680 about two weeks ago. With the further breakdown this week, below the next support level at 1640, there is a distinct pattern of lower highs and lower lows. That makes the $SPX chart bearish.
Equity-only put-call ratios are both on sell signals.
The common perception among option traders is that option buying is the “best” approach to a speculative situation because of the great leverage that the calls or puts provide. But in many cases, ranging from extremely short-term holding periods to ones of more moderate length, where limited stock moves are likely, one may be better served by trading the underlying entity than by buying options.
The market is using the excuse of potential Syrian bombing to sell off sharply. Yesterday was one of the ugliest days of the year, but still wasn’t all that negative in terms of pushing indicators into oversold territory. $SPX broke down what had been potential support at 1640 (last week’s lows). This now brings support at 1620, and then at 1600 into play.
Nearly all of our indicators turned bearish in the last two weeks. The breakdown of the Standard & Poors 500 Index ($SPX) below support at 1680 was the trigger that turned the $SPX chart negative.
However, market breadth is already oversold, and buy signals are beginning to appear from these indicators.
The Standard & Poors 500 Index ($SPX)) broke down below the important support level of 1670-1680 today and, in doing so, unleashed a torrent of sell signals. The picture has changed to intermediate-term negative.
The equity-only put-call ratios are split. The weighted ratio made new lows recently, trading at its lowest prices in over a year. Then it curled up, in a sell signal. The standard ratio remains on a buy.
The recent pattern of a late-day rally was broken yesterday, and it may have larger ramifications. Prices declined mostly all day yesterday, and it was especially significant that a rally that began at about 3pm was suddenly aborted and instead prices traded down and closed at the daily lows.
