(Barron's) - Options can be great contrary indicators.
Puts and calls are very versatile. Strategically, they can be used for leveraged speculation by some, while providing protection, income, or both, to others. Their prices and volume also can produce information advantageous for an investor or trader, even if that person doesn't actually buy or sell options.
The initial selling on Wednesday afternoon was probably just some profit-taking by traders who'd bought heavily on Monday and Tuesday. But then the selling gathered momentum.
After the FOMC meeting announcement Wednesday, the stock market fell sharply. All those people who had bought earlier – on Monday and Tuesday – had apparently become profit-takers by late Wednesday. Even though $SPX probed slightly above 1650 in the last two days, this was not an upside breakout. In fact, it just pushed the upper resistance area slightly higher, but $SPX still remains within the general 1600-1650 trading range.
The stock market has found itself under increasing pressure again this week, and once again seems to have found support at 1600. It is also clear that 1650 is resistance and $SPX is trading wildly and with great volatility in between those two levels.
Equity-only put-call ratios have remained solidly on sell signals throughout. Even on days when the market has rallied, there has been considerable put buying.
Market breadth indicators are currently mixed.
The feature article discusses the fact that stocks, bonds, and the U.S. Dollar have all been declining together. A hedged position is recommended in Bonds vs. the Dollar.
The $VIX spike peak buy signal was stopped out, but another may be setting up (page 4).
There are times when stocks and bonds move in the same direction, and times when they move in opposite direction. However, the U.S. dollar almost always moves opposite to bonds. Yet, in the last few weeks – ever since stocks topped out – all three markets are under pressure. This is creating a very unusual situation, both in terms of sentiment and probably in terms of economics, as well.
The failure of the market to follow through Monday on Thursday and Friday’s strong gains resulted in a pretty nasty day on Tuesday. Breadth was terrible, volatility rose sharply, and $SPX retreated to the support near 1620. Overnight, S&P futures are up about 7 points, so it appears that the 1620-1650 range is containing prices for the near term. A breakout from there could generate some momentum in the direction of the breakout.
The pressure on the stock market increased again this week, driving the Standard & Poors 500 Index ($SPX) down through some support levels, and generally turning almost all of our indicators to sell signals.
The next support level for $SPX -- at 1600 -- is the extremely important one, and that held today. There is now resistance at 1625-1635.
Equity-only put-call ratios are strongly on sell signals. They are now trending upwards, which is bearish for the market.
Stocks sold off almost all day Wednesday. This did a lot of additional technical damage. Specifically, $SPX closed below the 1625-1635 support area and now that means the 1600 level is the next support. 1600 was a double top back in April, and when $SPX broke upward through there in early May, it set off the wild buying spree that carried the market straight upu to 1690. Thus it is quite important.
Neutrality, as it applies to option positions, means that one is non-committal with respect to at least one of the factors that influence an option's price. This isn't quite the same neutrality that governments display -- theirs being a much more diplomatic undertaking -- but it is a viable approach to trading options. Simply put, this means that one can design an option position in which he may be able to profit, no matter which way the underlying security moves.
