By Poly

This is an excerpt from this week’s premium update from the The Financial Tap, which is dedicated to helping people learn to grow into successful investors by providing cycle research on multiple markets delivered twice weekly. Now offering monthly & quarterly subscriptions with 30 day refund. Promo code ZEN saves 10%.

2015-03-19_1011

The easy part of my call has been fulfilled. A rally out of that deep, oversold Bollinger Band crash was somewhat predictable, because both the bullish and bearish cases pointed to a temporary move higher before diverging. This is also why the right call to make there was for a Half Cycle Low that would be followed by a rally back to the 10 day moving average.

That’s roughly where the market stands today, although obviously with a much more bullish tint to it. The harder prediction to make now is whether equities fail from this position or go on to make new all-time highs. My position remains the same, which is that past Cycles are telling us that the pattern calls for yet one more surge higher before we begin to entertain a larger, Investor Cycle top. And judging by today’s FOMC reaction and surge, I believe this outlook holds much more weight, especially when I look at the chart after the markets close.

That does not necessarily mean it’s clear sailing, even though the Russell index is likely leading the markets higher today with new all-time highs. The bearish case is still potentially valid simply because there have been times in the past where big moves on FOMC days ended up being faded and served as a trap. Of course, I don’t believe that will happen here, I’m merely pointing it out because the odds are there and I want to be thorough in my analysis. In my opinion, this market is setup to surprise to the upside and prior Cycles firmly support this position.

3-18 Equities Daily

Investor Cycle Trading Strategy

The market is far too advanced in the current IC and far too over-priced to risk a position in either direction.

Daily Cycle Trader Strategy

Reprint:  Staying in here with positions to see where the market wants to go within the 2nd Half of this Daily Cycle. I believe it could move sharply higher and quickly from here based on how it has responded from similar positions in the past.

By Poly

This is an excerpt from this weekends’s premium update from the The Financial Tap, which is dedicated to helping people learn to grow into successful investors by providing cycle research on multiple markets delivered twice weekly. Now offering monthly & quarterly subscriptions with 30 day refund. Promo code ZEN saves 10%.

In all my years of studying and mapping out Cycles, I have found that gold is the most consistent of assets. I find it to be the truest of assets when it comes to respecting traditional technical analysis, including during long, bear market periods. And this remains true today, within this Daily and Investor Cycle, as gold is following a very clear, predictable and understandable path.

You generally don’t want to get into the business of predicting the day to day movements, but in this case, gold is extremely oversold and has not experienced a meaningful bounce in over a month. Since topping for the Investor Cycle, the path lower has been relentless for too long, leading me to believe that a counter-trend (suckers rally) is about to unfold.

This is primarily because we’re now at the Half Cycle Low point for this Daily Cycle. Also around this level, support should begin to develop as the “double bottom” buyers off the prior ICL ($1,130) begin to defend this area. Further, the move out of the last Cycle low generated just a $28 rally, which was well below the average. Yes, another equally poor showing is possible here, but a stronger $40-$50 reaction is also just as likely, sending gold back up to challenge the $1,200 area.

3-14 Gold DailyAs is always the case, the Daily Cycle is simply following the curvature of the longer Investor Cycle. As we know, the Investor Cycle is near the tail-end, heading towards the next Cycle trough, allowing us to generalize that the Daily Cycles will be severely pressured lower. We find during these periods that rallies can be sharp, but generally short in duration, as they are typically sold quickly and aggressively.

What we’re on the look-out for is evidence to support an Investor Cycle Low, that’s all that matters at this point. Typically that means a mix of the right Cycle timing, one-sided investor positioning (COT Report), and extremely pessimistic sentiment. A Cycle simply reflects the natural ebb & flow of investor appetite and sentiment towards an asset, and these three metrics help us determine where we stand within that Cycle flow. (more…)

By Chris Ebert

Note to readers: the following weekly analysis is based upon findings in the Thursday Evening Options Brief

Who among us wakes up in the morning, sees horrible news or terrible economic data, and immediately says “I want to buy stocks today”?

bad newsLikely, very few traders see fundamental economic weakness as the sole reason to buy stocks. In fact, most rational people would prefer to sell stocks given poor news regarding corporate earnings, employment, sales, prices, or any other factor which would tend to lower the chances of future corporate profits.

Nevertheless, sometimes bad news is good for stock prices. This can occur for a variety of reasons:

  • Traders were expecting worse news than what actually took place and thus more prone to buy stocks while feeling a sense of relief.
  • Other economic forces (e.g. the Federal Reserve) might be prepared to act in a manner intended counteract the effect of bad news, so the net effect of bad news could be good for the economy and thus perceived as good for future stock prices.
  • Long-term traders were looking to buy on a dip, and a dip is what was created when the news initially pushed short-term traders to sell, followed by higher prices when long-term traders stepped in.
  • Market-movers were seeking to use bad news as an opportunity to create a Bull trap, temporarily confusing other traders into buying stocks so the market-movers themselves could unload their stock positions to willing buyers at a much higher price than those buyers would otherwise be inclined to pay when confronted with poor economic news.

The Devil is in the Details

Of the above scenarios, the actions of market-movers – large collectives of investors and institutions – are capable of pushing stock prices in a way that is often not intuitive.

Any trader can intuitively understand an occasional (more…)

By Chris Ebert

In the February 26 Thursday Evening Options Brief it was noted that:

If Big-Money truly intends to drive the S&P to new all-time highs this March, it should not surprise individuals that the first step might be to take out as many of the individual traders’ stops as possible.”

This week’s analysis:

all clearThe S&P 500 has declined well off the all-time high recently achieved near the 2120 level. While the recent pullback off the high has not yet reached the 10% threshold (or 212 points off the high) to meet the traditional definition of a correction, it did indeed meet the definition of a correction offered by the options market.

As defined by option performance, a Bull-market “correction” would exist between a level of 2005 and 2057 for the S&P this week. That’s the range in which Covered Call* trading would exhibit some gains, but less than the maximum possible gains. Typically Covered Calls experience maximum gains during much of a Bull market, less-than-maximum gains occurring only during a correction, and losses occurring only during a Bear market.

Moreover, Long Straddles* tend to experience extreme losses during a correction, often approaching a level of 6%. This week, a level of 2005 to 2057 in the S&P is associated with extreme Long Straddle losses.

Welcome to Bull Market Stage 5

Thus, the dip into the upper 2030s on March 11 was enough to meet both options criteria for a correction:

  • Covered Calls still exhibited gains at that S&P level, but the gains were below the maximum amount possible for such trades.
  • Long Straddles suffered losses approaching 6%.

A dip below 2005 before bouncing higher would have been considered beyond the scope of a normal correction, instead signaling a potential Bear market. Covered Call losses would have occurred below S&P 2005 this week, not the small gains normally associated with Bull-market corrections. Additionally, Long Straddle losses would not have been anywhere near the 6% threshold had the S&P declined that far.

A dip that did not fall below 2057 would not have met the minimum requirement to be considered a correction. Not only would Covered Calls have returned their maximum profit, but Long Straddle losses would have been well below 6%; neither of the criteria for a correction would have been met. Only a dip to the narrow range between 2005 and 2057 meets the options definition of a correction, and that’s exactly what occurred.

Now that the S&P has bounced higher, the correction can likely be considered complete, at least for a little while. The S&P 500 has now entered a zone known as the “all clear”, or Bull Market Stage 5. This stage can sometimes bring the most explosive growth in stock prices of any environment. The following analysis provides details as to why such growth can occur.

 Stocks and Options at a Glance 03-14-15b

* All profits are calculated at expiration, as a percentage of the underlying SPY share price. SPY is an Exchange Traded Fund (ETF), the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) that closely tracks the performance of the S&P 500 stock index. All options are at-the-money (ATM) when-opened 4 months (112 days) to expiration.
EXAMPLE: If Long Call premium paid is $2 when SPY is trading at $200, the loss is 1% if the option expires worthless.

You are here – Bull Market Stage 5 – the “All Clear” stage.

On the chart above there are 3 categories of (more…)