The Markets

The volatility has picked up in the markets.  Last week the Nasdaq timing signal turned bearish for the long term.  The Dow however remains bullish for the long term.  We would need to see 2-3 weeks of continued selling pressure for the Dow to also signal a bearish trend.  In light of my projections for the first week of November I believe we will see the Dow also turn bearish the week of October 20th.

Bill Gross’s departure from Pimco and move to Janus is a big deal.  The markets rebounded on Friday with the announcement but in my view there is more trouble to come.   Gross’s departure has the signature of a former professional gambler calling the cards, it was expected that he would be dismissed on Saturday.  After the first week of October there could be a mass exodus from Pimco funds as more investors learn Bill is no longer a part of the firm.  There have been rumors for months that Bill was potentially going to be forced out/retire.  An article in Reuters last February titled “Is It Time For Bill Gross To Retire?” said it all, they wanted him out.  Looks like Bill threw has his own agenda and the market volatility peaked on the rumors.

The risk for more volatility is higher now with Uranus moving retrograde and then square the U.S. Sun at 13 degrees Cancer in October.  From here the markets will likely resume an upward trend and could potentially test the recent highs.  We will book profits into strength and look for short setups into October.

Lunar Eclipse October 8, 2014

Last week I covered the Mercury retrograde beginning October 5th.  On the heels of the retrograde is a total lunar eclipse at 15 degrees Aries.  This is a powerful eclipse so I have added the astrology chart to illustrate what is happening.  You can see a kite formation in the center with the aspect lines.

astrology

Kites are powerful configurations and I often mention them in stock chart analysis.  (more…)

By Chris Ebert

A recurring theme has been presented here over the past several years: the performance of certain simple option strategies quite often gives an accurate picture of the mood of the stock market. The mood of traders – the emotion – does not determine the future of stock prices, but it surely determines how traders are likely to react to future news.

As with any indicator, be it a Simple Moving Average (SMA), a Relative Strength Index (RSI), an Elliott Wave or a Fibonacci Retracement, the use of options as an indicator is not useful at predicting the future. But, one does not need to know the future in order to be a successful trader. To be successful requires a trader to be cognizant of the emotions present in the market, thus allowing the trader to observe changes in the stock market in their proper context, and react accordingly.

A trader needs to know when other traders are optimistic, because a dip in stock prices makes optimistic traders likely to buy stocks. On the other hand, pessimism makes traders look for the nearest exit. A dip in stock prices in an optimistic market is not the same as a dip in a pessimistic one. The context is important.

Last week saw the first major shift away from optimism in several months. It is still an optimistic market, but not nearly as optimistic as it was just a few short weeks ago. The shift in optimism has been clearly outlined in three recent articles, available here:

Rather that revisit those previous articles, today’s focus is on steps a trader may take to fix a broken trade. What can be done to turn a stock trade into a profitable one after it has experienced an unexpected loss? First, a look at the current stock market, in context.

Click on chart to enlarge

Click on chart to enlarge

* 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. (e.g. Profit of $6 per share on an expiring Long Call would represent a 3% profit if $SPY was trading at $200, regardless of whether the call premium itself actually increased 50%, 100% or more)

You are here – Bull Market Stage 3 – the “Resistance” Stage.

Options Market Stages

Click on chart to enlarge

On the chart above there are 3 categories of option trades: A, B and C. For this past week, ending September 26, 2014, this is how the trades performed on the S&P 500 index ($SPY):

  • Covered Call and Naked Put trading are each currently profitable (A+).
    This week’s profit was +2.4%.
  • Long Call and Married Put trading are each currently not profitable (B-).
    This week’s loss was -0.7%.
  • Long Straddle and Strangle trading is currently not profitable (C-).
    This week’s loss was -3.1%.

Using the chart above, it can be seen that the combination, A+ B- C-, occurs whenever the stock market environment is at Bull Market Stage 3, known here as the resistance stage. This stage gets its name from the tendency for stocks to (more…)

By Jeff Pierce

Both the daily and weekly chart of the VIX are are levels which in the past have been buying opportunities. While there are some bearish divergences setting up on the indexes it’s too early to tell if this is the end of the bull and for now the best the trend is up.  I continue to believe that before this bull is over we’ll see a fury of buying to the upside in a blow off top. Having said that I’ve slowed my new buys on the momentum stocks and I’m not using margin at all because the risk of a further sell off remains.

Vix Daily

vix

 

Vix Wkly

vix.weekly (more…)

By Chris Ebert

The best time to prepare for a Bear market, as with any foreseeable disaster, is long before it strikes. If one waits for word of a Bear market to be broadcast on the evening news, chances are good that it is already too late to prepare.

It’s too late to build a storm cellar when the tornado sirens are blaring, too late to get off the volcano when the pyroclastic flows have begun, and too late to buy bread and milk when the blizzard winds are howling. The best one can normally hope for, when a disaster is already underway, is to mitigate the damage; and that includes stock market crashes.

The problem with preparing for disaster is that there is a natural tendency to become desensitized to warnings that later prove inaccurate. As television’s Simpsons character Troy McClure observed many years ago, in 1995, “phony tornado alarms reduce readiness”. So to do phony predictions of coming stock market crashes reduce readiness.

Many have viewed the widely circulated charts showing the similarities of the current stock market to that of the Crash of 1929. While it is conceivable that such similarities could indeed mean we are headed for another stock market crash, the truth is that so many similar predictions have failed in the past that even if this one proves to be true it will likely be ignored, quite like phony tornado alarms.

As with any indicator, including stock market indicators, the value of the indicator depends on its ability to avoid as many false alarms as possible, while retaining the ability to send all valid alarms with enough advance notice to allow for time to prepare. Too many issued false alarms, too many missed valid alarms, or too many valid alarms issued too late, make any indicator useless.

With those constraints in mind, here is a nearly foolproof means of analyzing stock options in order to warn of a Bear market affecting the stocks in the S&P 500 while there is still time to prepare.

Click on chart to enlarge

* 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. (e.g. Profit of $6 per share on an expiring Long Call would represent a 3% profit if $SPY was trading at $200, regardless of whether the call premium itself actually increased 50%, 100% or more)

You are here – Bull Market Stage 1 – the “Digesting Gains” Stage.

Options Market Stages

Click on chart to enlarge

On the chart above there are 3 categories of option trades: A, B and C. For this past week, ending September 20, 2014, this is how the trades performed on the S&P 500 index ($SPY):

  • Covered Call and Naked Put trading are each currently profitable (A+).
    This week’s profit was +2.5%.
  • Long Call and Married Put trading are each currently profitable (B+).
    This week’s profit was +2.0%.
  • Long Straddle and Strangle trading is currently not profitable (C-).
    This week’s loss was -0.5%.

Using the chart above, it can be seen that the combination, A+ B+ C-, occurs whenever the stock market (more…)