By Jeff Pierce

As the market volatility increases and that is likely to continue for awhile let’s turn our attention to Bonds for clues. It’s entering an obvious area of resistance right now so it will be important to see how it trades between the $120-125 level.  I personally don’t think this has enough momentum to break out which could give the general markets a lift if this chart tops, but it’s to early to know that right now. It could just as easily continue moving higher but watch the RSI for clues as right now there is negative divergence as it won’t make a new RSI high if TLT makes new highs.

tlt

By Chris Ebert

Note to readers: The regular update of the S&P 500 options market will not be published this weekend due to the U.S. Columbus Day holiday. Regular updates will resume Sunday October 19, 2014.

The following chart may provide some perspective on the current state of the stock market. It’s definitely been a wild ride the past several days and weeks. But, overall the current sell-off is not too concerning considering it has not yet caused Covered Call trading to return a loss. Covered Calls opened at-the-money,4-months to expiration, are still profitable as the expire this week. Very often these trades are a harbinger of a Bear market, since they really only suffer losses when things have become truly bearish.

As long as Covered Call trading remains profitable, there is a possibility of major bounces higher for stock prices, as the nearly 300 point daily bounce for the Dow did this past Wednesday. It is conceivable that such a bounce could take stocks back to all-time highs. If, however, Covered Call trading becomes unprofitable (depicted by the red zone in the chart below) then chances are much greater that any bounce higher for stock prices would be a fleeting dead cat bounce. In that case it is conceivable that stock prices could fall considerably before finding support.

Options Market Stages 2014-10-11

The preceding is a post by Christopher Ebert, co-author of the popular option trading book “Show Me Your Options!” He uses his engineering background to mix and match options as a means of preserving portfolio wealth while outpacing inflation. Questions about constructing a specific option trade, or option trading in general, may be entered in the comment section below, or emailed to OptionScientist@zentrader.ca

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Related Options Posts:

Minimum Requirement for a Bear Market

Options Witching Effects On Stock Prices

Jobs Or Not, Stocks Are Hot

By Chris Ebert

During a sell-off in the stock market, in which prices are tumbling, who is it that is buying all the shares of stock that are being sold?

Somebody has to buy each stock, or else there would be no trades. Someone has to take the other side of the trade – which is why the term sell-off can be misleading – there is just as much buying as there is selling during a sell-off.

The term sell-off simply means that sellers have lost control of the price and must accept whatever bid price is offered. Sellers are not in a position to haggle during a sell-off; buyers are.

It is important for a trader to understand the reason that folks are buying stocks during a sell-off, because the folks who are buying stocks will have an effect on stock prices in the future. If the buyers have weak hands, they will readily be shaken out of their positions, leading to a speedy continuation of the downtrend in prices. Strong hands, however, can lead to impressive rallies, even when the overall outlook for stocks may appear weak. Some sell-offs lead to vigorous new growth; others lead to further decay, depending on whether hands are strong or weak.

A common method in widespread use among traders looking to decipher whether stocks are moving to weak hands or strong ones during a sell-off is a Fibonacci analysis. The method has its advantages, but also has a tendency to be a bit abstract. The following analysis of the options market is designed to aid a trader with Fibonacci. To begin, it is important to know exactly what types of option trades are currently profitable on the S&P 500 as a whole.

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 October 4, 2014, this is how the trades performed on the S&P 500 index ($SPY or $SPX):

  • Covered Call and Naked Put trading are each currently profitable (A+).
    This week’s profit was +2.7%.
  • Long Call and Married Put trading are each currently not profitable (B-).
    This week’s loss was -1.1%.
  • Long Straddle and Strangle trading is currently not profitable (C-).
    This week’s loss was -3.8%.

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 (more…)

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%. 

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The small cap Russell 2,000 index is generally considered the driver in any speculative advance, but we’re seeing reasons within that index to be concerned. After it showed a significant Investor Cycle failure earlier in the year, it then went on to only marginal (for one session) make new all-time highs. As we can see from the chart below, it has spent all of 2014 hammering out what appears to be a rounded topping pattern, evident by the 50dma crossing over and below the 200dma. The question is whether this is just a short term divergence from the broader markets or the type of weakness and distribution preceding a market top.

9-27 Russell 2000 topping

 

We don’t know of course if a top is coming, that’s why so many pundits continuously call for one whenever the market appears vulnerable.
That’s also what makes trading a bull market so difficult. It requires a large degree of blind faith to trade a speculative market. When a move is not fundamentals based (i.e. it’s of the speculative kind), it’s important to divorce one’s personal views and appreciate what truly drives such markets. (more…)