By Faces In Cabs

This low volume Monday appeared to end on a whimper, as the major indices ended at their lows of the day. Combined with the large fade in the afternoon, that’s a clue to me that the equities may be going down as early as Tuesday, so I wanted to put up a quick post to quickly warn Zentraders.

It is OpEx week, and that certainly adds another dynamic to a pull back. Often, OpEx is characterized by some type of max pain event – where price moves against the great number of participants (e.g., the crowd). I am not sure if that is occurring here, but I mention it for newer traders and in case anyone starts wondering (by Thursday) why the markets have pulled back after such an explosive Friday. Let’s look again at the INDU and its two day market volume.

Dow Retracement (the last 2 days are lower than average volume)


I am watching the market futures closely this evening. For the /ES (the S&P e-mini), I see 1927, 1916, and 1900 as inflection price points below to keep an eye on (I have already note resistance levels above in my weekend post). Any move downward will require larger volume, so I am also concurrently looking for that type of downside confirmation. Here are some brief market notes:

  • Low volume days continue to be associated with up days (we are retracing up)
  • Higher volume continues to be associated with selling days (no distribution since Thursday)
  • Watch out for a higher volume (above average) down day to begin as early as Tuesday
  • Watch out for a gap down in bond yields Tuesday morning (a bad start for bulls, imo)
  • A fade in the Nikkei (tonight) may impact US market futures (down) to start this process

I am already short the IWM from 114.18 today. It is my only position, but a rather large one (lots and lots of front month 113 puts). It closed up nearly 60% today. Why did I enter this trade? Well, the small cap’s had an extreme price move upward (1.7%) on Monday when most areas in the market were merely up 0.5%. That was a signal to me that the IWM had moved too far too fast. I basically shorted the first fib line on the chart below. I will probably cover Tuesday (because I am admittedly trading a volatile front month contract during OpEx week). (more…)

By Chris Ebert

“Fool me once, shame on you; fool me twice, shame on me”. It is remarkable how much insight that one simple phrase can provide for the stock market.

Nobody likes to play the fool, especially the financial fool. Unfortunately just about everyone will be a financial fool at some point; it’s nearly unavoidable, no matter how much effort is exerted. But the motivation to avoid making the same mistake twice is one of the strongest motivators of human behavior.

There’s little shame in being fooled by the stock market once. Avoiding the shame of being fooled twice – that’s what drives the stock market.

But what is it about the stock market, exactly, that tends to make someone feel like a fool? Obviously, a sudden severe sell-off such as the Crash of 1929, or Black Monday of 1987, can bring on feelings of foolishness for stock owners. Anyone who held stocks through the Financial Crisis of 2008 likely felt like a fool for a time as well.

Foolishness itself has a quantum characteristic. That is to say, the feeling does not tend to vary in intensity; it is either present or it is not. Once it’s present, it can be very persistent, lasting long beyond the event that initiated it. So, it can be helpful to identify it early, in ourselves as well as other participants in the stock market. An analysis of some simple stock options may be helpful in that regard.

Stocks and Options at a Glance

* All profits are calculated at expiration, as a percentage of the underlying SPY share price. SPY is an ETF that closely tracks the performance of the S&P 500, specifically the SPDR S&P 500 ETF Trust (NYSEARCA:SPY). All options are ATM-when-opened 4 months (112 days) to expiration. (e.g.  Profit of $6 per share on a Long Call would represent a 3% profit if $SPY was trading at $200, even if the call premium itself actually increased 50%, 100% or more)

You are here – Bull Market Stage 2 – 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 August 2, 2014, this is how the trades performed:

  • Covered Call and Naked Put trading are each currently profitable (A+).
    This week’s profit was +2.9%.
  • Long Call and Married Put trading are each currently profitable (B+).
    This week’s profit was +0.6%.
  • Long Straddle and Strangle trading is currently not profitable (C-).
    This week’s loss was -2.3%.

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 2, known here as the digesting gains stage. This stage gets its name from the tendency for stocks to experience periods of gains interspersed with relatively minor pullbacks, each temporary pullback being the market’s way of digesting the prior gain.

A chart describing all of the different Options Market Stages is available by clicking the link to the left to enlarge.

New Record High S&P Not Entirely Impossible

Readers here have been reminded recently that changes in the nature of (more…)


By Faces in Cabs

About 9 days ago, the markets experienced a 300+ point shock event down. However, that shock event’s price appears to be stabilizing after Friday’s large PPT reversal bounce (which began 4 hours after the Japan market open, when the Nikkei was down over 400 points). I would note that Friday’s large bounce came on average volume, so large volume days consistently remain associated with selling (distribution) days at present. As long as $SPX 1930 support holds, the bulls have an edge up to next resistance at 1942-43 and then 1955 (the 50 MA). After that, it will take a special effort to go much higher on this low volume (imo). If the volume profile changes (e.g., accumulation), then of course the trend up can resume (easily), but until it does I am more likely to eventually re-short into the noted resistance levels of this blog post.

Assessing Recent Damage

Dow Pull Back (Friday’s PPT reversal came on lower to average volume)

After Friday, we are now retracing back up. However, I want to take a moment to show how the recent pullback introduced technical damage to the long 2014 climb of the markets. First (see chart above), after a 5% pull back the $INDU’s trend is being challenged. We have a 17-43 crossover (which is suggested as a trend change signal by author and trader Jea Yu) on the chart. Here are some of the other market weaknesses I see developing.

  • Transports (a 9% pull back) saw an exit from the sector on volume (that’s distribution)
  • Semi’s tumbled 7.6% (a clear correction) leading the tech sector down.
  • Many market internals remain negative, for example the NASDAQ New Highs / New Lows is still well below zero line (a very negative signal)
  • Banking sector ($BKX) has crossed below its 200 MA

I am flat. After holding short for last week, I was stopped out on Friday. I may test a couple of longs beginning Monday, but my trading focus is (mostly) on determining the next major market swing now that the market shock event appears stabilized. The markets can retrace up here (and possible resume the rally above $SPX 1955), but the pull back’s damage has NOT been undone (yet).

Bond Market Bingo

One reason why I am individually negative on the equity markets is the current deflationary move by the bond yields. Because bonds are often a counter investment strategy to the equities, the bond yields have a history of moving in the same direction as equities. The noted deflationary-inflationary relationship (see 4th chart below) between the bond yields/US Dollar and equities has ONLY been accelerated under Fed’s market interventions (quantitative easing). As of this last week though, we are technically at a critical support for the 10 year yield. That’s why I am speaking up now.

10 Year Yield (approaching CRITICAL support as the 30 yr makes lower lows)

30 Year Yield (already below this historic support, which originally was a QE intervention point)

Bond Performance (take your pick, because if yields fall further then all bonds go up)

A Bond-Equity-USD Relationship (and some traders wonder why the markets recently fell)

The current divergence on the 4th chart (Bond Yields / US Dollar relationship to Equities) is what has my attention. Over the spring and summer, equities got overextended (e.g., just buy the dip) in their relationship to the bond yields / USD, no wonder we saw a correction on higher volume in the equities over the last two to three weeks. Now, the 10 year yield could accelerate that divergence further by breaking a key support for bond yields. Furthermore, we also have a stronger US Dollar (e.g., now that the Euro is finally pulling back after getting Draghi’d a couple of years ago).

I would finally note that this support level (just below 2.4 or 24.00 on the chart) for the 10 year yield was an intervention point for the Fed in the past. And now with the Fed’s clear commitment to tapering to $0 (zero) by September, this is why I suspect that the bond yields will most likely go down before they can go up significantly.

Short Trading Ideas (into resistance)

IBM (Big blue has lost its leadership. Looking to short into resistance, probably this week)

IWM (As a sector, small cap’s remain on my short radar. Down 11% from highs)

I wish you “Good Luck” with your own trading (Luck = Preparation + Opportunity + a little Risk).

By Jeff Pierce

I like the strength of THRM on the weekly for a decent swing trade setup after it has a further sell off. It could just keep going up, but if I was going to take a position in this stock I’d need to see it pullback to the $33-36 range. Watch the RSI as it’s very overbought and needs to go under 50 at a minimum before I’d feel comfortable buying a starter position.

Per yahoo finance:

Gentherm Incorporated designs, develops, and manufactures thermal management technologies and cable systems worldwide. It operates through three segments: Climate Controlled Seats (CCS), Advanced Technology, and W.E.T.