By Jeff Pierce

Now that the markets appear to have stabilized it’s OK to jump back in long trades…right? I believe the correct answer to be NO, based on that clear lack of leadership, declining volume on rallies, and the fact my timing signals and long term trend remain firmly down. Add on the fact that many weekly charts are starting to roll over on past leaders and it looks less and less likely that the Fed can print their way out of this one. I’m no permabear but I also don’t like how momentum stocks reacted over the last 3-4 weeks and without any new leadership where does one even think of putting their money to work on the long side?

I think it’s only a matter of time before the markets resume their selling and start the next leg down.

nasd

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%.

In the past, we’ve discussed at length the structural problems facing Crude. So the pressure the energy markets are under, both from the demand and supply sides, should come as no surprise. This double whammy to the Crude market is not likely to be resolved overnight; demand-supply issues require time to work through a market.

Through hydraulic fracking and a massive influx of investment capital, the US has again become a major oil producer. But it’s the speed with which new supply from the US has come on line that has taken the market by surprise and rocked prices.

The 4 million plus barrels of extra oil that the US is suddenly producing is causing a problem for exporters like Saudi Arabia, who now need to find new markets for their oil. Most of the world’s oil is not sold in futures contracts for delivery one to three months out. Rather oil contracts are long term in nature, made over 1 to 3 year periods. And the competition for existing oil markets has been fierce, forcing suppliers to drastically cut their prices relative to spot.

As the price of oil begins to fall, oil producing nations, most of whom are ill-equipped to handle sub-$80 pricing, will likely try to offset the revenue lost through lower prices by raising their production. Saudi Arabia, the only nation capable of meaningfully cutting production, has stated that it will likely increase production to maintain its revenue levels. The other nations capable of possibly cutting production are Iraq, Iran and Venezuela, but all have economic issues that make any cut (without general consensus) very unlikely.

This should only perpetuate the glut of supply into 2015, setting the scene for much further declines in price as the markets are faced with continuing demand problems. If the European recession turns into a continent-wide event, its impacts on the world economy and, by extension, the demand for oil will put Crude prices under even more severe pressure.

Judging by the Daily chart reversal in the energy stocks in the past 2 days, there is a good chance that Crude has finally hit bottom. As outlined earlier, I’m not bullish on Crude’s longer term prospects, but the current sell-off has been severe, and is likely over for now. Given the uncertainty in the Crude markets, we need to see Crude form a Swing Low, followed by a close above the 10dma and a break of the trend-line. Once that occurs, it’s likely that a counter-trend bounce will move price back to the $90 level.

10-18 Crude Daily

This sell-off has been extreme and much deeper than a standard ICL. The depth of the energy sector sell-off is on par with the last, big general market correction in 2011. The entire sector is now extremely oversold and should experience a decent rally during the next few weeks. But as in 2011, we don’t know is whether the current move down is just the beginning of a deeper decline. (more…)

By Chris Ebert

As the Bull market sent stock prices higher and higher over the past several years, readers here were provided with a unique perspective – a perspective that ignores the news of the day, ignores corporate fundamentals, and even ignores most common forms of technical analysis.

This perspective has managed to guide traders through the twists and turns of the Bull market, helping them to make rational trading decisions, avoiding unnecessary fear yet anticipating fear when fear is healthy, thus in better positions to reap profits in the stock market.

Now that the Bull market appears to have ended, the first Bear market in quite a few years seems likely to drive stock prices lower. The goal of the following analysis is to allow a trader to make a seamless transition to the new stock market environment. Many of the rules the market has followed for at least the last three years no longer apply. But the following analysis remains as valid as ever.

With a few minor adjustments to the usual analysis published here each week, a trader can be prepared for whatever the stock market can dish out. It begins, as always, with a look at three simple, ordinary option trades in order to find which of the three, if any, is currently profitable relative to the broad basket of stocks that make up the S&P 500 index. The broadness of the S&P 500 index makes it a good choice for analysis, since it represents the overall health of the entire stock market.

Stocks and Options at a Glance

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)

Once it is known what types of options trades are currently profitable, and which are not, it can be determined what type of stock market (more…)

By Chris Ebert

This is either the beginning of the end for the recent 3-year uninterrupted run for the Bull Market and stock prices are headed much much lower;  or it’s the end of a healthy Bull-market correction and stock prices are in a position to surpass their recent all-time highs within a few short weeks. The two scenarios are polar opposites. Now may be a good time for a trader to consider using option performance as an indicator of which path the stock market is on at the moment. Everyone can use options, even folks that don’t trade options, if for nothing other than a second opinion of where stocks are headed.

The S&P has currently finished Stage 4. That means it will soon enter Stage 5, perhaps as soon as this coming week.  Another significant dip in prices without a recovery by week’s end suggests Bear Market Stage 5 has begun. The slightest rally in stock prices without losing ground by week’s end suggests the recent sell-off is done and the Bull market Stage 5 is on it’s way.

Options Market Stages 2014-10-11

* 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 4 – the “Correction” Stage.

On the chart above there are 3 categories of option trades: A, B and C. For this past week, ending October 11, 2014, this is how the trades performed on the S&P 500 index ($SPY or $SPX):

Options Market Stages

Click on chart to enlarge

  • Covered Call and Naked Put trading are each currently not profitable (A-).
    This week’s loss was -0.5%.
  • Long Call and Married Put trading are each currently not profitable (B-).
    This week’s loss was -2.4%.
  • Long Straddle and Strangle trading is currently not profitable (C-).
    This week’s loss was -1.9%.

The combination A- B- C- would suggest the S&P 500 has entered a Bear market (Bear Market Stage 5) for the first time since November 2011. However, the Options Market Stages are intended as guidelines. They are not designed to be so rigid that a very small loss, for example the 0.5% loss for Covered Call trading, defines a Bear market.

This past week saw the S&P fall below the 1916 level – the level at which at-the-money 4-month-out Covered Call option trading became unprofitable. Normally, the unprofitability of those particular Covered Calls signals that a Bear market is underway; and it very well may be underway. But, 10 points (0.5% of the current S&P 500 level) is too small a margin to make such a bold statement with confidence, especially when considering the margin of error on calculating the profitability of such option trades. 20 points, maybe, but 10 is far too small.

Without confirmation – either by Covered Calls experiencing a second consecutive week of losses, or by Covered Call losses growing larger than 0.5% (larger than 10 points on the S&P) – it could prove to be a serious mistake to assume the Bull market has ended and a Bear market has begun. If the S&P remains below 1912 through the end of the upcoming week, especially if it closes below (more…)