By Chris Ebert
The stock market has and always will be unpredictable. Nevertheless, there are some aspects that can be predicted as a statistical probability. As a result, numerous technical indicators have been developed over the years in an effort to identify any statistical probability that might give a trader an edge in the market.
Technical indicators can range from something like a simple moving average (SMA) to a relative strength index (RSI) to complex candlestick patterns or Fibonacci retracements.
The problem with indicators is that they do not predict the future; they merely offer a statistical probability of what might happen. That is because all an indicator can really do is offer insight into the current sentiment among traders. An indicator cannot predict the news which might act as a catalyst that could move stock prices.
One drawback to indicators is that they are almost always backward-looking. For example, a simple moving average can tell a trader whether the stock price is above or below the simple moving average today or several months ago, but cannot reveal what that simple moving average will be several months in the future.
The Options Market Stages were designed to be forward-looking. This allows a trader to see in advance what sentiment is likely to exist at certain levels of the S&P 500. The Options Market Stages cannot predict what the S&P will actually do. But they have a good track record over the past 20 years of warning traders in advance of what type of sentiment to expect over the ensuing several months.
Currently the S&P has entered the light blue zone of Digesting Gains. The sentiment in that stage is often one in which a prolonged rally has caused traders to experience large gains and are therefore looking for opportunities to sell stocks and realize those gains. But because there is a clear uptrend in place, other traders tend to step in and buy stocks whenever they sense a bargain. The digestion can go on for weeks or months at times, as those with gains sell and bargain hunters step in, leading to a period of choppy sideways moves in stock prices.
While nothing is ever certain in the stock market, because the Options Market Stages are forward-looking, it can be seen that the upper limit of the green Lottery Fever zone never quite reaches 2600 through the end of June 2017. Since historically the S&P has rarely exceeded that limit, there is a very high probability that no matter how good the economic news, no matter how good corporate earnings are, the S&P will be limited to 2600 over the next several months.
It makes sense, because at 2600 many traders with gains would again be tempted not to push their luck and get greedy. The added selling pressure from those traders creates a limit, and the Options Market Stages upper limit of Lottery Fever tends to have a high correlation to when traders have reached their limit.
A full description of each zone in the Options Market Stages can be accessed HERE ==> Stage Descriptions
The preceding is a post by Christopher Ebert, co-author of the popular option trading book “Show Me Your Options!” Chris 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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