Wednesday, September 30, 2009

Got Volatility?

Well today the market basically covered all the bases and then some. Just a wild one. End of quarter. Whatever is going seems like a giant tug of war out there right now and I have no real conviction to either side here.I still lean towards the downside short term especially if the jobs report upsets. However, I do think any dip we get will be bought and we will likely see a final leg into the end of the year going forward. For now lets try to tackle Thursday October 1.

Crude oil supported the market after it rallied into midday and tagged 70 by the end of the day while the dollar caved back in a bit. I think commodities looks interesting here if they can have another continuation up day. The euro is at a huge area here and I think 1.461 low from last week should be watched into the weekend to see if we close below or not. If so, its dollar bullish into October.

The one thing I will say about the price action with an ounce of confidence is that volume is def greater to the downside this week and the rallies have been on weak volume that I do not trust. For now.

1065 on the SPX is key this week so if we get a close above that I think you gotta be bullish. But overall this is a good time to be trading light or even not so much at all. And whatever you do; be hedged or keep those stops in place.

Tuesday, September 29, 2009

MA Bear Put Spread

Mastercard (MA) is having some relative weakness today and the last week in the markets. The daily chart looks to be putting in a bear flag and having trouble near 210. I think MA is looking toppy here and could retrace all the way back down to the gap zone down at 190ish in the next few weeks. Also, if this market rolls over and retraces into October like I tend to think it may; then MA will be a fast mover imo.

Buy the 200 puts in October and sell the 180 puts for a bear put spread that costs roughly $3. 

MA options looks relatively cheap on an implied volatility basis as IV in Oct is around the mid 30s. Max the spread can be worth at Oct expy is $20.

Monday, September 28, 2009

Weekly Watchlist 9/28

The 3rd quarter ends in just a few days and then October comes as the markets are showing signs of toppiness. The bears are roaring the past few days as they believe they called the top. Lots of traders piled in short the last few days thinking the same. They have stops that could be tested early this week just above current levels. Monday is a Jewish holiday so volume won't be quite average. That, in addition to end of quarter window-dressing the next few days could result in a weak bounce back off some short term support between 1035-1030. Then by Wednesday the market may rollover and continue lower if the jobs data at the end of the week does not impress.

From looking at some scans and other sector charts this weekend I think this correction could be more along the lines of 8-10% for starters. I would not be surprised to see 987 in the SPX soon as that is rock solid support. The transports are looking very weak and led the way down last week with the commodities as well. On top of this, the US dollar index daily chart is looking bullish and I think we could be at the start of an interesting short squeeze of a rally in the US dollar. The euro and aussie dollar look just the opposite and should selloff further imo. Oil broke some important trendlines last week as it came back to 66. I would expect crude to sell off further as long as the dollar rallies. You could easily see crude retest the 60 area.

The watchlist:



Thursday, September 24, 2009

Collar Up RIMM Profits

Research in Motion (RIMM) is reporting earnings after the bell and if you are holding stock that you want to hold on to I think a great way to protect yourself is to "collar it up" by selling a call and buying a put.

RIMM has had a nice run and with the market pulling back it could see profit-taking after earnings. The implied volatility is around 64% in Oct and 53% for Nov. If the skew was much greater than this between each month I would consider buying a calendar spread in RIMM or even a double diagonal. If I were long stock I would advise selling a 95 call and buying a 75 put for nearly even-money. You sell the 95 call for 1.70 and buy the put for 1.70. Net-net its a zero cost collar and protects you to the downside if RIMM tanks. If it rallies thru 95 you simply get called away at 95 at Oct expy.

If I were not holding a position in the stock I would consider selling an iron condor with wide enough strikes to be cushioned against a big move in RIMM after earnings, which often happens as you can see the last several quarters. If I had a gun to my head I would consider the 70/75/100/105 Oct iron condor short. But I am not officially putting this on as the RIMM earnings move are too volatile for my blood.

Adam Warner of Daily Options Report has some interesting thoughts on RIMM earnings as well.

Wednesday, September 23, 2009

Buy the Dip?

Well it was a crazy day on Wall Street as the Fed Statement gave us an initial pop but subsequent drop into the close. The move down in the last hour was ugly and surprised me. The candle we formed today was a textbook outside reversal which usually gives you a few days of follow-thru the downside in this situation.

You have to remember the SPX is up about 90 points in 3 weeks from top to bottom and the rubber band is a bit stretched at this point. Markets usually mean revert to a sense of normalcy. Today's reversal merely brought us back to within a few points of the 8ema on the daily. I would expect the markets to test the 20ema as we get a potential multi-day dip here.

A 50% retracement of the move up since early Sept is 1034 and that area is also the site of some good support so I would not be surprised to see this area tested before the bulls come back into charge. I think this will be a great area to scoop up some more longs and buy the dip. Ultimately, I do think this market continues higher. But we will watch and determine that accordingly. For now the dollar could likely bounce a bit and commodities pullback, which further pressures stocks.

Monday, September 21, 2009

Weekly Watchlist 9/21

This week the markets will see plenty of data from home sales and durable orders to jobless claims and the latest FOMC meeting on Wednesday. The G-20 meets in Pittsburgh on Thursday. And throughout the week the treasury will be auctioning off several billion in short term bonds. It should be a macro-focused week in the markets and the SPX will start it off at 1068. Another interesting index to watch will be the Dow, as it sits at 9820 and close to that psychological 10k figure that the media is just drooling over. I anticipate this area to get hit this week and then you will really see the Johnny Come-lately retail investors pour into this market going into the end of month.

The dollar is still looking weak but the possibility of a bounce should be watched as its oversold and the Fed speak and G-20 meeting could ignite some defensive rhetoric from officials. Gold looks ready for a profit taking perhaps if it can't hold the 1005 area.

The SPX is pretty much in a vacuum zone overhead with the low supply area's from last Fall's crash giving us a good chance at seeing a rapid rally to the upside. Last Fall we saw a panic selling for fear of the unknown. This Fall we could see the markets race right back to 1150 or so as a panic buying comes into the markets, for fear of missing out on the upside starts to set in. Human emotion is a funny thing isn't it?

This is a momentum driven market right now and it has been for several months. These types of markets usually don't top out with a surprise crash or something. They top out with either a blowoff top on huge volume or a long gradual rolling top that plays out over several weeks or even months. We have seen neither yet. Trade safe.

The watchlist:


Shorts>> MCO

Wednesday, September 16, 2009

Bulls On Parade

At midweek the major market indexes are at fresh highs on the year above 1065 which I originally called for here back on May 31. The market is poised to push further into friday as we have quadruple witching options expiration coming. We have seen a steady grind up in the markets and low volatility overall. Traders see this and will take off protective hedges into friday which could further fuel a burst into 1100 SPX. This market momentum is not something to stand in front of and I continue to see traders do just that.

We are setup to see the gap from last October get filled on the SPY and perhaps even then some. If you look at the SPY the gap comes in a bit above 108 and then there is "pure air" between here and about 1110 on the SPX cash index. Which just happens to line up with my SPX 1111 target I've been calling for since August and my "Dow 10k by early Fall" target as seen here in July.

There is broad strength in the markets from sectors such as banks, energy, tech, and transports. These are the sectors you want to be leading. At the same time internals remain strong and stocks making new highs are expanding with each move higher. No divergence yet in stocks making new highs versus the new highs in the SPX tells me we are still running on a full tank of gas, no matter how steep the hill ahead may look.

The dollar is also continuing to make new lows which doesn't hurt either. Commodity currencies such as the Aussie and Canadian dollar are making new highs on the year as well which is why oil, copper, and gold continue to rally. It will be interesting to see if oil and copper can break above their recent resistance of 75 and 3 respectively. But overall I think if we can see 3 out of 4 of the above sectors carry us then this market will go higher. Period. Trade safe.

Monday, September 14, 2009

Weekly Watchlist 9/14

Going into options expiration week the SPX finished last week at 1042 after hitting new highs on the year. The levels on the downside that have and should continue to provide support on the SPX are 1027, 1014, 994. On the upside I am looking at 1052, 1080, and 1100 to come into play if this market breaks out. It does seem like we are in the latter stages of the rally since March because the market feels fragile but that does not mean we cannot see one more burst to the high side into the end of 3rd quarter for the next few weeks.

The commodities like copper and oil had sort of an ugly reversal on friday and the dollar strengthened a bit late. Whether this leads to more continuation this week we shall see but the trend is certainly pointing the other way for now. Another sector to watch of course is the banks (XLF) as they did not make new highs last week as the broad market did. This could be a warning sign going forward as banks need to participate if the market is going to rally to new highs. Retail will be in focus this week as investors try to gauge the strength of the consumer when BBY reports Tuesday.

The Watchlist:


Shorts>>> ICE, ERTS

Wednesday, September 9, 2009

Market Testing Resistance

At midweek stocks are showing strong momentum and challenging last month's highs near 1039 on the SPX. I think we will break these highs soon and continue to squeeze shorts in this market. Traders (myself included) got a bit too bearish the last few times we sold off. We have seen dips being bought every time the funds get a chance. Remember that funds are going into end of 3rd quarter soon and they are under-allocated which is one reason why I believe we have the potential to see one big thrust up into the end of the month that could get us to 1100 on the SPX quickly.

After the breakout in the Euro this week and continued strength in the commodities I adjusted my bias up and think the shallow correction we saw last week will result in continued buying into end of Sept. Too many are expecting "the selloff" to 950 and I just do not want to be on the same side of the crowd. Ever.

I think we run into trouble into October perhaps as the last few bears get on board the rally if we break to new highs here. Then and only then, will we see a risk of a more steep correction going into the 4th quarter. We will cross that bridge when we get there however.

It is clear that the Fed is committed to "easy money" and will keep supporting US asset prices (stocks) as best they can. After all, the goal is to show Americans that the recovery is underway and "good times" are ahead and the best way to do that is to have equities rise and the Average Joe to see gains in his portfolio. Even if that means the intrinsic value of those assets hasnt quite changed in real terms.

Bond auctions have seen good demand and its a light data week in the US overall so we should continue to see a grind up in buying momo. GS closing above 170 was very positive and the transports look to be breaking out as well. The Nasdaq and energy also look strong and if the market does breakout these sectors should lead. Trade nimble out there.

Wednesday, September 2, 2009

Gold Looks Shiny

On Wed. Gold saw its biggest daily gain since March and has officially broken out of the tight range consolidation triangle pattern that I have been watching for months. I believe today's breakout on high volume was just the start of a multi month breakout. I can see gold getting to 1150-1200 by year end as I think this is the move that will finally give gold a push thru that 1000 dollar level and this should give it added momentum.

If you take a fibonacci extension from the down move in 2008 as a target you get about 109.5 in the GLD as the 127.2% extension. The second target is up at the 161.8% extension and is 121.5. This would be more of a longer term target looking a year down the road but the point is that gold is going higher and you need to buy some.

I would be a buyer of the GLD on a pullback over the next few days or a bull flag consolidation setup on the 60min chart could offer up a nice entry point. If the GLD can pullback to the the low 95's then I want to be buying some Oct at-the-money calls and selling put spreads in gold miners such as ABX, NEM, GOLD.

The implied volatility of gold miners is more than twice that of the GLD which is why I would rather sell some of that premium in the miners in the form of bullish credit spreads and buy up calls in the etf.

Free Fallin'

So at midweek the market looks to be starting a correction that could continue thru Sept imo. After yesterday being one of the strongest sells I have seen all summer with volume the highest since early May and internals weak as can be; the path of least resistance appears to be lower for now. Remember how far we have came in the last 6 months. The SPX ran from 666 to 1039. Support levels below here sit at 980, 968, 950. The 200 day ema on the SPX stands at 954 and has been relatively flat all summer as it based out and tried to curl higher. If this market does eventually lose 950 then I must caution a gap fill zone down at 905 that will be waiting. I think we at least see a bounce off that 950 area and we will see how the market reacts to it.

As for the rest of this week, we have the ECB interest rate decision tonight in Europe and that should get the currency markets moving before the stock market opens. If the Euro fails at 1.42 area then it could fall very fast. That would put pressure on stocks. Also friday's jobs report is what everyone is waiting for so it should be interesting but like I said, the markets feel heavy and due to correct further this month imo.

Gold is the big chart breakout of the week so far and I will try to do a post on that trade as well. I think we saw a multi month breakout in gold today and at the same time long term bonds rallied to new relative highs. This is troubling for now as it could point to new worries over the flow of credit going into the fall. For now I am keeping a negative tilt to my bias and watching the above support levels to see how the markets acts if it gets to them.