SPX Through 12-11-09

Our breadth oscillators have given six separate sell signals over the last month, as $SPX has been unable to break out on the upside. That is certainly a negative sign, and those sell signals remain in place today.

Equity-only put-call ratios have been unreliable ever since heavy hedging activity began last summer. That activity seems to be abating now, so we are tentatively looking to use the equity-only ratios as trustworthy market indicators again. They, too (like breadth) have generated sell signals this week.

VIX Through 12-11-09

In summary, both bulls and bears are frustrated — and will likely remain so until a breakout occurs.

SPX Through 12-4-09

The $SPX chart remains mostly bullish. The rising trend line connecting the March and October lows is at about 1070 and rising. Coupled with the just mentioned support at 1080, this means that the trend is still bullish. However, a close below 1070 would be problematic for the bulls.

Equity-only put-call ratios have begun to clearly decline and thus generate buy signals. In normal times, we would be encouraged by that fact, but with the distortions caused by the heavy hedging activity since July/August, we still view the signals from these put-call ratios tentatively. These are not our primary indicators at this time.

Market breadth, on the other hand, has been a much more accurate signal during the rally since March. Breadth has given a sell signal each time that $SPX has approached the top of the trading range and then fallen back. Today was no exception, as yet another sell signal has been issued after the $SPX failure to break out on the upside.

VIX Through 12-4-09

In summary, $SPX has been unable to break out of the trading range. Perhaps Friday’s Unemployment Report will provide a catalyst for the breakout. Traders should wait for the breakout before taking speculative positions.

[An unexpectedly good unemployment report did send the S&P 500 up 1.5% at 10 AM but it quickly fell back and closed up 0.5% at 1106.] ]]> http://tradenakedoptions.com/2009/12/still-in-a-tight-range/feed/ 0 http://tradenakedoptions.com/2009/11/1100-is-critical/ http://tradenakedoptions.com/2009/11/1100-is-critical/#comments Fri, 13 Nov 2009 17:21:03 +0000 http://tradenakedoptions.com/?p=2141 Larry McMillan’s freebie weekly market analysiss:

SPX Through 11-13-09

A breakout above 1100 would be bullish, and could probably propel prices to the 1150 level without much trouble. However, a failure at 1100 means that support areas would be important. There is support at 1160-1170, near the 20-day moving average, and then below that at 1030, the late October lows, followed by 1020, the early October lows.

There are now breadth sell signals as of today’s failure at 1100. Also, there is a matter of negative divergence: breadth rose to much higher levels when $SPX first visited 1100 a month ago.

VIX Through 11-13-09

In summary, the intermediate-term trend of the $SPX chart continues to be bullish. However, there are several potential short- term negatives which mean that another correction could be about to emerge. A close above $SPX 1100, however, would essentially end bearish thoughts.

This from Larry McMillan

SPX Up to 9-4-09

First — and probably most important — the $SPX chart remains bullish. The trend line connecting the March and July bottoms is intact. It currently sits at about 965 and is rising daily. That is major support. In addition, there is support at $SPX 980, which is the area of the August lows. So, as long as those two support areas are intact, the $SPX chart remains intermediate-term bullish.

Weighted Put Call Ratio 9-4-09 With OEX

Also, market breadth has generated sell signals as well.

VIX Through 9-4-09

In summary, the weight of the evidence is bearish at this time, so we expect the $SPX support in the 970-980 area to be tested. If it gives way, then a more aggressive bearish stance would be warranted.

SPY / 4 vs UDN

Here we are looking at the ETF that tracks the S&P 500, SPY, divided by four to make it comparable to UDN. UDN is the ETF that is inverse to the dollar index. From the creation of UDN, its correlation with SPY is 24% which is significant.

The next chart looks at the same two ETFs over the last year.

SPY / 4 and UDN 6/2008-8/2009

The correlation has increased to 31% for the period shown from 6/2/2008 to yesterday. The interesting thing is that in the 163 trading days in 2009, during 114 of them, UDN and SPY were in the same direction, while 46 of them they went in opposite directions. (Three of them, UDN had no change.)

So it would be interesting to see if we can predict the direction of the market by looking at the overnight movement of the dollar.

Stay tuned!

Chipotle Mexican Grill

First, let’s look at past earnings announcements and the close to open change in price.

It’s trading at 90 and the 90 August straddle goes for $10. So we could try a calendar at 80 and 100.  (Click on the charts to enlarge).

If after earnings tonight, the volatility of the August options collapses to the September values the return graph for tomorrow is the colored curve. It is positive from 80 to 108. (Click on the charts to enlarge).

Return After Volatility Collapse

Intuitive Surgical

Here is a table of the last few returns from the close just before earnings to the open right after earnings are releases.

The ISRG straddle is selling for $22.50 or 13.3% the average move on earnings is 0.32%, but the average absolute move is 8.82%. So 13.3% is still high. They are expecting a large move. Let’s see what the dual calendar spread would do if we center it around 145 and 190. (Click on the charts to enlarge).

If the volatility collapses, we have:

Seems plausible,  but being skeptical, I wanted to test it.

Here is a plot of daily trading volume in SPY, the proxy for the S&P 500.

SPY Volume (20 day Simple Moving Average)

I’ve plotted the 20 (trading) day simple moving average. That smooths the plot and I use it to compare the daily volume to the moving average to get a measure of high volume or low volume.

As you can see, it has been rising since 2000. Since the volume has been rising, I compare the daily volume to the MA to see if the daily volume is high or low.

SPY Daily Volume (20 day Moving Average)

To measure the volatility, I take the daily range as a percent of the opening price.

SPY Daily Range

The correlation coefficient for the full time series, from 31st January 2000 to 29 June 2009 is 0.273; while for the smaller sample, 3rd January 2007 to 29 June 2009 it is 0.234. Pretty much the same.

Perfect correlation would be +1 and perfect anticorrelation would be -1. 0.27 is pretty good for financial time series. When I trimmed the outliers, the correlation for the full series went to 0.22. So the result is robust.

(You trim away the outliers, those points that are far away from the mass of points, because they have too large an influence on the correlation.)

The plot of the full time period looks like a solid mass, so I just plotted the shorter time period.

$SPX broke out to the upside on Monday, easily overcoming the various resistance levels (January highs, May highs, and 200-day moving average). It then proceeded to pull back and test the breakout successfully, before advancing again today. Since none of our indicators are on sell signals, the path of least resistance is to the upside.

SP500 5 June 2009

Equity Only Put Call Ratio

Put Call Ratio Weighted By Cost

VIX through 4 June 2009

In summary, the situation remains bullish, although overbought conditions indicate that sharp, but short-lived declines are possible at any time.

The broad market, as depicted by $SPX, remains in a trading range. On the upside, resistance is evident at the 930-940 area, and it is comprised of several items. These present a formidable barrier to further short-term advances — at least until the current overbought conditions abate and new buy signals arise. On the downside, there is support at 880.


SPX Showing Support and Resistance

The equity-only put-call ratios have flirted with sell signals,

but only the standard ratio has a confirmed sell signal — and even it’s a bit shaky (see Figure 2). Meanwhile, the weighted ratio has moved lower and established new lows. Thus, it remains on its previous buy signal and has not generated a confirmed sell signal.

Standard Put Call Ratio

Weighted Put Call Ratio

Market breadth had finally worked off its overbought condition and generated sell signals last week. However, breadth expanded greatly on Monday’s rally, so those sell signals were briefly canceled out before reinstating themselves today. The rally is mature now, so there is a greater chance that the current sell signal will precede a broader market decline.

Volatility indices ($VIX and $VXO) continue to decline, in general, and that means they remain on buy signals. Much has been made on CNBC of the rise in $VIX since yesterday morning’s lows, but as you can see from the chart in Figure 4, $VIX is still clearly in a downtrend. $VIX would have to rise above 34, in our opinion, to break the bullish downtrend and potentially generate a sell signal for the broad market.

VIX

So we can buy at 880 and sell at 940.