As noted in the recent tweet, we had a strong downside momentum day on Monday, with Demand closing at 15 and Supply at 214. The general pattern following such downside momentum days is a bounce one day later followed by subsequent weakness, although this pattern is affected by larger-term market regimes.

Given the significant expansion in the number of stocks registering fresh 20-day lows, I went back to October, 2002 (when I first began archiving the 20-day high/low data) and examined what happens in the S&P 500 Index (SPY) after 20-day new lows make a 20-day new high. The next day, SPY averages a gain of .18% (91 occasions up, 59 down), versus no change for the rest of the sample (818 up, 712 down). Five days after a surge in 20-day lows, SPY averages a gain of .47% (88 up, 62 down), versus .02% for the remainder of the sample (836 up, 694 down).

It’s thus not unusual to get a bounce following significant market weakness. I will be watching to see how we trade relative to yesterday’s pivot level, as well as the usual sentiment gauges of NYSE TICK and volume transacted at bid/offer, to gauge the likelihood of sustaining a bounce on the day today. Alternatively, inability to sustain buying sentiment below the pivot would sustain the downtrend.

10:17 AM CT – I added the above chart of the NYSE TICK with a green 20-minute moving average to show how sentiment has weakened during the trading day, with more stocks transacting on downticks than upticks. Noticing that shift was key to anticipating the move below the overnight low. Should we continue with bearish sentiment, the next target would be S1. The fact that it’s taken us a while to even approach S1 suggests to me, however, that we could see more of a range environment, trading back into the overnight range, in advance of the Fed announcement and Wednesday’s numbers. I’m watching TICK closely to handicap that scenario (but not become wedded to it!)

As you can see from the chart above, after today’s sharp drop, new 20-day lows across the NYSE, NASDAQ, and ASE are now outpacing new highs rather handily. On Monday, the new lows hit a level they haven’t seen since the March bottoming period. I notice that new 65-day highs and lows are now about even. This fits with the pattern of market weakness–and the trend shift–noted in the recent indicator review and update of the sectors. Seeing the market weakness setting up early in the morning, as noted in the intraday Twitter comments, and placing that weakness in the context of a trend shift was helpful in anticipating our break of last week’s lows. It’s a nice example of how placing short-term strength/weakness in the context of longer-term market activity is useful in anticipating moves to and through key price levels.
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Last week’s indicator review found that “As long as new lows exceed new highs, we have to look at this as a potential trend shift that could take us well into May’s trading range.” We did, indeed, see those new 20-day lows continue to outpace new highs, taking us briefly below 900 in the S&P 500 Index before bouncing higher late in the week.

The bullish momentum that we saw sustained from the March lows (top chart) has been lost, a situation that commonly occurs during topping processes. New 65-day highs, which peaked early in June, have steadily declined since then and now stand barely higher than new lows (middle chart). Meanwhile, the advance-decline line specific to S&P 500 stocks–a great feature from the Decision Point service–actually broke May lows last week before bouncing.

With a majority of S&P 500 sectors retreating from their bullish trending status, we now stand in a broad trading range between May’s lows and June’s highs. At this juncture, given the relative strength of NYSE Cumulative TICK and intermediate-term new highs/lows, I see this more as a correction within a bull market move than as the start of a fresh bear market. A move below May lows, particularly accompanied by new 65-day lows exceeding new highs, would lead me to re-evaluate that stance.

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In the last few weeks, stocks have struggled to add to recent gains, suffering even more from a lack of buying interest than from selling pressure.

The chart of the week below is an attempt to use two basic indicators to capture the lack of volume and market breadth that has undermined the March to mid-June rally. As a measure of market volume, I have chosen to highlight on balance volume (OBV), which is a running total of the volume on up days minus the volume on down days. This indicator is excellent at highlighting trends which are at risk due to declining volume, which is exactly what the warning suggested when there was a peak in OBV during the first two weeks of May.

In a similar vein, the McClellan Summation Index (aka the NYSE Summation Index or NYSI) shows market breadth as derived from the net daily advancing stocks minus declining stocks. The McClellan Summation Index did turn up at the end of February, just before the March bottom and is generally an excellent tool for gauging trends in market breadth.

In addition to the May highs, note that both OBV and the McClellan Summation Index have recently made lower highs as well. While OBV shows some indications of steadying at current levels, the larger concern is the decline in market breadth issues highlighted by the McClellan Summation Index.

Like all indicators, these two are far from perfect, but they often provide important information about the decline in strength and potential for reversal in major trends.

For additional information on the subjects above try:

• The McClellan Summation Index (4/3/07)
• Two Thoughts on the McClellan Summation Index (10/25/07)
• McClellan Summation Index Turns Positive (2/29/09)
• Whither COF? (5/27/08)

[graphic: StockCharts]

Interestingly, though we’ve moved back into May’s trading range in the S&P e-mini (ES) contract (pink line above), the Cumulative NYSE TICK has stayed well above May levels. Continued strength in Cumulative TICK would suggest to me that we’re experiencing a correction in a bull market, not the start of a renewed bear.
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Press Release

Their announcement came out at 1:30 AM this morning. Here it is:

“Ipsen (Paris:IPN) and its partner Medicis (NYSE: MRX) announced today that the companies are in active labeling and Risk Evaluation and Mitigation Strategy (”REMS”) discussions with the U.S. Food and Drug Administration (”FDA”) related to the Biologics License Application (”BLA”) for Ipsen’s botulinum toxin type A product in both therapeutic and aesthetic indications. ”

This is a form of Botox used cosmetically (over 5 million times a year in the US) to soften lines of the face, and medically to treat crossed eyes and other muscle spasms.

Selling Straddles

Yesterday, I sold MRX April 12.50 straddles. The implied vol we 200% for April options and the IV for May options was 115% It has a 30 day hist. vol of 99% and the straddle sold for 2.35 when the stock was at 13.

I ran a Monte Carlo calculation to test the trade. The outcome was that the break even points will be violated 15% of the time. So that is good odds especially if the implied volatility were to drop by half to the value of the later month’s option series.

Today the implied volatility of the April options did drop to 90, and the price of the stock came in to 12.69 So the question is, should I stay in the trade to expiration or not? Is it still a good trade or is all the juice squeezed out of it?

Exit the Trade?

Rerunning the Monte Carlo with today’s information, the 12.50 straddle selling for 0.94 with the stock at 12.69 and its historical volatility at 102% It looks like there is a 51% probability that MRX could close outside the break even points.

The expected return for this trade is -$86. Not a good trade. So I will close it out tomorrow morning.

For more trades like this, get my free CD “7 Secrets To Make $1,000 Per Week Trading Options”.