Trade Naked » Odds

Still in a Tight Range

Fri, 04 Dec 2009 21:10:23 +0000

Weekly comment on the market from Larry McMillan:

SPX Through 12-4-09

The S&P 500 Index ($SPX) has still not been able to break out of its 1080-1110 trading range on a closing basis. This is a very tight range that has lasted for nearly a month (since November 9th, actually). Our indicators are modestly bullish, so the odds slightly favor an upside breakout.

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

Volatility indices have generally declined, with both $VIX and $VXO near yearly lows earlier today. Declining volatility is bullish for the broad stock market.

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.]

How Much Happens On The Weekend?

Fri, 31 Jul 2009 17:26:04 +0000

I decided to test something that I had read about in Jeff Augen’s book Trading Options at Expiration: Strategies and Models for Winning the Endgame (Amazon link) about time decay during expiration week. Late in the afternoon the Friday before expiration week there are seven days left until options expire. Two of those days are weekend, Saturday and Sunday. How much can the S&P 500 move from the close Friday to the open Monday? (Click on the chart to enlarge).

30 Jan 2006 to 30 July 2009 Weekend Returns

In the histogram the labels refer to the hatch mark just to the right of the number.
So the big peak is in the bucket between -0.5% and +0.5%.

So I took prices for SPY from 30 January 2006 to 20 July 2009 to see. Of those 181 weekends, 129 Monday opens were with in one half of one percent of Friday’s close. Not much movement at all, 71% of the time. Another 11.6% of the time, 21 weekends, the move was greater than half a percent but less than one percent. Another 10.5% of the time the move was one to two percent. So the total for a move of less than two percent over the weekend is 93.4%, pretty good odds.

Outliers

The big moves were 6% the weekend of 10-12 October 2008, two returns less than -3%. One of them was the previous month, 12 – 15 September 2008, the other in the middle of February this year. There was a +3% move over the weekend 21 -24 November 2008. So many of the big weekend moves happened last Fall.

So weekends look pretty safe.

Continuing the Trend

gyatz — Sat, 20 Jun 2009 23:09:03 +0000

Friday 6/19/2009 Dr. Brett Steenbarger published this on TraderFeed:

Here’s how we look (bottom chart) in the S&P 500 e-mini (ES) contract going into the 7:30 AM CT jobless claim numbers. Note the resistance between 912 and 914, as we continue in a short-term downtrend mode. If the 7:30 AM number cannot move us above that resistance level, I’ll be looking for a test of Wednesday’s lows below 900. Note that we’ll have a few opportunities to move this morning, with Treasury Secretary Geithner talking at 8:30 AM CT and Leading Economic Indicators and Philadelphia Fed reports at 9 AM CT.

I find it worth tracking interest rates and the dollar in response to these releases and events and correlating those moves to stocks to pick up on emerging and continuing intermarket themes. In general, if the numbers cannot move us out of a value range that was established up to that point, I assume that the trend that has been in place will remain intact. Once again, I’ll be tracking all of this intraday via Twitter (follow the tweets here).

8:15 AM CT – Update: We traded higher on the jobless claim numbers, but have stayed firmly within the overnight range. Note in the middle Market Delta chart that we’re now trading above the day’s volume-weighted average price (VWAP; red line), as the dollar has weakened versus the euro and 10-year rates have bumped higher. I’ll be watching to see how we trade around VWAP to handicap the odds of taking out Wednesday’s lows in early morning trade vs stay within the overnight range trade.

10:24 AM CT – I’ve added a fresh Market Delta chart (top) to show how we’ve been accepting value above the VWAP (red line) and around the 914/915 ES resistance. This raises the odds that, rather than trap bulls, we’ll flush out bears by taking the market above that resistance. I’m watching TICK and intermarket themes (weak dollar, strong 10-year rates) to see if that scenario unfolds.
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Simple Trade

Mon, 09 Mar 2009 15:50:00 +0000

I did a very simple analysis last week. I came up with a simple trade that is successful 60% of the time. That is a good win percentage and probably can be improved with a little effort. It won’t work forever in this simple form, but while I am trading it, I will look for ways to improve it without overfitting as described in a previous post.

Looking at the S&P500 from 11th January 2008 to 20th February 2009, add up the number of up weeks, there were 17, and the number of down weeks, there were 26. Interestingly, the average return for a positive week was 4.37% while the average loss was 4.77% Not a big difference in the size of the return, about a 10% bigger loss than gain. But there were a lot more losing weeks than winning weeks.

In fact, 60% of the weeks were down weeks and 40% up weeks.

So last Tuesday, 3rd March, I sold some DIA calls. (DIA is an exchange traded fund that holds the same stocks as the Dow Jones Industrial Average.) The next day the market was up, but at 3:30 it started to turn over so I sold a few SPY calls. (SPY is an exchange traded fund that holds the same stocks as the S&P500 index).

The idea is that I improve my odds by waiting for an up day and then selling the calls. There hasn’t been more than one up day a week for a long time. Also, the equity only put call ratio is in the middle of its range as is the VIX. So it doesn’t look like there is going to be a bounce very soon. These are the indicators I will look at to see if they improve the win percentage of the trade.

A week later, today, the trade is up 56%. The Dow is 6.6% away from the strike I sold it at. and the S&P is 6.5% away from its strike. That would take a week and a half to make up if we had up weeks for the next two weeks at the average 4.3% pace.

It is still important to stay vigilant.

Good trading.

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