Today’s price action was practically identical to yesterday’s. The trading day starts out strong and fades until mid-day where it hits what has proved to be fairly strong support (1412 area on SPX) and then begins the climb back up into the close. As I stated yesterday, the price action seems to be the typical end of the quarter window dressing especially given the lack of volume during the end of the day ascent.

Now the market enters the historically strong month of April. The Dow has seen 6 straight years of gains during the first day of April. Furthermore, the first trading day of April has finished higher 9 out of the last 12 years and the trading day prior to Good Friday  has been higher in the S&P 9 out of the last 11 years with an average return that exceeds 0.5%.

I will be watching closely to see if the seasonal bias lives up to its historical tendencies. Premium in the Iron Condor position has come back nicely with the move back towards the middle of the range and the time decay, but a sharp move next week could quickly cancel that out.

I was hoping to see more of a fade and hold move towards the support which would have brought the major benchmarks we follow (stated below) into an oversold state. This would have been an ideal setup, but “ideal” is often not realistic. I will continue to patiently wait on the sidelines until a high probability setup occurs. I still have the month long Iron Condor position on which should bring in a little over 14% this month, but as always I will be happy to see a tradeable edge occur so that I can take action in the ETF Extremes. Currently, our measures are in a neutral state and our proprieatry shorter-term measures are neutral as well. As I always say, “it is a marathon, not a sprint”. All it takes is one trade. Be patient.

As I have stated repeatedly over the history of this blog, seasonality should never be the sole reason to place a trade. However, when coupled with technical analysis it can be a wonderful tool, so being aware of the historical seasonal conditions can certainly give you an extra edge when considering trading a position. I think we could be in one of those instances where being aware of the seasonal picture could be advantageous.

Overbought/Oversold levels for March 30, 2007

• SPY - 50.4 (neutral)
• DIA - 53.4 (neutral)
• IWM - 56.7 (neutral)
• QQQQ - 41.4 (neutral)
• OIH - 52.3 (neutral)
• GLD - 57.4 (neutral)

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The market moved sharply lower shortly after the open only to reverse itself 90 minutes before the close of the trading day. Was the intra-day reversal just end of the month/quarter window dressing or an early start to the upcoming positive seasonal bias? My guess is the former, but it is just that, a guess. I would still like to see a dip down to the 1410 area of the S&P (like everyone else it seems) before seriously considering a position on the long side. Tomorrow is the last trading of March and the short-term seasonal picture is historically bleak. However, the bearish tendencies are quickly reversed as we move into the first week of April.

Given the upcoming seasonal bias I think a portion of yesterday’s post is worth repeating. I stated ”according to the Stock Trader’s Almanac (an invaluable tool) the last trading day of March has been lower 13 out of the last 17 years with significant losses. If the market does move lower we should expect to see “oversold” to “very oversold” conditions which should prove to be an area for considering short-term long exposure.

 

Moreover, the first few trading days are historically very bullish. The first trading day of April has finished higher 9 out of the last 12 years and the trading day prior to Good Friday  has been higher in the S&P 9 out of the last 11 years with an average return that exceeds 0.5%.

As I have stated repeatedly over the history of this blog, seasonality should never be the sole reason to place a trade. However, when coupled with technical analysis it can be a wonderful tool, so being aware of the historical seasonal conditions can certainly give you an extra edge when considering trading a position. I think we could be in one of those instances where being aware of the seasonal picture could be advantageous.”

Overbought/Oversold levels for March 29, 2007

• SPY - 49.8 (neutral)
• DIA - 47.4 (neutral)
• IWM - 50.0 (neutral)
• QQQQ - 42.9 (neutral)
• OIH - 72.1 (overbought)
• GLD - 55.0 (neutral)

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The month of March and the first quarter are finally winding down. As you can see below the major benchmarks are nearing an oversold state. The next two trading days are historically weak with the probability in the S&P of a advancing day at only 33% and 48%. Furthermore, according to the Stock Trader’s Almanac (an invaluable tool) the last trading day of March has been lower 13 out of the last 17 years with significant losses. If the market does move lower we should expect to see “oversold” to “very oversold” conditions which should prove to be an area for considering short-term long exposure.

Moreover, the first few trading days are historically very bullish. The first trading day of April has finished higher 9 out of the last 12 years and the trading day prior to Good Friday  has been higher in the S&P 9 out of the last 11 years with an average return that exceeds 0.5%.

As I have stated repeatedly over the history of this blog, seasonality should never be the sole reason to place a trade. However, when coupled with technical analysis it can be a wonderful tool, so being aware of the historical seasonal conditions can certainly give you an extra edge when considering trading a position. I think we could be in one of those instances where being aware of the seasonal picture could be advantageous.

My ETF Extremes strategy takes advantage of these types of situations and so far the track record has been outstanding. The strategy is higher 42.7% since it was initiated on Jan.1, 2006. My goal was to outperform the major benchmarks and the strategy has done so handily. So, it surely pays to be aware of the short-term seasonal picture.

Overbought/Oversold levels for March 28, 2007

• SPY - 47.2 (neutral)
• DIA - 41.0 (neutral)
• IWM - 49.0 (neutral)
• QQQQ - 40.8 (neutral)
• OIH - 61.5 (neutral)
• GLD - 68.9 (neutral)

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The anticipated short-term decline finally came today and the major indices we follow (with the exception of the S&P (SPY)) are firmly entrenched in neutral territory. As I write this futures are lower across the board. This will obviously help out our current condor position and should give us some breathing room for the moment. As I always do, I will look at our position to see if any adjustments make sense at this juncture. Most likely, I will sit tight with our current position, but I always want to see what the market is willing to offer.

As for the ETF Extremes I am sitting comfortably on the sidelines until a high probability set-up comes my way. Even with my recent short-term bearish bias I was still somewhat uncomfortable about taking a position. I am certainly never in a hurry to place a trade. As I always say, this is a marathon, not a sprint.

However, this is why I decided to show my subscribers how to trade Iron Condors. They present an opportunity to take advantage of the market during times of uncertainty.  The increase in premium over the last month has afforded me the opportunity to choose a much wider range so unless we see a significant move (whether it is bearish or bullish) occurs over the next few weeks the current positions should prove to be profitable.

Please do not hesitate to email me with any questions or comments regarding our strategies or the blog.

Overbought/Oversold levels for March 27, 2007

• SPY - 66.3 (neutral)
• DIA - 57.5 (neutral)
• IWM - 58.8 (neutral)
• QQQQ - 56.7 (neutral)
• OIH - 78.9 (overbought)
• GLD - 62.2 (neutral)

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A sharp decline occurred immediately following the  the surprisingly poor housing news (new home sales fell 3.9%) from the Commerce Department at 10:000 EST. However, the steep decline was recovered by the end of the trading day. As a result, the market is still within the range that established towards the end of last week. Furthermore, the S&P remains in an overbought state.

My sentiment over the short-term (1-5 days) continues to be bearish. I stated at the end of last week that “this type of price action (substantial advance followed by tight range-bound price action) typically leads to a short-term reprieve, particularly  when the market is in an overbought state. Furthermore, the longer the indices remain in a tight range the shaper the move outside of the range and given that the upside looks limited due to the overbought levels I expect to see a short-term move lower towards the beginning of next week. Not much has changed over the last few days.

Also, as I have stated the last few days (and several times in the past) the initial move following a fed release is usually reversed within a few days particularly if the move was greater than 0.5% in the S&P. When I combine all of the elements mentioned above I can’t help but have a short-term bearish bias.”

Was today’s bounce fueled by end of the quarter window-dressing? We have certainly seen this type of move before. This could be my skeptical side temporarily taking over my mindset because I was so enthused by the early drop. Why you ask? The early decline brought our current SPX Short Iron Condor position closer to the middle of our chosen range.

Overbought/Oversold levels for March 26, 2007

• SPY - 74.1 (overbought)
• DIA - 69.2 (neutral)
• IWM - 67.7 (neutral)
• QQQQ - 70.9 (overbought)
• OIH - 82.4 (very overbought)
• GLD - 66.8 (neutral)

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The S&P experienced the best one week performance since March 2003. After a nice rally Monday-Wednesday, the market was unable to continue the surge higher during the last two trading days of the week and as a result traded in a very tight range.

As I have stated many times in the past, this type of price action (substantial advance followed by tight range-bound price action) typically leads to a short-term reprieve particularly  when the market is in an extreme overbought state. Furthermore, the longer the indices remain in a tight range the shaper the move outside of the range and given that the upside looks limited due to the overbought levels I expect to see a short-term move lower towards the beginning of next week. Not much has changed over the last few days.

Also, as I have stated the last few days (and several times in the past) the initial move following a fed release is usually reversed within a few days particularly if the move was greater than 0.5% in the S&P. When I combine all of the elements mentioned above I can’t help but have a short-term bearish bias. Once the market is able to work off the current overbought levels I will reevaluate my stance, but until then I think the short-term bias leans towards the bears.

Overbought/Oversold levels for March 23, 2007

• SPY - 78.2 (overbought)
• DIA - 78.1 (overbought)
• IWM - 74.0 (overbought)
• QQQQ - 67.3 (neutral)
• OIH - 80.4 (very overbought)
• GLD - 53.1 (neutral)

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I am keeping it fairly short tonight as my mother is in town visiting. Please do not hesitate to email me with any topics that you would like for me to discuss. I have already had a request for tax laws on options trading so I will be covering that next week. I would love to hear other requests, comments or ideas that will make your trading/investing more worthwhile. Now onto today’s comments.

After the best three day performance since November 2004 the major benchmarks traded in a fairly tight range and finished the day basically flat. The benchmarks were unable to work off the overbought conditions so I still anticipate that the market will experience a short-term decline over the next few days. Any moves to the upside should be limited and not sustainable at least until the market is able to work off the current overbought levels. 

Yesterday’s move was no doubt a pleasure for those who were siding with the bullish camp. As wonderful as the day seemed for the bulls, this type of price action usually does not bode well for the market over the short-term (1-5 days). As I stated yesterday (and several times in the past) the intial move following a fed release is usually reversed within a few days particularly if the move was greater than 0.5% in the S&P.

Overbought/Oversold levels for March 22, 2007

• SPY - 77.1 (overbought)
• DIA - 76.3 (overbought)
• IWM - 74.7 (overbought)
• QQQQ - 73.4 (overbought)
• OIH - 78.5 (overbought)
• GLD - 75.1 (overbought)

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Immediately following the Fed announcement at 2:15 EST the market surged higher which pushed all of the major benchmarks into an “overbought” to “very overbought state”. Typically, when the market moves sharply in one direction it is often reversed within a few days. Given the the current overbought levels and the fact that the shorter-term levels I follow are in an extreme state I would expect to see a decline over the next few days. The question is will the expected short-term decline wipe out today’s gains? I tend to doubt it, at least over the short-term, but stranger things have happened.

The extreme short-term overbought situation should make for an interesting short-term set-up especially if I see a small advance over the coming days. The probability of a decline looks good over the next few days so I might consider stepping in for a short-term play at this juncture.

The three day rally has really put the SPX Short Iron Condor strategy in a bind. I chose a 140 point range which allowed for a 5% move (70 points) each way but with SPX gaining 50 points in three days during the first week of our trade I could be forced to make some adjustments in the near future. This is the largest three day advance in quite some time. If this occurred during the third our fourth week the strategy would be okay, but given that this is the first week of the April cycle this could lead to a loss. Sharp directional moves are the worst scenario for the Iron Condor strategy, particularly during the first week. As I stated earlier, I expect to see a decline over the coming days due to the overbought nature of the market and if there is any upside it should be limited and not sustainable. But as we all know, this is Mr. Market we are talking about and even though probability is on your side there are never any guarantees in trading/investing.But we all know that already.

Overbought/Oversold levels for March 21, 2007

• SPY - 78.7 (overbought)
• DIA - 75.2 (overbought)
• IWM - 76.2 (overbought)
• QQQQ - 80.2 (very overbought)
• OIH - 71.5 (overbought)
• GLD - 77.6 (overbought)

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The market continued to rally today and has pushed the major indices near an overbought state. Our shorter-term overbought/oversold measures are nearing an extreme so more than likely we will see a short-term decline or pause very soon. As I stated yesterday the 141 level of SPY (1410 on the SPX) should prove to be an important area of resistance. So far the market has held up quite nicely, but I think the move could be overextended.

The fed announcement is due out tomorrow so be prepared for some volatility. Typically, any sharp directional move after the announcement is reversed within days so be careful for false breakouts particularly if we see a sharp move to the upside.

The VIX dropped another $1.32 today so premium is once again hard to come by. This certainly helps out our SPX iron condor position and moreover,  we are still comfortably situated 50 points from our short call position. Given the near overbought levels I expect to see SPX move back towards our midpoint over the coming days. Unfortunately, I do not have a crystal ball so there are no certainties, but probability is on our side. If the underlying SPX continues to push higher in the face of overbought conditions I will start looking at potential adjustments, but we are currently well within our chosen range so we are not yet concerned.

Overbought/Oversold levels for March 20, 2007

• SPY - 66.1 (neutral)
• DIA - 62.9 (neutral)
• IWM - 64.4 (neutral)
• QQQQ - 67.7 (neutral)
• OIH - 58.7 (neutral)
• GLD - 70.2 (overbought)

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We established our SPX short Iron Condor trade with a 140 point range. We were able to get in at the open before too much premium was sucked out. There are many ways to use this strategy and over the course of the next year or so I will randomly (when the situation arrives) talk about various ways to effectively use this strategy. More importantly, I will talk about the pitfalls of the strategy and how to appropriately manage positions gone astray. It should be an educational.

The rally today was unable to push the major indices into an overbought state. Recently, when the market rallied it would push the indices into an overbought state which typically signals a short-term decline or at minimum, a pause was near. Not this time. The sharp move today did not even push our shorter-term measures near an extreme state which means the market still has some room to run here.

If the market continues to climb higher I would expect to see some overhead pressure around 141 on SPY although we are not out of the woods at our current level. We saw three days of consolidation (3/8,3/9,3/12) where the market struggled and was very close to an overbought state. Obviously a move back to that level will put the major indices we follow in an overbought state so I will be watching closely to see if the move comes to fruition. If it does I will start thinking of stepping back in. Until then I will be patiently sitting on my hands waiting for an opportunity to arise.

Patience is the key, particularly with strategies such as the ETF Extremes. As Todd Harrison, states “opportunities are made up easier than losses”. So, if you let a few pass you by don’t dwell on what could have been. There will always be more opportunities around the corner. Remember, this is a marathon not a sprint.

In the ETF Extremes we like to wait until the odds are heavily skewed in our favor so obviously trades are limited. This is just one approach/strategy to the market and just another way to diversify an portfolio.  It is not the ”holy grail” of strategies (there isn’t one)but just one that takes advantage of specific extremes in the market. 

Overbought/Oversold levels for March 19, 2007

• SPY - 55.0 (neutral)
• DIA - 53.5 (neutral)
• IWM - 57.6 (neutral)
• QQQQ – 59.7 (neutral)
• OIH - 74.2 (overbought)
• GLD - 60.1 (neutral)

We work hard to bring you our latest views, opinions and research on a daily basis. If you are a loyal reader and find our thoughts useful please show us your support by joining our newsletter service.  We currently follow 2 stock option strategies and one stock-based strategy in our investment newsletter. All of our strategies use ETFs as the underlying. Check it out! Also, you will receive two free months of our investment newsletter when you purchase our White Paper.

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Have a great night!