The S&P (SPX) continues to struggle with overhead resistance. Today marked the third straight reversal day and could be a early warning sign of things to come. The large-cap Dow (DIA) and S&P (SPY) remain in an overbought state so short-term weakness would not come as a surprise.  

My thoughts from the last few days remains the same, “a short-term reprieve looks likely this week as market performance during post-options expiration is historically weaker than normal. Couple the seasonal tendencies with an overbought market and very strong overhead resistance and you can see why we should expect to see the market struggle over the short-term (1-5 days).”

Our current condor position looks very good. We were able to sell the condor spread for $.90 and the spread is already showing $.65. Not bad with only a few days into the June expiration month. As we all know anything can happen, but as I have stated repeatedly the summer months are, in my opinion, the best time to look at implementing an Iron Condor strategy.

I typically like to take a neutral stance with a 140 point range which allows for a 70 point movement on both sides in the SPX. This means SPX can move roughly 4.5% to the upside/downside over the next four weeks before the strategy fails.

Our range this month is 140 points in the SPX. AS long as the underlying SPX stays within 1580 and 1440 we will make roughly 9% for the expiration month. With June expiration cycle only lasting four weeks with a holiday in there we like our chances with such a large range.  

Overbought/Oversold levels for May 23, 2007

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My thoughts from the last few days remains the same, “a short-term reprieve looks likely this week as market performance during post-options expiration is historically weaker than normal. Couple the seasonal tendencies with an overbought market and very strong overhead resistance and you can see why we should expect to see the market struggle over the short-term (1-5 days).”

I stated yesterday, “a push below Friday’s lows could potentially lead to a continued move lower. In a market where every dip has been bought a sustained sell-off could be a signal of things to come over the intermediate-term.”

Seasonality over the next few days is interesting. Tomorrow is actually quite bearish as the Dow, S&P and Nasdaq are only on average 38.1%, 38.1% and 47.6% of the time, respectively.

However, Thursday is significantly stronger as the Dow and S&P are higher 71.4% and 81.0% of the time, respectively.

The trading day before the extended holiday weekend is typically better than average, although I expect to see a continuation of the trading range mentality as volume should be fairly light. Overhead resistance is too strong at this juncture.

Since 1950 the market has performed exceptionally well during the week of Memorial Day. However, if we look over the last ten years  the Dow has been lower 7 out of the last 11.

All of this seasonal info can be rather confusing as you are probably asking yourself, how can I apply this to my short-term trading strategy. I would not read too much into the historical precedents this time around. There is strong overhead resistance and the large-cap indices are still in overbought territory. If anything the seasonal conditions might be able to hold the market up for a few days, but I think the inevitable short-term sell-off is right around the corner. It could be tomorrow, the bearish signs are lining up that way. As for how long the sell-off will last, well, that is the million dollar question.

A push below Friday’s lows could potentially lead to a continued move lower. In a market where every dip has been bought a sustained sell-off could be a signal of things to come over the intermediate-term.

Overbought/Oversold levels for May 21, 2007

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The first day of the June option expiration cycle was greeted with the S&P surpassing its record close for the first time in over 7 years. The market moved sharply higher into the noon hour only to sell off sharply during the final hour of trading.

As I stated last week, a short-term reprieve looks likely this week as market performance during post-options expiration is historically weaker than normal. Couple the seasonal tendencies with an overbought market and very strong overhead resistance and you can see why we should expect to see the market struggle over the short-term (1-5 days).

I am starting to see several indicators elude to intermediate-term weakness ahead. I will go over some of these tomorrow. Also, as we move deeper into the weak I will discuss the seasonal tendencies that surround Memorial Day.

As I have stated several times over the past few weeks the market is in the midst of the weakest part of the year. Watch closely over the next week or so to see how the market reacts to the new highs. A push below Friday’s lows could potentially lead to a continued move lower. In a market where every dip has been bought a sustained sell-off could be a signal of things to come over the intermediate-term. As I said earlier, I will mention some of these in tomorrow’s post.

Overbought/Oversold levels for May 21, 2007

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• SPY -  75.8 (overbought)
• DIA - 82.6 (very overbought)
• IWM - 52.5 (neutral)
• QQQQ - 58.8 (neutral)
• GLD -  35.3 (oversold)
• OIH - 87.4 (very overbought)

On 5/3 I stated “bullish seasonal tendencies (end/beginning of the month) ended today as the market officially moves into the “sell in May and go away” period”.

On 5/4 the S&P (SPY) opened at $150.75. Today the S&P (SPY) closed the day at $151.30, up $.55 or .36% since the old Wall Street adage began.

As you can see from the paltry gains above the S&P has found a comfortable trading range over the past few weeks. I would like to go back to some statistics that I referenced early last week.

I looked at the historical average return of the S&P on a monthly basis over the last 60 years to see if actually backed up typical range-bound summer months also known as the “summer doldrums”.

• Jan. – 1.4%
• Feb. – (-0.2%)
• Mar. – 1.0%
• Apr. – 1.3%
• May – .0.3%
• Jun. – 0.2%
• Jul. – 0.9%
• Aug. – 0.0%
• Sep. – (-0.6%)
• Oct. – 0.9%
• Nov. – 1.8%
• Dec. – 1.7%

I stated at the time that I referenced the stats and in my most recent newsletter issue, the Stock Trader’s Almanac states “A $10,000 investment compounded to $5444,323 during the November-April period over the last 56 years compared to a $272 loss for May-October. I think that sums up the significance of the historical period known as the “Summer Doldrums”.

So, the question is, how can we make money during the historically flat period from May-October. Well, look no further than an Iron Condor Strategy. An iron condor performs best during a range-bound environment. It never hurts to learn an alternative investment strategy to see if it meets your risk profile and more importantly, if it can help you achieve a higher potential return in your overall portfolio. The strategy is not a “get rich quick” strategy and it has some obvious risks like any other leveraged investment strategy. 

However, risks can be reduced in many ways, position sizing, defined stop-loss, etc. But, another way is to limit short iron condor positions to particular expiration cycles. Historically, some are weaker than others and the summer doldrums are typically a period that is attractive for this type of strategy. If you think that history will repeat itself this year then you might want to investigate an Iron Condor Strategy that fits your risk profile.

The next expiration cycle is also only 4 weeks which is typically advantageous for this type of strategy. You should expect to receive less premium then a five week cycle, but the VIX (investor’s fear gauge for the S&P) is up to 13.50. At the onset of the May expration cycle four weeks ago the VIX was hovering around 12.50. The increase in volatility should increase the potential premium, which means the potential return during the June expiration cycle should increase if all things stay the same (i.e., chosen range).

Currently, as the major indices approach options expiration the Dow remains in an overbought state. I mentioned yesterday that if the bulls can sustain the positive momentum through Thursday then we could see a short-term opportunity present itself as early as Friday. The bulls did take a short-term reprieve today, but if they can somehow manage to stay in an “overbought” state or preferably moving back into a “very overbought” state tomorrow then a short-term reprieve in the Dow (DIA) looks likely during the early past of next week. Remember, historically if the market is overbought as the market moves into the week of post options expiration a decent short opportunity  is usually found.

Overbought/Oversold levels for May 17, 2007

• SPY -  62.2 (neutral)
• DIA - 77.9 (overbought)
• IWM - 33.6 (neutral)
• QQQQ - 46.7 (neutral)
• GLD -  21.9 (oversold)
• OIH - 82.9 (overbought)

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 the major benchmarks as the underlying. Furthermore, you will receive two free months of our investment newsletter when you purchase our White Paper. Check it out!

Watch and learn how we implement our strategies.

Have a great night!

www.crowderinvestments.com