The Dow Nearing Technical Extremes

The Dow (DIA) has once again moved into ”very overbought” territory” and our shorter-term proprietary indicators are nearing also nearing an extreme.  I mentioned yesterday that if the bulls can sustain the positive momentum through tomorrow then we could see a short-term opportunity present itself as early as Friday. Thursday of option expiration week is typically positive and tomorrow is no different as the S&P, Dow and Nasdaq 100 are historically higher 61.9%, 71.4% and 71.4% of the time.

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. In this case, the large-cap Dow (DIA) looks to be the most favorable for a short play. As you can see below the major indice is already in a “very overbought” state and continued push higher will only increase the probability of a short-term move lower over the short-term (1-5 days).

As a trader, it can be frustrating waiting for high-odds set-ups, but as my loyal readers and especially the subscribers to my ETF Extremes strategy have witnessed since the inception of my service, patience pays. Knowing when to sit on your hands is often the most difficult aspect of trading.  I will allow the market to make that determination for me over the next few days. Stay tuned!

Overbought/Oversold levels for May 16, 2007

• SPY -  69.3 (neutral)
• DIA - 84.0 (very overbought)
• IWM - 42.7 (neutral)
• QQQQ - 54.1 (neutral)
• GLD -  27.2 (oversold)
• OIH - 70.1 (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!

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Seasonal winds could be blowing at the back of an already favorable technical set-up

Over the last ten days the S&P (SPY) has established a trading range that seems to show strong resistance at $151.50 and decent support around the $150 area. My guess is that we will see similar price action as we move closer to options expiration on Friday. I would be surprised to see the S&P (SPY) break the defined range mentioned above this week, but next week could be a different story.

Post-expiration is a completely different story though. The average return is 0.03% with only a 53% chance of ending the week higher.

You might be asking yourself, how can this help me? Well, if the market is oversold coming into expiration week the probability of a trade to the long-side could be favorable, whereas if the market is overbought as the market moves into post options expiration the week there could be a decent short opportunity to be found.

As I mentioned yesterday I will be looking for this type of opportunity next week if the market happens to move into an overbought state. Currently, the Dow (DIA) has my attention and if it is able to stay afloat or better yet, move further into a “very overbought” state I will be looking at a possible set-up. 

As I always say, patience is key and “opportunities are made up more easier than losses”, so I will certainly not rush into a position just because seasonal factors are on my side. However, if the seasonal winds are blowing at the back of an already favorable technical set-up. Well, as a trader, you just can’t ask for more.  

Overbought/Oversold levels for May 15, 2007

• SPY -  55.4 (neutral)
• DIA - 76.2 (overbought)
• IWM - 32.6 (neutral)
• QQQQ - 38.1 (neutral)
• GLD -  41.1 (neutral)
• OIH - 66.0 (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 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!

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May expiration cycle looks good for the SPX Short Iron Condor. Are the higher-beta indices telling us something?

The week of option expiration is finally upon us and our SPX Short Iron Condor strategy (after a rough few months) finally looks to reap the max profit for the month. As I reported on 5/11, the seasonal edge for the strategy is here and hopefully we can take advantage of the typical range-bound period from May-October.

Price action during the week of option expiration tends to be fairly lackluster and I would expect to see much of the same this week as the S&P struggles with the 1500 area. Since 5/2 the S&P has been trading in a fairly tight range and I do not expect to see that change, at least over the short-term. However, if the market can somehow manage to push higher I would expect to see weakness towards the early past of next week. Typically, the trading day following option expiration is weak so I will be watching how things develop as the week progresses.

However, the historical precedent (bearish the trading day following expiration) has been turned upside down as of late. Furthermore, since 1950, the day following May expiration has been higher 71.4% in the Dow and 61.9% in the S&P. As I said before, I will be watching how the week progresses to see if any highly probable set-ups are in the cards.

The higher-beta Nasdaq 100 (QQQQ) and Russell 2000 (IWM) are once again nearing oversold territory. This is in the face of the continued march higher in the Dow. The higher-beta sectors are often an early indicator of things to come so I will be interested to see if that theory comes to fruition. Certainly if the QQQQ or IWM reaches an oversold state I will be looking for potential short-term (1-5 days) trades. Stay tuned. This week has the potential to be very interesting.

Overbought/Oversold levels for May 14, 2007

• SPY -  54.8 (neutral)
• DIA - 71.8 (overbought)
• IWM - 42.1 (neutral)
• QQQQ - 49.0 (neutral)
• GLD -  33.5 (neutral)
• OIH - 64.6 (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 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

Summer Doldrums and the Iron Condor

Over the last few weeks the S&P seems to have found a comfortable trading range. I expect to see much of the same as the market moves into the week of options expiration.

We learned some valuable lessons last expiration period in our SPX Short Iron Condor strategy and will certainly not make the same mistake twice. Last month was indeed a anomaly, but this is where we learn the most. As it currently stands our Iron Condor strategy  is 45 points away from the short call strike which should be ample room in assisting the strategy towards a max gain of 6.5% this month.

The underlying SPX had 135 point range to work with during the four week expiration cycle or a 4.5% move in either direction. We should receive the same opportunity to make 6.5% during next month’s four week expiration period. The summer doldrums typically provide the best opportunity for an Iron Condor strategy with a wide range as the vacillation tends to decrease. 

Just look at the historical average return of the S&P on a monthly basis over the last 60 years.

• 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%

As I stated yesterday 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. This might sound like an attempt at shamelessly promoting our SPX Short Iron Condor strategy and in a way, I admit, it is. 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 periods. Historically, some are weaker than others and the summer doldrums are typically a period that is attractive for this type of strategy. We keep an updated chart of the SPX’s monthly % gains/losses on our insider’s page to help our subscribers with this type of dilemma. You may find other underlying equities that better suit your investment profile, but at least, check out the Iron Condor strategy, whether through our White paper or another website, it never hurts to learn more about alternative ways to invest/trade.

Overbought/Oversold levels for May 11, 2007

• SPY -  60.5 (neutral)
• DIA - 70.0 (overbought)
• IWM - 52.3 (neutral)
• QQQQ - 61.5 (neutral)
• GLD -  35.9 (neutral)
• OIH - 66.8 (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 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

More Selling? Range-bound? Summer Doldrums?

Will we see a “Fed Reversal”?

Filed Under Crowder's Daily Market Commentary ·  

Another successful trade in the ETF Extremes strategy!

May 8, 2007

Trade initiated May 4, 2007 

Trade closed May 8, 2007 

A trade was signaled in our ETF Extremes strategy on Friday (5/4). The quick rise in the S&P brought the indicators we follow into an “extreme” state. As a result, a signal was triggered in the ETF Extremes strategy. We decided to buy 10 Jul07 SPY 151 puts (SYHSU) for $3.10. 

Today, with the futures down early, we sold the Jul07 151 puts (SYHSU) for $3.30, resulting in a 6.5% gain on the trade. We did not want to risk losing our profits ahead of the fed minutes that are scheduled to come out at 2 PM EST tomorrow. Furthermore, in this current market where every dip is quickly bought we decided that it was best to lock in a small profit. I say small, but this one trade alone is close to what the market has achieved YTD. 

on our site for further details). I would also like to point out that our returns are based on a fixed number of contracts per trade (10). Many of you have written in to tell us about your compounded returns that exceed 200%. Yes, it is true, but we tend to take a more conservative approach to our position sizing, which is why our performance is not as high as it would be if we reinvested our gains. 

Back to the trade, SPY was in an overbought state and our stochastic indicators were at an extreme state. There were also strong bearish seasonal conditions scheduled for Friday and Monday. Typically, when all of these indicators are in this type of state the probability of a short-term move lower is high. 

The short-term bearish seasonal conditions that typically occur in the S&P on the 4th and 5th trading day of May did not live up to the historical billing. This is why I have stated repeatedly that seasonality alone is (in almost every case) not a reason to place a trade.  

However, the S&P struggled to advance Friday and Monday and more of the technical indicators that we follow reached extremes. The intra-day range on Monday was one of the tightest that we have witnessed in quite some time and led to extreme readings in the “Average True Range” of the S&P (SPY). Typically, this type of extreme precedes weakness in the market.  In general, tight intra-day ranges while in an overbought state lead to short-term weakness. 

The short-term concern was the upcoming Fed meeting on Wednesday afternoon (2 PM EST). The problem with establishing a position before a market-moving event like the fed announcement is the chance of a quick, sharp move that goes against our position. In this case, a move to the upside. This is why I intended on taking off the position beforehand as the risk was just too high for my taste. 

Obviously we are pleased with the win ratio, but we are realists. We realize there is no holy grail in trading. One thing we do know for certain is that we have found a rare, unique, and concrete opportunity that makes the world of sense to us and we trade it to hopefully make money over the long-term. Furthermore, we realize that the less we trade, the better the strategy will do in the long run. And the long run is what matters. This is what makes our ETF Extremes strategy unique and so far, successful. Hopefully, we can continue our winning ways and extend the gains going forward.

Patience is the key ingredient to the success of this strategy and forcing a trade is, in most cases, detrimental to any strategy. Our exact words on the site are as follows: “This strategy requires patience coupled with a disciplined approach. The strategy will make approximately, on average 1 to 3 recommendations a month with holding periods of 1 to 15 days, however; there will be some months when no recommendations are made. The key to this strategy is patience. Waiting for the appropriate scenario to recommend trades with a high probability of success is what makes this strategy a success.”

Believe me, we would love to have potentially profitable signals on a daily basis, but that just isn’t reasonable with this strategy. We will never make any apologies for our system and why should we, with a win ratio of 92.9% YTD (13 out of 14) and gains of 48.7% since inception (1/06), we feel confident in the strategy and its ability to produce long-term returns. 

As always, please do not hesitate to email us with any questions or comments that you might have. 

Overbought/Oversold levels for May 8, 2007

• SPY -  73.5 (overbought)
• DIA - 89.8 (very overbought)
• IWM - 51.4 (neutral)
• QQQQ - 77.4 (overbought)
• GLD -  56.0 (neutral)
• OIH - 63.1 (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 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

Filed Under Crowder's Daily Market Commentary ·  

S&P at Technical Extremes

May 7, 2007

The short-term bearish seasonal conditions that typically occur in the S&P on the 4th and 5th trading day of May did not live up to the historical billing this year. This is why I have stated repeatedly that seasonality alone is (in almost every case) not a reason to place a trade.  When compared  with the current state of the market at the time the seasonal tendency arrives, the probability of a successful trade can be increased tremendously.

The S&P has struggled to advance over the last few days and now more of the technical indicators that we follow have reached extremes. The intra-day range today was one of the tightest that we witnessed in quite some time and has led to extreme readings in the “average true range” of several of the major benchmarks that we follow. Typically, this type of extreme precedes weakness in the market.  In general, tight intra-day ranges while in an overbought state lead to short-term weakness.

The “average true range” was created by my favorite technical analysts, J. Welles Wilder. The indicator measures volatility. As stated by stockcharts.com “the indicator does not provide an indication of of price direction or duration, simply the price movement or volatility”. Basically, the ranges show the commitment or enthusiasm of traders. Wilder states “large or increasing ranges suggest traders prepared to continue to bid up or sell down a stock or index through the course of a day. Decreasing range suggest waning interest.

As I stated earlier the range has reached an extreme low which suggests waning interest and typically precedes. Couple this with the extreme overbought readings in the S&P and Dow and you can see why the probability of a short-term move to the downside looks is high.

The short-term concern is the upcoming Fed meeting on Wednesday afternoon (2 PM EST). Either way I think the meeting will be the catalyst that finally allows the market to correct, at least over the short-term. The problem with establishing a position beforehand is the chance of a head fake or two that drives the market higher and as a result moves the shorts to the sidelines. This is why I intend on taking off any positions as the risk is just too high for my taste. Historically, weakness follows the Fed announcements, but as we have seen lately, history does not always repeat itself. As William Watt stated “Do not put your faith in what statistics say until you have carefully considered what they do not say”.

Our current SPX Iron Condor position is worth $.55. This is slightly lower than where we sold the combined bull put spread and bear call spread. With less than two weeks until SPX settles and over 40 points until our position breaches our short call strike we are in good position for a max profit. The wild card is the upcoming fed meeting. I will be paying close attention to how the underlying SPX reacts and if any necessary adjustments need to be made as a result of SPX rallying towards our short call strike.

Overbought/Oversold levels for May 7, 2007

• SPY -  80.5 (very overbought)
• DIA - 89.4 (very overbought)
• IWM - 58.6 (neutral)
• QQQQ - 74.1 (overbought)
• GLD -  67.3 (neutral)
• OIH - 64.7 (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 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

Filed Under Crowder's Daily Market Commentary ·  

S&P in a “Very Overbought” State leading into Monday’s Short-term Seasonal Bearishness

May 4, 2007

After moving sideways for most of the day the major indices moved higher during the last few minutes of trading. This brought the S&P (SPY) into a very overbought state leading into a seasonally bearish day. Monday, the fifth trading day of the month is quite bearish as only 19.0% of the days have finished higher. However, as I always state, seasonality alone is (in almost every case) not a reason to place a trade.  When compared  with the current state of the market at the time the seasonal tendency arrives, the probability of a successful trade can be increased tremendously.

Our shorter-term proprietary indicators have also reached an extreme which often signals that a short-term decline is right around the corner. Overbought markets are tough to gage. Unlike oversold levels they can stay in an overbought state, particularly in a momentum driven market, for quite some time. The Dow (DIA) is a very good example. DIA has been in an overbought state for weeks (since 4/13) without taking a breather. Overbought conditions can last for a month or so, whereas an oversold condition typically lasts at most a week.  This is why anticipating a top is such a difficult task.

Overbought/Oversold levels for May 4, 2007

• SPY -  80.3 (very overbought)
• DIA - 87.8 (very overbought)
• IWM - 65.3 (neutral)
• QQQQ - 74.1 (overbought)
• GLD -  66.4 (neutral)
• OIH - 75.1 (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

Filed Under Crowder's Daily Market Commentary ·  

Short-term Bearish Seasonal Winds Blowing In.

May 3, 2007

Bullish seasonal tendencies (end/beginning of the month) ended today as the market officially moves into the “sell in May and go away” period. The next two trading days are historically quite bearish as the S&P has only finished higher 23.8% and 19.0%, respectively.

seasonality alone is (in almost every case) not a reason to place a trade. However, when compared  with the current state of the market at the time the seasonal tendency arrives, the probability of a successful trade can be increased tremendously. Always be aware of the market’s seasonal picture.

With three out of the four major benchmarks in an “oversold” to “very oversold” condition the probability of a sustained move higher is low.

The market-moving unemployment report is due out before the bell tomorrow. If the market gaps higher at the opening I will be tempted to place a short-term trade. With the benchmarks already in an overbought state and the bearish seasonal winds blowing in for the next few days it will certainly be hard to resist.

Over the past year this type of action (gap open) has occurred roughly 50% of the time. When it does occur the return a week later is approximately -1.2%.  

Overbought/Oversold levels for May 3, 2007

• SPY -  76.0 (overbought)
• DIA - 85.7 (very overbought)
• IWM - 56.4 (neutral)
• QQQQ - 73.1 (overbought)
• GLD -  54.5 (neutral)
• OIH - 74.7 (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

Filed Under Crowder's Daily Market Commentary ·  

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