June 26, 2017

Bearish November Leads to Bullish December

Do you believe the Dow Theory? I have to admit all of the recent negativity has me leaning towards the bullish side, at least for the short-term. The short-term indicators I follow, again short-term, are overwhelmingly bullish; however bullish indicators don’t amount to much if buyers are not willing to step in.

I really don’t care too much about the longer-term picture as I am not that type of trader. I try to decipher what the market has laid in front of me and from my seat it looks like a bottoming process is in the making. Of course, I could be completely wrong, believe me it has happened more than once, but I have to go with what has gotten me this far as a trader. If I am wrong I allow my risk management techniques to take over. Anyway, when I look at the oversold levels over several time frames it certainly looks as though a bottom is near.

Furthermore, high volatility is generally witnessed during market bottoms. Adam Hamilton has a few interesting insights about SPX Volatility Extinctions.

There is no doubt that the market is officially in a correction, but is there more to come. TickerSense gives us a few insights on the scenario.

I also went back 30 years to see how December typically reacts after a bearish November just to see if anything stuck out. Interestingly enough I found that over the last 30 years there have been 8 bearish Novembers and not one of those occurences was followed by a lower December.

                     November Decline         December Reaction

  1. 1976             -0.8%                           +5.2%
  2. 1984             -1.5%                           +2.2%
  3. 1987             -8.5%                           +7.3%
  4. 1988             -1.9%                           +1.5%
  5. 1991             -4.4%                           +11.2%
  6. 1993             -1.3%                           +1.0%
  7. 1994             -3.9%                           +1.3%
  8. 2000             -8.0%                           +0.4%
  9. 2007             -7.6% (so far)                 ????

December has also been higher 24 out of the last 30 years, the most of any month.

It will certainly be interesting to see how December pans out.

As I said before the longer-term picture really doesn’t matter too much to me. I only care about expiration cycle to expiration cycle. As I stated yesterday, we established a 300 point range on our current SPX Iron Condor position which basically means that the S&P can move slightly over 10% up or down over the next 23 days before our trade is in jeopardy of taking a loss. Since we established our new trading guidelines using probability as our chief guidelines rather than being greedy and seeing how much premium we can take in each expiratiomn cycle. The new guidlines have led to 25.1% cumulative gains over the last three months and if all goes well this month, our neutral position (300 point range) will make 7.9%. Remember, the more premium that you bring the less probability of success for that particular position. We are completely satisfied taking a 7.9% gain over four weeks with a trade that has over an 83% chance of success. 

As always please do not hesitate to email us with any questions that you might have. We encourage it! 

Overbought/Oversold for November 27, 2007

S&P (SPY) – 42.0 (neutral)

Russell 2000 (IWM) – 39.7 (oversold)

Dow (DIA) – 46.6 (neutral)

Nasdaq 100 (QQQQ) – 50.0 (neutral)

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