August 19, 2017

Bearish seasonal weakness coupled with overbought conditions often spells trouble

Last week I stated that we should see some short-term weakness going into this week and that is exactly what we saw today. Moreover, by the way the market finished the day we could see a continuation of the weakness tomorrow. As the saying goes “professionals rule the close” and a weak close often carries into the following trading day.

The weakness was not unexpected. Overbought conditions from the initial bounce off the recent lows, and seasonal weakness (according to the Stock Trader’s Almanac the “end of August has been murderous 6 out of the the last 10 years” with the “average loss for 5 days:Dow -2.6%, S&P -2.3%, and the Nasdaq -2.1%) looked to be problematic for the bulls.

Furthermore, on a historical basis tomorrow (the 21st trading day of August) has shown the weakest performance for the month of August. Will we see a test of 1450 in the S&P tomorrow?

With the VIX in a short-term oversold state we thought it was best to wait on adding an Iron Condor position. So far it looks like this was the appropriate decision and if we see more weakness tomorrow (and consequently a rising VIX) we should be able to bring in even more premium. Even with the flat opening today, with the VIX above 20 there were 200 point range iron condors using SPX as the underlying trading for approximately $.85 to $1.00. Not bad, not bad at all.

Again, as I stated last week, we will establish a similar iron condor position in SPY so that we can compare the pros and cons of each underlying.

Also, this week I will begin the SPY LEAPS Strategy which I will discuss in great detail in the daily commentary section. I will utilize the paper trade tool in Thinkorswim to accurately report all of the details including greeks, etc. Stay tuned

Overbought/Oversold for August 27, 2007

SPY – 58.3 (neutral)

IWM – 50.9 (neutral)

DIA – 63.4 (neutral)

QQQQ – 61.6 (neutral)

GLD – 61.4 (neutral)

OIH – 61.8 (neutral)

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Andrew Crowder,