June 27, 2017

Divergence in the major benchmarks

The broad market index (S&P) gapped lower today today and never looked back. The push lower moved the major indices we follow back in a neutral state. Interestingly enough, the tech heavy Nasdaq 100 (QQQQ) surged higher creating a short-term divergence that will most likely settle out over the coming days.

The move lower was to be expected given the reasons I stated in the blog Friday. Tomorrow and Wednesday bring bearish seasonal days and then the market ends the week with two historically bullish days. This is one of the few weeks of the year, according to the Stock Trader’s Almanac, that the market experiences four days with historically significant bullish/bearish seasonal tendencies. As I always say, I never use seasonal tendencies to base a trade, but I always consider which way the seasonal winds are blowing, particularly if they wholeheartedly agree with my current short-term direction. This often increses the probability of my trade.

Stock Options Strategy – SPY Diagonal LEAPS

I discussed the strategy in great detail in the newsletter that I sent out Sunday. Subscribers, please take a look at this if you have not had a chance. It is archived on the Insider’s page of the website.

With the underlying SPY down $.83 today the portfolio still made gains. As it stands as long as SPY stays above $150.50 the strategy should experience a wonderful month. Since its inception three weeks ago, the conservative options strategy (by most option strategies standards), is up $902 in our test account. Based on the $20,000 that we started with (even though $2,500 is sitting in cash) the strategy is up 4.5%. Over the same period SPY is only up 1.7%. Our goal is to beat the market on an annual basis and this is certainly a great beginning.

Stock Options Strategy – SPX Short Iron Condor

The S&P (SPX) remains safely within our 200 point range. Hopefully the VIX will stay above 15, preferably 20, so that we can continue to choose huge ranges while still making 7%-10% from expiration to expiration. OF course, we realize that high-probability trades come with risk if the underlying moves sharply in one direction, but since our last loss we have added a few guidelines to hopefully minimize the losses when they occur.

I have heard from many traders/brokers out there that Iron Condors are currently out of favor. The huge swings back in late July/early August created some drawdowns among many iron condor strategists, ourselves included. But, with proper money management (only allocating a small percentage to any one option strategy) those who felt the short-term pain lived to trade another day. We remain patient with the strategy, knowing it will take its lumps now and then. One thing before I sign off, always know the risk/reward of every strategy that you consider trading. After that trade it on paper for a few months, learn the ins and outs. Knowing what the max loss is going to be and feeling comfortable with it will make you a better trader. Why? Because it will force you to pay attention to risk management and more specifically, how position sizing will effect your overall portfolio.

Overbought/Oversold for October 8, 2007

S&P (SPY) – 66.1 (neutral)

Russell 2000 (IWM) – 68.5 (neutral)

Dow (DIA) – 64.7 (neutral)

Nasdaq 100 (QQQQ) – 86.7 (very overbought)

Subscribers please check the Insiders’ page of the website if you wish to check the overbought/oversold levels of the following 22 ETF’s: OIH, XLF, XLE, XLY, XLK, XLV, XLB, XLI, XLP, TTH, XLU, GLD, FXI, ILF, EZU, EWA, INP, UNG, DBA, DBB, DBE, and DBP.

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Andrew Crowder, Chief Investment Strategist, www.crowderinvestments.com