The market vacillated wildly today which is not out of the ordinary given that it is the week of options expiration. The market gapped substantially higher at the open and then proceeded to decline lower throughout the day until the upside gap was closed. Once the gap closed the market settled down and began another upwards push. By the close the broad market S&P (SPY) and tech heavy Nasdaq 100 (QQQQ) were able to sustain gains of +0.3% and +64.7%. As a result, the indices that we follow remain in an neutral state.
According to the next two days the Stock Trader’s Almanac, the next two trading days are seasonally bullish with the S&P finishing higher 71.4% and 66.7%, respectively.
As I have stated numerous times over the last few days I would like to see the bears rear their ugly heads, if only temporarily, and push the market into an oversold state. This would certainly bring in some short-term bulls and make for a high risk/reward setup. The S&P has not witnesses an oversold reading since 8/15/07.
We still have some time decay left in the short positions of our New SPY Diagonal LEAPS strategy. With only two days left we will need to roll our short October positions most likely tomorrow. All three short positions are in-the-money (SPY Oct. 151, 152 and 154) so unless the underlying SPY moves substantially lower tomorrow we are better off rolling our short positions tomorrow. We thought we would roll today but theta (time decay) is still quite high in a few of our short positions so holding on to them and allowing time decay to work in our favor is the best option (no pun intended).
Most likely we will roll our positions towards the late afternonn tomorrow. Of course if the market presents better opportunities for us to roll then we will take advantage of the situation. As we have stated for roughly a week now stay tuned as we will give the guidelines for rolling positions over in the SPY Diagonal LEAPS strategy.
Overbought/Oversold for October 17, 2007
S&P (SPY) – 42.7 (neutral)
Russell 2000 (IWM) – 40.8 (neutral)
Dow (DIA) – 36.9 (neutral)
Nasdaq 100 (QQQQ) – 64.7 (neutral)
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Andrew Crowder, Chief Investment Strategist, www.crowderinvestments.com