June 26, 2017

More Volatility – August is Often Bleak

Yesterday I talked about the importance of the 1490 area on the S&P (SPX). I stated that once reached,  it would most likely act as an area of strong resistance and as a result bring in sellers.

The market was able to push the S&P (SPX) to the 1490 level early this morning (with a gap up) only to quickly fade and continue the move lower as the day progressed. The sell-off moved into high gear at the end of the day and brought back recent bad memories of last Friday’s collapse. Now the market as a whole is back in an oversold state so one would expect to see another push higher by the bulls in the coming days. However, I am not so certain this time around. The end of the day sell-offs have been sharp and severe. Furthermore, we are moving into a period of bearish seasonality. We could move deeper into oversold territory before we see another push higher.

August has been the worst performing month in the S&P since 1987 and the second worst in the Dow and tech-heavy Nasdaq. Moreover, the short-term seasonal scenario does not look so great either. According to the Stock Trader’s Almanac “the first trading day in August has been atrocious” with the Dow down last 13 of 20 with only a 38.1% chance of finishing the day to the upside.

Tomorrow (and the rest of the week for that matter) brings some vital economic reports that could potentially move the market. The subprime woes continue to plague the market and have brought a new level of anxiety to the market that has not been seen in quite some time. Just look at the VIX. The February jitters did not have the same effect on the VIX (investor’s fear gauge). This should give some insight as to how the broader market feels towards the current market condition.

This is one of the reasons that I decided to take off our short put spread in the SPX Short Iron Condor strategy and did not immediately add another short bull put spread. I want to see how the market reacts to the upcoming economic reports. After the market has had the ability to absorb some of the info I plan on adding another short put spread. As I stated yesterday with volatility this high we have the ability to be somewhat patient here. We have already eliminated all downside risk by taking off the short put spread, but we had to take a loss to do so. Now our goal is to bring the loss back to breakeven or as close as possible before the August cycle is over in a little less than three weeks. As always I will keep the Iron Condor subscribers abreast of any adjustments in real-time. As for the rest of you I will try and keep you informed as the days progress.  

Overbought/Oversold levels for July 31, 2007

  • SPY – 26.7 (oversold)
  • IWM – 22.1 (oversold)
  • DIA – 25.3 (oversold)
  • QQQQ – 22.9 (oversold)
  • GLD –  38.4 (neutral)
  • OIH – 33.2 (neutral)

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