SPY Diagonal LEAPS strategy off to a great start! Short-term pullback in sight? ETF Extremes watch…

October 5, 2007 · Print This Article

The market rallied mightily today with nary a pause. Typically, the market will fade a bit, if only to fill the upside gap, but not today. The market moved steadily higher throughout the afternoon and then pulled back a tad at the close, but that was most likely a result of traders taking some money off the table ahead of the weekend.

Now all of the major market benchmarks that we follow are back in an overbought to very overbought state and the shorter-term measures that we follow have reached an extreme state.

Typically, when the market reaches this type of an extreme we see a short-term (1-5 days) fade in the indices. Furthermore, sharp moves after payroll reports tend to fade back a bit in the coming days.

In addition to the bearish tendencies above the Stock Trader’s Almanac, reports that Tuesday and Wednesday of next are historically quite bearish with the S&P only finishing higher 28.6% and 38.1%, respectively.

As you can guess all of the extreme readings that I have mentioned above have put our ETF Extremes strategy very close to its first signal in quite some time. We have had some close calls recently, but this time around looks very likely. With a win ratio near 90% we are confident in all of our signals. Of course there are no guarantees in trading, only probabilities.

Iron Condor Strategy

Even with today’s sharp move, the S&P (SPX) is still well within our 200 point range. SPX would have to rally over 4% in the next two weeks before our short call position is in jeopardy. If the S&P (SPX) falls within our chosen range we stand to make over 8% for the expiration period.

NEW!!! Spy Diagonal LEAPS Strategy

We started this strategy in our test account Sept. 24th and plan to follow the strategy in the blog. Our paid subscribers will receive a more detatiled account in the newsletters and on the Insider’s page of the website. So far there hasn’t been much to report about, which is often a sign that the strategy is going well. Typically the first two to three weeks (depending on the length of the expiration period) after expiration, when short positions are established, there is no need to touch the strategy. As long as the underlying, in our case, SPY vacillates in a reasonable range there is no need. It is only suring the last couple of weeks that you have to pay close attention and this only requires watching a few key steps, mostly watching time decay on the options you hold and deciding when to them over into the following month. Be patient we will discuss this when the time arrives. We don’t wat to get ahead of ourselves. Once the month is over we will compile the necessary ingredients to the strategy and discuss them in a report. Stay tuned!

As of today, two weeks into the strategy, we are up $892, or 4.5%. The fact that we leave one position unhedged, or long allows us to take advantage of extended upside moves. Currently the delta is close to neutral so we are sitting pretty. Now we sit and wait for theta to kick in.

We will have an extended report in the newsletter this weekend.

Overbought/Oversold for October 5, 2007

S&P (SPY) - 81.9 (very overbought)

Russell 2000 (IWM) - 81.2 (very overbought)

Dow (DIA) - 74.6 (overbought)

Nasdaq 100 (QQQQ) - 84.0 (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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