Major Indices Remain in a Short-term Overbought State
December 7, 2011
Random Thoughts
Three of the top five most short-term overbought ETFs that I follow are major market ETFs. DIA, SPY and IWM (in that order) are currently “very overbought” on a short-term basis. The RSI (2) of SPY and DIA are roughly 96 and above and IWM is not far behind at 92.
As I write this the futures are higher and if we open at these levels we will see another test of the recent overhead resistance that has plagued the bulls since last Wednesday’s historical surge.
As I stated yesterday with DIA and SPY in short-term extreme overbought states coming off huge gaps to the upside and battling with strong overhead resistance the probability for a short-term reprieve is high.
However, as we all know, stranger things have happened during the seasonally bullish month of December. Add the historical bullishness of December triple witching and one can quickly see how the market could push significantly higher before a significant decline occurs. As contrarians, we have all witnessed the power and irrationality of short-term trends (the most recent observance was in the month of October) so as always pay close attention to the position size of your trades whether you are bullish or bearish.
Remember, position size IS the key to long-term success as a trader.
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Back in a Neutral State. Where Now?
November 1, 2011
The market moved decisively lower today and while most think it was just a normal decline I think there could be more ahead. Tim Knight of Slope of Hope recently stated that he thought the 1223 area on the /ES would act as a strong area of support and I think he is correct in his assumption. If we break that area then I would expect to see a decisive decline as we head into December. The true test will be once the market reaches its next short-term oversold state. If the bounce is violent then, yes, I would expect to see another push higher into November expiration. But, if the the bounce is weak, then bears should have good reason to rejoice as another swift decline could be in order.
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Short-Term Reprieve Occurs – Will It Continue?
October 17, 2011
The short-term reprieve that I mentioned in the Free Weekend Report (Sign-Up Free Here) occurred today and by the looks of it we could see more downside tomorrow.
As I mentioned in the report “as for the current technical picture, the all of the major indices and most sectors are in a short-term “very overbought” state as we head into the week of options expiration. Not only are the major benchmarks in one of the most short-term overbought states that we have seen in quite some time, but we are now hitting strong overhead resistance with two unclosed gaps directly underneath. Combine all of the aforementioned and you can quickly see why the risk/reward scenario leans heavily towards a short-term reprieve next week.”
Now all of our Theta Driver Options Strategy look to be highly profitable. We have one that is to reap the full credit at October expiration Friday and the trade we added last week is now well below the short strike for the November expiration cycle.
For all of you not aware of the Theta Driver Options Strategy, it is a strategy that I have been using for years that due to high demand I recently incorporated into my strategy line-up. It involves the most powerful options strategy there is – credit spreads. More specifically, bear call spreads and bull put spreads. I am able to choose my own probability of success and as well as my rate of return. This is a new way to trade/invest for most investors, so if you have any questions please do not hesitate to email me. I would be more than happy to answer any and all questions that you might have.
Anyway, tomorrow should also bode well for all of our positions as IBM came out with weaker than expected numbers and as I write this futures in all of the major benchmarks are lower. With Apple (Nasdaq AAPL) due out tomorrow after the bell we could see a quick move back to the middle of the two month range that we have been trading in. If the decline holds tomorrow as AAPL reports number that for some reason do not please Wall Street then we could close the 10/10 gap that was established in almost every ETF. In reality the gap is not that far away. IT would only take a 2.5% move in SPY over the next few days for the gap to close. After a 14% rally in nine days a pullback of that degree would not be that out of the ordinary.
Remember, only two weeks ago the market was in free fall mode. Nothing has changed since that point in time. Yes, the heads of the EU mentioned that they were going to make a plan for a plan, but so far nothing has come to fruition. We are all supposed to know something on the 23rd, but until that point the bearish underlying economic factors remain the same.
Links of Interest
If you haven’t already, don’t forget to sign-up for my :
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High-Probability, Mean-Reversion Options Strategy
October 14, 2011
I hope all of you with a bearish lean are surviving this absolutely crazy market. I know that it has been the most difficult month for the High-Probability, Mean-Reversion Options Strategy in since its inception. The ongoing nine day rally has pushed both of our positions in losing territory, yet I am still confident that the performance will improve as we move towards the latter part of the month. No one said trading was easy, especially options trading, but it is all about perseverance . As for the Theta Driver Options Strategy we are well on our way to the third straight month of gains.
All of the major indices have moved into short-term “very overbought” extremes, while hitting strong overhead resistance. Moreover, we have two large unclosed gaps in all of the major benchmark ETFs. Combine all of the aforementioned and the high-probability move leans heavily towards the downside. But, as we have seen over the past few weeks the market sometimes has a mind of its own.
I will be back with a lengthier discussion in the weekend report due out Sunday, including the overbought/oversold indicators. Stay tuned!
Kindest,
Andy
Options Offer Tremendous Opportunities
October 13, 2011
I am always amazed how large the opportunity to “make it big” factors into the great magnetism of the market. The belief that anyone, from any background can be successful and make tons of money has quite the allure. But, in all of this euphoria people neglect to think about all of those that failed before them. And believe me the failure rate is high. Yet, investors/traders continue to choose the most difficult of investments to trade – stocks. Stock-only traders are at a complete disadvantage because they have no way to trade the randomness of the market. They have a 50/50 chance of success for each and every trade.
Bottom line – stock investors/traders are truly at a disadvantage.
Again, stock investors only have two ways to make a profit: buy a stock or short a stock. And most retail investors are not willing to short a stock, so basically they are only able to profit in one direction – up.
Another characteristic that stocks have is that they don’t have an expiration date like options. I know some of you are probably rolling your eyes right now. How could something that expires be more attractive than something that can be held to perpetuity?
Well, we all know about the marriage that many of us have for our beloved stock positions. A plan to end the investment/trade often doesn’t exist because the stock goes up and you hold it and then it goes down and you hold it even longer an if it continues to go down you hold it for that much longer hoping that your position will eventually come back to break-even and even then most decide to exit the position.
Just think of all the missed opportunities. It drives me absolutely insane to think about it. Your capital could have been used for so many other opportunities. Also, an expiration date forces options traders to truly think about the risk/reward of each and every investment /trade. Furthermore, it forces the options trader to think about the future in greater detail. It also forces you to think about the risk/reward of every trade.
Remember, when you buy a stock, you have the entire amount of your capital at risk and more importantly you have dedicated a large portion of capital to the trade. With certain option strategies you could have a tenth of the capital tied up.
Of course, there will always be the foolish guy who has dedicated as much on one options position as they would in a stock position., They don’t understand the importance of position-sizing. A basic rule that I like to use is that if I become too emotional about a losing trade then I have too big of a position on.
I know this has been a post full of random thoughts and I apologize, but I just wanted to communicate a few quick thoughts that might be helpful to a few of you.
Kindest,
Andy
Links of Interest
If you haven’t already, don’t forget to sign-up for my :
High-Probability, Mean-Reversion Options Strategy : Free 30-day trial
Theta Driver Options Strategy (limited room available): Free 30-day trial
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Options Trades in the High-Probability, Mean-Reversion Strategies
August 22, 2011
A trade in the High-Probability, Mean Reversion Strategy looks likely if IWM happens to open flat or open tomorrow. Of course, there are a few other thng is that need to line-up, but the first trade of a slow August seems likely. Subscribers stay tuned!
Our latest Theta Driver Options trade looks very good. Last Monday, I placed our first trade for a credit of $0.25 and thanks to some help from the bears (although a flat to slightly higher market would have worked as well, just not so quickly) the credit spread is now worth less than $0.05. With only $0.05 and 25 days left until September expiration I will mostly likely lock in the gain for roughly a 9% gain (including commissions) and place another Theta Driver trade within the next few days. Volatility remains high so we might be able to extend our gains this months. My goal is to seek out a credit spread trade that allows a 10-12% gain over the next 25 days. I might have to take a bit less if volatility declines sharply tomorrow, but my guess is that unless the market moves sharply higher, volatility will remain above 40 which will allow me to continue to sell some great premium.
For all of those who are still interested in the Theta Driver strategy I still have a few remaining spots. Once the spots are filled I intend to close the strategy to new members. I hate to keep mentioning this, but I have had quite a few of you email me over the past week so I just wanted to remind you.
Market Mumbo Jumbo
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Patient, Methodical Approach Leads to Further Gains in the High-Probability, Options Strategy. Portfolio Up 47.9% Since Inception.
July 11, 2011
On Wednesday I entered into some IWM puts. Of course, the market raced higher and my trade was quickly underwater, but I knew that the probability of a short-term decline was extremely high so I placed another trade and the following day the market declined. I stuck with the trade over the weekend because the short-term overbought reading had not worked itself out so the probability of a move lower remained high.
Today, the market pushed significantly lower at the open so I was able to get out of my combined position for a nice profit that pushed my the High-Probability, Mean-Reversion options strategy to new high of 47.9% since its inception back in November.
New Credit Spread Options Strategy – Beta
The surge last week pushed the underlying IWM to a high of $85.97, only a few cents from touching the 86 strike. This is where asset allocation/ position-sizing comes in. I could go over various adjustments that I could make including opening new positions, exit the trade early, roll the trade up or forward and a few others. But, I prefer to let the statistics play out. I know that if I stay disciplined and allow the statistics to work for me I will succeed over the long-term.
Never allow a position take to have a dramatic impact on your options portfolio. This frees you of the inevitable psychological constraints and allows you to focus on letting the probabilities to work themselves out.
Basically, when probability is on your side, it only makes sense to allow the probabilities to work for you. Entering expensive or risky hedges or artificial stop losses act only as a detriment because they do not allow the probability of the trade to work itself out.
The Strategy
Again, I like my new strategy because now both of my options strategies are working in unison. I am able to collect premium in the Credit Spread strategy while patiently allowing time decay to works its magic. And, while I allow the time decay to eat away at my credit spread I am able to play short-term extremes in the ETFs I follow in the High-Probability, Mean-Reversion strategy. Intermediate and short-term options strategies at work.
Just like diversifying a portfolio of stocks, you should do the same when investing with options – diversify your options strategies.
Here it is: the first trade in my new Credit Spread Options Strategy, officially named Crowder’s Credit Spreads. I will continue to go over the trade in full detail in the Free Weekly Options Report.
Market Mumbo Jumbo
Summary
SPY remains range-bound!
Same message: Not much has changed over the past few weeks - range-bound trading persists. I appears we could see the markets move sideways for a few more months. Are the summer doldrums already upon us? How long can SPY stay in this range of roughly $126 to $137? The question is, while I continue trading extremes in the HPMR strategy , how can I take advantage of the range bound movement at the same time. You guessed it – a credit spread! I will discuss this further in Weekly Options Report.
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Options Strategy Indicator – Overbought / Oversold Extremes
Short-Term High-Probability, Mean-Reversion Indicator. A Few Oversold ETFs, But No Extremes.
November 24, 2010
More uncertainty entered the market today. North and South Korea conflict, more allegations of insider trading and continued concerns plagued the market today and one has to wonder if this market can gain any ground as we move closer and closer to the 2011. Fortunately, I do not concern myself with these types of issues in my trading. The so-called noise does not concern me as much as when the ETFs I follow hit a short-term oversold/overbought extreme.
The High-Probability, Mean-Reversion Indicator was once again successful in pointing out the short-term direction in overbought Retail sector (RTH) as well as the Semiconductors (SMH). After today’s market-wide drubbing, several of the ETFs that I follow have moved into a short-term oversold state, but none of them have yet to display an extreme reading.
The next two trading days are seasonally bullish. Yes, the day before and after Turkey Day are quite bullish, but the two days after that are overwhelmingly bearish.
It is my hope that the market is able to defy the historically seasonal bullishness and move lower tomorrow to push a few of the ETFs I follow into a short-term oversold extreme. If this plays out and I see a few of the ETFs move into an oversold extreme I will be sending out a trade alert to all of my loyal subscribers.
I just wanted to thank all of you for the continued kind words. It seems as though the High-Probability, Mean-Reversion strategy has been a success so far and many of you have been able to take advantage of the indicators that I publish daily. I hope
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Short-Term High-Probability, Mean-Reversion Indicator – as of close 11/22/10
Benchmark ETFs
* S&P 500 (SPY) – 32.3 (neutral)
* Dow Jones (DIA) –28.9 (oversold)
* Russell 2000 (IWM) – 49.1 (neutral)
* NASDAQ 100 (QQQQ) – 40.5 (neutral)
Sector ETFs
* Biotech (IBB) – 46.4 (neutral)
* Consumer Discretionary (XLY) – 43.2 (neutral)
* Health Care (XLV) – 30.2 (neutral)
* Financial (XLF) – 24.1 (oversold)
* Energy (XLE) – 42.6 (neutral)
* Gold Miners (GDX) – 53.9 (neutral)
* Industrial (XLI) – 37.4 (neutral)
* Materials (XLB) – 38.2 (neutral)
* Real Estate (IYR) – 35.8 (neutral)
* Retail (RTH) – 51.8 (neutral)
* Semiconductor (SMH) – 65.9 (neutral)
* United States Oil Fund (USO) – 31.1 (neutral)
* Utilities (XLU) – 25.7 (oversold)
International ETFs
* Brazil (EWZ) – 25.8 (oversold)
* China 25 (FXI) – 22.8 (oversold)
* EAFE (EFA) – 25.3 (oversold)
* South Korea (EWY) – 27.6 (oversold)
Commodity ETFs
* Gold (GLD) – 62.3 (neutral)
Ultra Extremes
* Small Cap Bear 3x (TZA) – 48.9 (neutral)
* Small-Cap Bull 3x (TNA) – 48.3 (neutral)
* UltraLong QQQQ (QLD) – 40.6 (neutral)
* Ultra Long S&P 500 (SSO) – 32.0 (neutral)
* Ultra Short S&P 500 (SDS) – 66.9 (neutral)
* UltraShort 20+ Treasury (TBT) – 35.6 (neutral)
I work hard to bring you my latest views, opinions and research on a daily basis. If you are a loyal reader and find my thoughts useful please show your support by joining my newsletter service. For the first time, I am offering a 30-Day Free Trial.
Watch and learn firsthand how I implement my options strategies.
Kindest,
Andy
Short-Term High-Probability, Mean-Reversion Indicator. Semiconductors and Retail Overbought.
November 23, 2010
As I stated last week, the day after Thanksgiving is historically bearish. Well, for most of the day the historical tendency held true, but as the day progressed the bulls slowly chipped away at the losses and as a result, two out the four major indices (QQQQ and IWM) managed to close the day higher.
Actually, quite a few of the ETFs I follow in my High-Probability, Mean-Reversion Strategy advanced today, but only two managed to reach a short-term overbought extreme: Retail (RTH) and Semiconductors (SMH). Both moved into a short-term overbought territory and the RSI (2) for both pushed above 95. As a result, both on currently on my radar, so subscribers stay tuned tomorrow as you could be receiving a trade alert at the beginning of the trading day.
Tomorrow I will bring you the seasonal chart the surrounds Turkey day.
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Short-Term High-Probability, Mean-Reversion Indicator – as of close 11/22/10
Benchmark ETFs
* S&P 500 (SPY) – 53.4 (neutral)
* Dow Jones (DIA) –46.6 (neutral)
* Russell 2000 (IWM) – 62.9 (neutral)
* NASDAQ 100 (QQQQ) – 61.8 (neutral)
Sector ETFs
* Biotech (IBB) – 68.0 (neutral)
* Consumer Discretionary (XLY) – 67.3 (neutral)
* Health Care (XLV) – 53.4 (neutral)
* Financial (XLF) – 32.8 (neutral)
* Energy (XLE) – 64.6 (neutral)
* Gold Miners (GDX) – 60.2 (neutral)
* Industrial (XLI) – 56.1 (neutral)
* Materials (XLB) – 57.2 (neutral)
* Real Estate (IYR) – 42.4 (neutral)
* Retail (RTH) – 73.4 (overbought) / RSI (2) – 95.3
* Semiconductor (SMH) – 77.4 (overbought) / RSI (2) – 95.6
* United States Oil Fund (USO) – 32.6 (neutral)
* Utilities (XLU) – 41.5 (neutral)
International ETFs
* Brazil (EWZ) – 41.0 (neutral)
* China 25 (FXI) – 33.4 (neutral)
* EAFE (EFA) – 44.3 (neutral)
* South Korea (EWY) – 60.9 (neutral)
Commodity ETFs
* Gold (GLD) – 55.3 (neutral)
Ultra Extremes
* Small Cap Bear 3x (TZA) – 34.8 (neutral)
* Small-Cap Bull 3x (TNA) – 61.8 (neutral)
* UltraLong QQQQ (QLD) – 62.6 (neutral)
* Ultra Long S&P 500 (SSO) – 53.0 (neutral)
* Ultra Short S&P 500 (SDS) – 46.4 (neutral)
* UltraShort 20+ Treasury (TBT) – 40.7 (neutral)
I work hard to bring you my latest views, opinions and research on a daily basis. If you are a loyal reader and find my thoughts useful please show your support by joining my newsletter service. For the first time, I am offering a 30-Day Free Trial.
Watch and learn firsthand how I implement my options strategies.
Kindest,
Andy
Short-Term High-Probability, Mean Reversion Indicator. Weakness After Options Expiration?
November 20, 2010
Options expiration started out with a sharp decline at the open which I thought might just close the gap on SPY at $118.71. The ETF fell as low as $119.25 before rallying to close the end of the week at $120.29.
Historically, the week after options expiration, particularly the trading day immediately following options expiration is quite bearish. While there is no true edge currently, at least according to my High-Probability, Mean-Reversion Indicator, I do think that history will once again repeat itself on Monday. I expect to see a close of the gap early next week and possibly a return to the declines that began on 11/08.
The one thing that could keep this market afloat over the next week or so is the bullishness that surrounds the Thanksgiving holiday. As I have stated numerous times over the years, Turkey Day is bullish the day before and after the holiday and quite bearish the next two days. This could postpone the gap fill a few days ago or it could postpone the decline that began on 11/08, but I think we will see a decent decline fairly soon.
I would like to see a continued advance so that we see an overbought extreme hit a few of the ETFs I follow in the High-Probability, Mean-Reversion Strategy. One thing is certain, I will sit patiently on the sidelines until a signal is triggered.
Currently, the Semiconductors (SMH) and the Retail sector are the closest to being in an overbought state and the RSI (2) has pushed above 90 in both ETFs. A day or two of higher prices would certainly push both into an overbought state and possibly into the extreme state that would trigger a signal. Stay tuned!
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Short-Term High-Probability, Mean-Reversion Indicator – as of close 11/19/10
Benchmark ETFs
* S&P 500 (SPY) – 55.1 (neutral)
* Dow Jones (DIA) –49.9 (neutral)
* Russell 2000 (IWM) – 58.1 (neutral)
* NASDAQ 100 (QQQQ) – 51.1 (neutral)
Sector ETFs
* Biotech (IBB) – 62.1 (neutral)
* Consumer Discretionary (XLY) – 62.0 (neutral)
* Health Care (XLV) – 52.6 (neutral)
* Financial (XLF) – 45.3 (neutral)
* Energy (XLE) – 69.2 (neutral)
* Gold Miners (GDX) – 52.0 (neutral)
* Industrial (XLI) – 59.8 (neutral)
* Materials (XLB) – 54.9 (neutral)
* Real Estate (IYR) – 39.8 (neutral)
* Retail (RTH) – 65.8 (neutral)
* Semiconductor (SMH) – 69.1 (neutral)
* United States Oil Fund (USO) – 34.9 (neutral)
* Utilities (XLU) – 32.8 (neutral)
International ETFs
* Brazil (EWZ) – 51.6 (neutral)
* China 25 (FXI) – 35.8 (neutral)
* EAFE (EFA) – 56.6 (neutral)
* South Korea (EWY) – 60.3 (neutral)
Commodity ETFs
* Gold (GLD) – 43.8 (neutral)
Ultra Extremes
* Small Cap Bear 3x (TZA) – 39.7 (neutral)
* Small-Cap Bull 3x (TNA) – 56.9 (neutral)
* UltraLong QQQQ (QLD) – 50.9 (neutral)
* Ultra Long S&P 500 (SSO) – 54.4 (neutral)
* Ultra Short S&P 500 (SDS) – 43.4 (neutral)
* UltraShort 20+ Treasury (TBT) – 46.8 (neutral)
I work hard to bring you my latest views, opinions and research on a daily basis. If you are a loyal reader and find my thoughts useful please show your support by joining my newsletter service. For the first time, I am offering a 30-Day Free Trial.
Watch and learn firsthand how I implement my options strategies.
Kindest,
Andy
