Fear in the undercurrents

From an open-to-close basis, markets are doing nothing. Today was no different on the surface, yet a look at VIX and you see fear is ramping up. VXST is above 20, and VIX is nearly in spiking mode - although it just missed a true spike signal today. 

Market breadth is awful and the market closesd slightly down for its 5th down day. On top of a long losing streak, reasons for being bullish abound. First, tomorrow is the 1st of November - historically an up day on the market. Also, there was a a huge spike in put buying on Friday. McMillan and others noted it as a usually short-term buy signal for the SPX. So far that has not played out. 

Our bear call spread closed (way) out of the money today. That has left us with no bear calls to defend our put spreads. I am OK with that going into tomorrow, and will aim to put them on if the market does spike higher during the day. 

I moved the SPX Oct31 2130/2120 put spread out to Nov4 for an additional credit of 90 cents! So, we have an opportunity to make some more money as we continue to simply roll this out. 

To get more bullish, I added a small SPX Nov2 2100/2190 put spread for $1.05 credit and a small NDX Nov3 4720/4710 put spread for $1.22 credit. 

I view these as relatively low risk, high probability trades as the Market Forecast is set up for upside potential in the short-term . If the market doesn't cooperate, at least downside should be limited. 

 

The FBI steps in

The FBI ruined a great rally. More importantly, the VXST is now trading higher than the VIX signalling more downside is likely unless we get a quick reversal of volatility.

Luckily, we had the extra 2150/2160 SPX call spread expire worthless on Friday. We have another expiring tomorrow.

However, now our 2130/2120 expiring tomorrow is in the money, and if we don't get a bounce early tomorrow, I need to move it out. I will have to add some call spreads close to the money also.

Generally, the week before the elections is bullish. It looked like everything was going well on Friday to start that process off, but we have huge political risk with the FBI investigations now.

I need to be very aggressive in protecting our positions if this turns into a large sell off.

Back to the head fake

Today seemed a lot like Tuesday. A nice powerful open (the SPX actually hit 2147 in the first few minutes) only to be sold as it left the gates. Then a 4 hour come back only to be sold in to the close. The market cannot get a footing right now, but the sell offs are wimpy.

The real news started after the close. It seems AMZN botched something and lost 6% in the after hours market. This shut down a nice 4% immediate jump in GOOG which ended up about 2% anyway. We have XOM reporting tomorrow before the open. Everyone will see how big oil is handling sub-$50 oil prices.  

VIX keeps climbing and now its above 15, but VXST is still lower and the terms structure still marks bullish for the market. SKEW fell a bit. $TRIN was bullish - hitting lows around 0.5 today! But nothing matters... The SPX is just in a range. In fact it is creating a small ascending triangle that could last a while longer and bring the market lower a bit. I have mentioned previously, lots of commentators are saying the market is sideways until the US election is resolved. In fact, historically that is what generally occurs. Research says that following the election the market moves 5% on average in the next 30 days. That would be a big move and warrant a position with long puts or calls. 

The RUT says this triangle will break lower as the important 1200 level was lost today after putting in a textbook double top recently. The whole picture looks pretty awesome for a trade setup, especially if the 1200 was retested and failed in the next few days. The MarketForecast is pointing distinctly at that possibility as it is oversold to the point it made a bullish cluster today! I suspect tomorrow we could see some bullishness. 

Today, I rolled the 2130/2120 SPX put spread that was set to expire tomorrow out to the 31st for another 35 cent credit. 

I also added another 2150/2160 call spread on the SPX for expiration tomorrow, because it was paying a decent credit on the rebound today. I pulled in $1.20 credit while at close it was only worth 30 cents already. This was another small position, but everything helps! 

The Nov9 2060/2050 put spread is taking heat as VIX expands and the market flops lower. It is still far out of the money, so I am not taking action yet. However, I will buy puts if the market is not able to bounce from here and SPX breaks 2110. 

I have a few call spreads lined up for November and December, but I need a tick up to get decent pricing on spreads above the all time highs. 

Mirror Opposite of Yesterday

Today the SPX opened miserably down and almost touched the 2131 level before reaching its high around 2145 within an hour. After that it was a fade and a rebound to close only fractionally down. The RUT floundered and lost almost 1%, and AAPL weighed on the NDX. Still the markets are tightly range bound with the SPX flip-flopping between 2130 and 2150 this week.

I rolled out the 2150/2160 SPX call spread due to expire in two days to next Monday. For an extra trading day of expiration, I was able to get another 80 cents so now the total for that spread is a $5.15 credit.

The important after-hours movers were generally bullish, except for ORLY, so we cannot blame bad news for a soft open tomorrow. No real important companies are reporting before the bell either.

The indicators are indecisive. VIX rose insignificantly, $TRIN ended down around 0.65. SKEW is still only around 123. I dare jinx the whole market and say that this ideal 'going nowhere' could still continue for some time.

Tomorrow, I will try and roll the 2130/2120 put spread and bring in more premium.

SKEW on TastyTrade

TastyTrade reviewed the SKEW on a recent segment of Market Measures. Their view it basically as an 'old school' way of viewing volatility.

The segment is important as they show that selling -0.3 delta SPY puts with 45 days-to-expiration when SKEW is higher (above >125 or  >135) is much more profitable and less risky than selling them all the time.

This conclusion is rather incomplete, in my opinion. Although selling puts when SKEW is high leads to great results, that is largely because after extreme readings (especially above 135) the SKEW often prints at an extremely low level, say below 120, within a few days. Those low prints after an extreme often mark the bottom of the SPX in the short term.

In fact, this reversal in SKEW is similar to the VIX speak that McMillan discusses and trades. Both are confirming indicators to get bullish. For that, in the money puts can be sold profitably with great success.

SPX does a head fake

What started out impressively bullish overnight, got nasty into the open, then nudged itself back to break even, then fell and bounced around to finish near its lows around 2143.

I added a regular size SPX put spread for November 9th at the 2060/2050 level for 85 cents, right at the close. As long as the market stays above 2120, this spread will die quick. However, with the election coming anything could happen.

The $TRIN was up above 1.24 and really piled on the gains in the last hour of trade. As I mentioned yesterday, Visa was weak after its earnings announcement. GM botched its forecast for the future also, and it went down 4.5%. Oil also fell. 9 of the 11 main sector ETFs were negative today, but the damage to the SPX was minimal really.

After hours AAPL said some scary things (I suppose) as it traded lower by about 2.5%. This has put some weight on the futures already, and so tomorrow's opening could be soft.

Volatility traded higher today, but not significantly. The volatility term structure remains bullish. The SKEW traded slightly lower, and is in a good place to trade on both the bearish and bullish side of the market.

We need to watch our little Iron Condor at 2150/2160 X 2130/2120 carefully as it expires on Friday. If the lower end comes under pressure tomorrow, I will move to out or just close it. The bear calls brought in a lot of premium ($4.35), so that is important to collect if we can.

Overnight bulls

The market opened higher after weekend merger news. This pushed the SPX up into the 2150 area, and put our 2150/2160 call spreads expiring Wednesday under pressure. I rolled them at the same strikes to Friday for an additional credit of $0.65. So, we have collected $4.35 in total on this spread.

Later in the day, I sold the same number of 2130/2120 put spread that expires on Friday for a credit of $1.35 to help offset any need to roll the calls further.

The 2190/2200 call spread expiring Friday that we traded in a half size position about a week ago is already nearly worthless, but because we only brought in a 50 cent credit, I will likely hold it through expiration.

As for the main trading indicators, the momentum line on the MarketForecast and the Stochastics are already high up in their ranges, so upside should be limited from here. With Visa down slightly after hours (even though it beat estimates), we should have the SPX under some pressure tomorrow.

Rather interestingly, the $TRIN traded higher today, especially on the open. So underneath the rally, traders were selling. Also, VXST rose today by about 6% from a level that has acted as support for the past month.

Near-term volatility rose today.

More call selling

SPX is not moving. I sold another call spread (very small position) - this time using the 2150/2160 (quite aggressive) on the October 26s. I received a credit of $3.70. I plan to close this out at half of the profit, once we get a pull back.

The market closed slightly lower today and even though most companies are posting decent earnings and guidance, the market is following the price of oil.

Volatility is low and falling. The SKEW is in the middle of nowhere around 123 and the percent of stocks above their 20 day moving average is around 41%. Nothing shows signs of great gains or a rapid correction. It seems like the trading range should continue with near term resistance somewhere around 2150 on the SPX.

Selling calls on the bounce

Today the SPX bounced higher (mostly overnight) and traded sideways until a small fade into the close. After hours news from Intel and Yahoo was not great, but not awful. We can expect more upside in the next few days if earnings come in positive, but to what extent will the rally go?

I traded a half size bear call position in the October 28s, using the 2190/2200 spread for a $0.50 credit. We still need the VIX to trade definitively lower below 15 and the SKEW to print below 120 to get bullish.

Only Sideways

The SPX continues to stay above the 2120 mark on closing basis. The market is slowly rolling over and is in a short-term down trend.

Meanwhile, most stocks trade below their important 20 day moving averages. In fact, so many trade below that level that the market seems to be getting critically oversold in the short term, as seen by the areas marked with pink boxes below.

Volatility indexes are rising in a slow and slight manner. Until the VIX closes below 14.5 this market could sell off hard and fast to mark the bottom of this pullback. 

Trading here is tough unless you want to play condors on the indexes and hope this long sideways action continues. I am waiting until we get the sell off in order to take a more directional trade.

Next week set up

With Monday being the first trading day of the new month, I would expect a bullish bias. I would feel more sure about those expectations had Friday been a down day - or at least flat. It was not.

All indicators are showing lack of direction in the markets by either flipping back and forth between a bullish and bearish bias or meaningless data. Market breadth is generally bullish, except on the big down days when it slips to bearish. The SKEW is middle of the road, showing no conviction to the upside nor fear of the downside.

The number of stocks above their respective 50-day moving average is converging to its middle around 55%. The market has gone sideways when we get stuck here.

MMTW is stuck in the middle of its range

The volatility complex generally has maintained a slight bullish stance all through the recent sell off. The short term VXST has spiked higher than the longer term measures of volatility, but has not been able to hold that bias. At the same time, all volatility indexes are demonstrating an upward trend in their low points. This could be interpreted as a bearish forewarning signal.

Volatility was low and is now trending higher. 

When VIX can break and hold above 15 there would be a larger sense of bearishness that would warrant a more directional position.