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.

Bearishness winning

Today we saw a lot of selling pressure in the morning session again. As in the last two days, the bulls were able to come in the afternoon and push the SPX to close above the lows of the day, but still the market ended down.

The market forecast was is showing that tomorrow could be another down day. As volatility erupted to the upside today again, the SKEW actually fell again. All this is just really a choppy market in the range between 2120 and 2180 on the SPX. This could last awhile actually, even though it seems like the market has been range bound for so long already.

The RUT and the NDX fell more than the SPX, and they look like they could show more weakness before they rebound. 

Bulls in the afternoons

The market is fighting off selling with afternoon bullishness. We have seen that scenario for two days straight. The bullishness comes from the energy sector on news of a OPEC output limit. A lot of the bearishness is coming from news around DB in Europe. With earnings and an Italian constitutional referendum coming in December, we should have an interesting Q4.

Volatility has fallen farther today, while the SKEW rose a bit. None of the indicators are particularly providing a definitive bias to the market. Most are bullish, in general.

Our Sep28'16 SPX bull put spread at 2110/2100 closed way out of the money today. The trade earned 8% in the two days of its lifespan.

I am likely to put some more trades on this week, especially if the SPX comes up to 2180 by Friday. I am waiting for the Put/Call ratios to give a clear bias when this happens.

Pre-Debate Risk Off

Today the SPX fell over 18 points (-0.86%) on lighter volume than Friday. VIX closed up significantly, but still only at 14.5 or so. VXST is again higher than the VIX - a forewarning of more volatility to come. In the other hand, the SKEW actually fell to 121 however.

I sold the Sep28'16 SPX 2110/2100 put spread near the close for 80 cents. This two day trade is placed below the major support level at 2120, and about 3% off Fridays close. The market has to really react negatively to the debate in order to fall that far, as only unimportant economic data is on the cards for release tomorrow. Yellen will speak on Wednesday and that could roil markets a bit.

August update

We are deep into the complacency of the summer after SPX broke out to new highs in July. For the last three days the SKEW has risen, and is now well above 130 as the market continues to make new highs. The short-term volatility indicator (VXST) also buried its head below 9 a few days ago, and has since been rising. These are cautionary tells for the bulls.

That said, most all technical indicators are bullish so the SPX may continue higher - even up to the 2200 level - before we get a wave of selling. At the same time, a short term retest of the 2135 area could occur if selling does pick up.

The second half of August can provide a volatility spike and a nice set up for the rest of the year. Now is the time to watch for the volatility spikes and sharp turns in market sentiment.