Jeff Pierce's  Instablog

Different views on the market is what makes the market so interesting (and challenging). While I'm generally bearish on the markets it's important to never let bias exclude you from looking at the other side of the coin. That in itself is one reason I think a service like All About Trends is so valuable as they could get you to look at the charts in a different way. ~jeff

By All About Trends

Yesterday we said:

See that green line? (which we've changed to PINK today) It's downtrend resistance. That automatically doesn't mean we roll over here either though, right now it's that we just tagged a resistance level after a big short term move higher. Think digestion of those gains if we are going to work higher from here.
As for the bullish and bearish counts? We can build a case for us being done going down, but I can also build a case for a retest of the lows for the E5 wave (as shown and mentioned yesterday in our SPX chart below).

(click to enlarge)

(click to enlarge)

As of the open today, down trendline resistance stuck and here we are carving out wave 5 of the C wave as shown. That's not automatically bad mind you as we've talked numerous times about testing testing testing and that's about what things look like they are doing. Don't be surprised should we retest the recent lows to carve out a double bottom on the 15 minute time frequency charts.

How many times have we seen this at lows and highs, where we hit a peak or low only to pull away from it and return to the scene of the crime within a few days. We've been here before and we'll all be here again over the next 20 years as patterns repeat themselves because investor's emotions never change.

We were hoping we could have got at least another up day out of this bounce, but the market doesn't care what we want or hope as it the boss not us. Moving on to the 60-minute time frequency charts it allows us to take a bigger view of this whole ABC down off the 2012 highs.

(click to enlarge)

(click to enlarge)

So in summary? There is a good possibility that what we are seeing is the 5th down wave of the bigger C wave which is either going to be a retest of recent lows or even an undercut (Don't forget 1292 is a support level on SPX). Now if we do hit those numbers/zones mentioned above and we chew around and take off? Then YES the C wave will have been completed.

Overall when we look at our current holdings considering what's going on out there today its really not that bad, sure we have a few issues giving us some guff and have been for a bit anyway, but with us in back to the scene of the crime retest underway for a 5th wave which is an ending wave by the way. Should we just throw in the towel on our issues giving us some guff? Its also why we use trade size risk management, it cushions those issues that give you a hard time every now and then. Besides, after all what comes after 5 waves down? Why 3 waves up of course.

The following has been an excerpt from today's premium update by All About Trends. Premium members receive daily market commentary and stock picks, a weekend wrap-up, and a concise trading plan. I personally recommend their service for their insightful content, trading methodology, and value. Try it here at a significant discount.

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One Bullish Perspective On The Markets

By Chris Ebert

The Long Straddle/Strangle Index (LSSI) is within normal limits, so no surprises are expected. The Covered Call/Naked Put Index (CCNPI) is weak, but still mildly bullish while the Long Call/Married Put Index (LCMPI) is non-bullish. The markets are stuck in a stalemate, waiting for Europe to make the next move.

With the approaching U.S. holiday weekend, the mixed emotions portrayed by the option indices are unlikely to have much effect on Friday. Greed and fear fought a good battle this week, but neither side can declare victory. With the fear of the ongoing problems in Europe not likely to change significantly over the upcoming weekend, and with Friday's consumer sentiment report being the only anticipated catalyst for greed, both sides will probably call a temporary truce. Given the current level of the Option Indices, many traders can be expected to sit out Friday's session and extend the weekend to four days.

(click to enlarge)

(click to enlarge)

All Index values are calculated relative to the S&P 500 using volatility data to extrapolate the theoretical performance over the given time periods. It is not possible to match the exact performances shown because the strike prices and expiration dates available in actual trading will always differ from those used in the calculations.

(click to enlarge)

The preceding is a post by Christopher Ebert, who uses his engineering background to mix and match options as a means of preserving portfolio wealth while outpacing inflation. He studies options daily, trades options almost exclusively, and enjoys sharing his experiences. He recently co-published the book "Show Me Your Options".

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I'll Have Another Covered Call

Option Trader's Emotions Are Shifting

By Chris Ebert

Given the importance of emotions in trading, it may come as surprise that widespread measurement of these seemingly intangible aspects of the stock market is a relatively new phenomenon. Fear indices such as the VIX, VXD and VXN, while commonplace today, were almost unheard of 20 years ago.

The VIX is a powerful technical indicator. Derived from the pure emotions of option traders, it differs from other types of analysis in that it represents how the market perceives the future. When the consensus of trader's emotions is justified, individual traders can benefit from a study of the VIX. However, there are many instances in which the market either becomes complacent - resulting in the volatility index giving a false sense of security, or becomes overly fearful - yielding an unjustified sense of impending doom.

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Readers were alerted here on April 4 that the VIX was showing signs of complacency, and those who remained bullish at that time were advised of the attractiveness of relatively cheap insurance then available in the form of protective put options. Those who took that opportunity to protect their portfolios have since endured losses approaching 10% in the S&P and a nearly 1,000 point decline in the Dow, but have done so without giving up the gains of the earlier Bull Market of 2012.

In order to address the limitations of volatility indices such as the VIX, namely their tendencies to underestimate future volatility at market tops and overstate it at bottoms, three new option indices were recently introduced. The Covered Call/Naked Put Index (CCNPI), Long Call/Married Put Index (LCMPI), and Long Straddle/Strangle Index (LSSI) each measure changes in the emotions of traders. The most recent update of these indices indicated a major shift in sentiment. The implication of this shift is that protective put options no longer present the opportunity they offered several weeks ago. There is a correct time for every option strategy, and protective puts are no different in this regard.

So what is the best stock and option strategy now?

• Long Stocks - Now that the LCMPI has lost its bullish pattern, choosing the best performing stocks will become more important. Traders buying the actual shares or using options to create synthetic long positions can no longer rely on upward momentum of the broader market to support individual stocks. Almost everyone is a winner in a bull market, but only the best do well in a flat market or downtrend. Individual stocks showing strength in spite of the downturn are the most likely to profit when the trend eventually reverses.
• Protective Puts - From the change in the LCMPI, it appears that the time for new protective puts has passed; opening such trades now is equivalent to closing the barn door after the horse has escaped. However, those that were opened before the recent selloff have given traders a nice opportunity to wait out the current market in hopes of a rebound without taking on much additional downside risk.
• Long Puts - While selling puts has recently become unprofitable as indicated by the CCNPI, volatility has also limited the effectiveness of simply buying at-the-money puts. Although these trades do have the potential to be winners if the market crashes, the premiums are now too high to generate profits in most cases.
• Long Calls - The consistent poor performance of the LCMPI over periods from 7 to 112 days shows that at-the-money long calls are currently long shots. Even if the market does bounce back, the resulting decrease in volatility will greatly lower the profitability of these trades.
• Long Straddles or Strangles - Given the relatively high premiums compared to several weeks ago, long straddles and strangles, while they have shown recent gains, have historically not sustained such gains for periods exceeding a few weeks. The recent positive performance of the LSSI is a rare occurrence.
• Naked Calls - Although buying at-the-money calls has been a losing practice over the past several weeks and months, as indicated by the LCMPI, reversing the trade by selling naked calls involves considerable risk. As risky as these trades are, the risk can be minimized by choosing an appropriate strike price. It would take some outstanding news to propel the major market indices back up to the trading levels of early April or May. Even if Europe experiences some sort of financial miracle or U.S. jobless numbers suddenly plunge, the markets will likely experience resistance near the levels of the year-to-date highs of a few weeks ago. Selling near-term naked calls with strikes near those expected levels of resistance would not only take advantage of the increase in premiums caused by recent volatility, but would also benefit from the volatility crush that would occur if the market did rally back that high.
• Naked Puts - While the weakening CCNPI shows just how risky these trades can be when they are opened at-the-money, the volatility-inflated premiums now allow these trades to generate income even at strikes far out-of-the-money. Traders who remain bullish and would be willing to go long in the market at a level such as the 200-day moving average or a year-to-date low can sell naked puts at strikes near those apparent support levels. If the puts end up being assigned, the underlying shares would be purchased at the price the trader previously believed was desirable.
• Covered Calls - Given the recent poor performance of the CCNPI, at-the-money covered calls are not looking particularly attractive at the moment. Those that are out-of-the-money have fared even more poorly. As with naked puts, lowering the strike price of a near-term covered call to a level at which a long-term bullish trader would be willing to go long in the underlying shares is an effective method of generating income while buying the dips. If the calls are assigned, the trader keeps the time premium as income; if not, the result is a long position at the cost basis of the covered call. When used correctly, covered calls can work well in bull markets, range-bound markets and even moderate downturns. Being a sort of Triple Crown of option trades, I think I'll have another covered call.

The preceding is a post by Christopher Ebert, who uses his engineering background to mix and match options as a means of preserving portfolio wealth while outpacing inflation. He studies options daily, trades options almost exclusively, and enjoys sharing his experiences. He recently co-published the book "Show Me Your Options".