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Jeff Pierce
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I’m a swing trader of momentum stocks with a holding period of anywhere from a few hours to a few months. I run a number of screens to locate the strongest/weakest stocks out there, using technical analysis to determine my entries and exits. Trying to calculate the intrinsic value of stocks in... More
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  • Options: Cause For Concern Over Mid-1500s S&Amp;P

    By Chris Ebert

    Option Index Summary

    For those keeping score - Over the past 66 weeks, covered call trading on the S&P 500 has returned a profit 64 times. That's no surprise. The only time that covered calls are unprofitable is in a bear market, when stock prices fall so fast that the premium received on a covered call is too small to make up for the loss on the stock.

    There have been some significant sell-offs over the past 66 weeks, but it takes more than a sell-off to create a bear market. Sell-offs, corrections, pullbacks, consolidations, whatever one wants to call them, are often a sign of a healthy bull market. No matter how great the pullback, as long as covered call trading remains profitable the argument can be made that it is not a bear market, just a bull market that is getting prepared for the next leg up.

    The Covered Call/Naked Put Index (CCNPI) is published here each week, and tracks the profitability of covered call trading. Because covered call profitability is directly linked to the existence of a bull market, the CCNPI is an effective indicator of bullishness or bearishness among the broad array of stocks that make up the S&P 500. This past week saw profits for covered call trading, so the CCNPI remained positive, and that indicates continued bullishness among traders. But because all bull markets must eventually come to an end, the CCNPI by itself presents too narrow a view of the market. That is where the other option indexes become useful.

    The Covered Call/Naked Put Index (CCNPI) is actually one of three option indices, each with its own insight into the stock market. Together with the Long Call/Married Put Index (LCMPI) and the Long Straddle/Strangle Index (LSSI) a complete picture of the current market conditions appears. The 3-step process is as follows:

    STEP 1: Are the Bulls in control of the market?

    The performance of Covered Calls and Naked Puts reveals whether the Bulls are in control. The Covered Call/Naked Put Index (CCNPI) measures the performance of these trades on the S&P 500 when opened at-the-money over several time frames. Most important is the profitability of these trades opened 112 days prior to expiration.

    (click to enlarge)

    This week, covered call trading and naked put trading were both profitable, as they have been for anextended period. That means the Bulls remain in control. The reasoning goes as follows:

    • "If I can sell an at-the-money covered call or a naked put and make a profit, then prices have either been going up, or have not fallen significantly." Either way, it's a Bull market.
    • "If I can't collect enough of a premium on a covered call or naked put to earn a profit, it means prices are falling too fast. If implied volatility increases, as measured by indicators such as the VIX, the premiums I collect will increase as well. If the higher premiums are insufficient to offset my losses, the Bulls have lost control." It's a Bear market.

    STEP 2: How strong are the Bulls?

    The performance of Long Calls and Married Puts reveals whether bullish traders' confidence is strong or weak. The Long Call/Married Put Index (LCMPI) measures the performance of these trades on the S&P 500 when opened at-the-money over several time frames. Most important is the profitability of these trades opened 112 days prior to expiration.

    (click to enlarge)

    This week, long call trading and married put trading were both profitable. Both forms of trading became profitable in late January. It means the Bulls are not only in control now, but they are confident and strong. The reasoning goes as follows:

    • "If I can pay the premium on an at-the-money long call or a married put and still manage to earn a profit, then prices have been going up - and going up quickly." The Bulls are not just in control, but they are showing their strength.
    • "If I pay the premium on a long call or a married put and fail to earn a profit, then prices have either gone down, or have not risen significantly." Either way, if the Bulls are in control they are not showing their strength.

    STEP 3: Have the Bulls overstepped their authority?

    The performance of Long Straddles and Strangles reveals whether traders feel the market is normal, has come too far and needs to correct, or has not moved far enough and needs to break out of its current range. The Long Straddle/Strangle Index (LSSI) measures the performance of these trades on the S&P 500 when opened at-the-money over several time frames. Most important is the profitability of these trades opened 112 days prior to expiration.

    (click to enlarge)

    This week, long straddle trading and long strangle trading were both very near to returning profits. Profitability does not necessarily indicate that a market correction is imminent, but it is an important warning sign.

    Profitability is a rare occurrence for long straddles or long strangles, so it is a good indication that the condition of the market is one that is rare as well. Profitability can sometimes signal that the market is topping out, while excessive profitability (in excess of 4%) is almost a sure sign that the market has reached a top and is about to correct. The 4% level has not been reached yet, but it wouldn't take much now. A couple of triple digit gain days for the Dow or the mid-1500s on the S&P is all it would take to push the LSSI over 4%. If that happens, look out below! The reasoning goes as follows:

    • "If I can pay the premium, not just on an at-the-money call, but also on an at-the-money put and still manage to earn a profit, then prices have not only been going up quickly, but have gone up surprisingly fast." Profits warrant concern that the market may be becoming over-extended, but generally profits of less than 4% do not indicate an immediate threat of a correction.
    • "If I can pay both premiums and earn a profit of more than 4%, then the pace of the uptrend has been ridiculous and unsustainable." No matter how much strength the Bulls have, they have pushed the market too far, too fast, and it needs to correct

    Conclusion

    It is still possible for prices to move a little higher without the LSSI signaling that the market is "Due for a Correction". It is a bull market, as shown by the CCNPI. In fact, it's a strong bull market, as shown by the LCMPI. Higher prices are what bull markets are about, so they would not be surprising now. But at the same time, higher prices could easily push the LSSI to signal a correction now. If the S&P gets into the mid-1500s or the Dow gets to the mid-14,000s over the next week or so, that should be a flashing red light to all traders to be prepared for the possibility of a correction. But the LSSI has already put up a warning sign, so waiting to see the flashing red light does carry some risk.

    *Option position returns are extrapolated from historical data that, while reliable, cannot be guaranteed accurate. It is not possible to match the exact performances shown, because the strike prices and expiration dates used in the calculations will not always be available in actual trading. All data is relative to the S&P 500 index.

    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!"

    Mar 03 8:48 PM | Link | Comment!
  • Trade Analysis Of Stocktwits Trending Stocks

    By Jeff Pierce

    WDAY

    wday

    AAPL Trend Analysisaapl

    FB Trend Analysis

    FB

    SWHC Trend Analysis

    swhc

    Mar 02 5:32 AM | Link | Comment!
  • Italian Election Could Be Game Changer

    By Poly

    The Italian election results were very big in my opinion. It again underscored the people's impatience and unwillingness to embrace growth-crushing austerity. The problem is that Italy is going to need help restructuring their debt at some point in the very near future, for this I am very confident. At 130% of debt to GDP and an economy potentially facing depression like conditions in the coming years, Italy remains the 2,000 pound elephant in the room. The IMF and EU would never agree to a bailout without deep austerity, but in this case the electorate has already beaten them to parliament. With a €2 Trillion debt pile, Italy may well be the driving force that breaks the monetary union apart.

    Of course this potential crisis has always existed, it never went away. The ECB's pledge to support these sovereigns at all cost (using banks as a conduit) has only masked the real structural problems facing Europe. This is likely the source of the recent Dollar strength I've been seeing. The Dollar is showing a Daily Cycle Top now, but that's after 17 days. This type of strength points to a new Investor Cycle that is gaining traction with the potential to really breakout on a weekly chart.

    The Euro is now showing signs of vulnerability. With a break of its weekly trend-line and a turn of the oscillators, it's pretty clear now that the Euro topped back in Week 11. This confirms the new Dollar IC, therefore this bounce out of the (4th Daily Cycle) is likely to be just a counter trend rally back to the $1.34 area before topping. It's my belief that once the Euro tops, it will signal a top in all risk assets and the long hard decline towards the next ICL will accelerate.

    This is an excerpt from this midweek's premium update published on Wednesday (2.27) focusing on the US DOLLAR from the The Financial Tap, which is dedicated to helping people learn to grow into successful investors by providing cycle research on multiple markets delivered twice weekly, as well as real time trade alerts to profit from market inefficiencies.

    They offer a FREE 15-day trial where you'll receive complete access to the entire site. Coupon code (NYSE:ZEN) saves you 15%.

    Mar 01 4:35 AM | Link | Comment!
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