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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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  • Trend Remains Up (With Possible Surprises)

    By Facesincabs

    "The fundamentalist studies the cause of market movement, while the technician studies the effect." - John Murphy

    $SPX Climbs Mildly From Flag Pattern

    By Friday, the $SPX inched slightly above its short-term flag pattern. Noted leaders (small cap's, transports, cyclicals) showed more upward progress. The tech sector even showed up to lead price on a couple of light volume days, and remained noisy enough to avoid a pull back (e.g., a close below $NDX 2720).

    $SPX Daily (QE infinity remains underneath the market)

    Technically, the inter-market relationships presently support the equities continuing their move up. Volatility remains way down, bond yields remain mildly elevated, total market volume is low, and dips continue to be bought.

    While the trend up remains intact, I still have some concerns about how quickly the markets have risen since November 2012. Price continues to rise daily (squeezing shorts), but market accumulation is less clear. Overall, I think some buying caution is warranted here. Entering OpEx week, I would not be surprised by a price pull back (like ES 1450-51). Also, the slow grind higher this last week suggests to me that we could see a pull back sooner rather than later. As I am writing, this news just came out:

    Coin-mageddon (watching for a shock event in futures Sunday evening)

    The above news event is a reminder to me that over the next 45 to 60 days that a single news event about the debt ceiling can enter the market picture quickly.

    Noted Technician Calls A Top

    The prospects for an $SPX 1500 top gained some attention this week when Tom DeMark (a well followed TA guy) suggested a top is near at $SPX 1492. I would comment that his system's record is actually pretty good at calling broader swing tops and bottoms. Here is a Bloomberg article about that.

    Tom DeMark Article (Bloomberg)

    Technically, it is my understanding that Tom DeMark uses an exhaustion top model (waiting for 13 exhaustion days) to call market tops. Based on his $SPX calculations, the US market has seen 12 exhaustion days in this climb (so far), and he warns that the 13th is close at hand. I do not follow Tom Demark myself, but if interested, you can find his books on Amazon and Stockcharts.

    Additionally, I do not implicitly trade off of market top calls like this. I am interested though in related crowd behavior and dynamics, as they can be a viable counter-trading tactic. Related to this, in the last few days the AAII survey was released suggesting that investors sentiment is near highs (this is often considered a key divergence by technical analysts calling market lows and highs). Furthermore, recently I have seen far too many traders calling for a specific climb to a $SPX 1500 top (e.g., even the field of top callers is getting pretty big). When that happens my radar props up and I often watch for surprises for "the crowd" of people following the top caller.

    AAPL Update (Cause and Effect)

    I had mentioned AAPL as a short trade in my last blog post. Personally, I traded AAPL short this past week (entry 529) with a planned exit and option target below 515 (e.g., a break of fib support), however I covered on Friday (521.50) when it became apparent it was not going to work the way I had planned the trade. I was also concerned about the theta burn on my options. I held my AAPL short position for a few days .. long enough for a break of 515 area to present itself, but that level held on 2 tests of 515 this week.

    When a trade does not work as planned, I often will take it off. However, AAPL remains on my short radar until: (NYSE:A) its earnings date (January 23rd), and/or (NYSE:B) until bulls can break through 532 and trend line resistance on the daily chart (below). With the earnings event about 10 days away, I expect to be executing some shorter-term trades (1 to 2 holds) before that date.

    Apple Daily (AAPL earnings on January 23rd)

    Apple Weekly (its bear market and $500 BIG support)

    Much like the quote above, for Apple, its earnings (fundamentals) are the cause and its technicals are the effect. Normally AAPL is an earnings powerhouse, but with tablet pricing and consumer choices becoming more competitive globally, AAPL earnings could present a surprise in either direction. Android is gaining ground in countries where the high end, much higher priced Apple products are less affordable to the masses. This is primarily why I will most likely stand aside during and around the AAPL earnings day.

    To my trading eye, AAPL's down trend remains its most important technical feature. However, I see an emerging technical problem for bears as AAPL gets close to its earnings date. January 23rd conveniently arrives closely to when the current declining trend line (see daily chart) intersects the 522 to 531 range. Technically, a break up above the trend line becomes very easy near its earnings, and a break of the downward trend line would invalidate the primary trend that I have been trading off of (e.g., my edge disappears).

    My Intention

    In closing, I want to emphasize that my market observations are my own. The presented technical and trading ideas should NOT be construed as a recommendation. My intention here is to demonstrate: (1) how someone might technically trade a stock, (2) a decision process associated with short term entry and exit, and (3) to others how to explore and test their own trading ideas using technical analysis.

    I am on Twitter most days (@facesincabs), where I socialize with other traders, share entries and exits, and share real time observations about the markets. Good luck with your own trading (luck = preparation + opportunity + a little risk).

    Tags: AAPL, SPY
    Jan 16 7:13 PM | Link | Comment!
  • Covered Call Trading Starts 2013 With A Bang

    By Chris Ebert

    Option Index Summary

    Last week's Option Index Update concluded: "Be prepared for a sideways or choppy market next week, as last week's gains get digested!"

    Not much has changed since last week's update. Covered call trading continued its nearly uninterrupted streak of profits; a streak that has now gone on week after week for over 13 months. When covered call trading is profitable, the market is healthy and traders tend to be bullish.

    Bullish traders are not zombies - they don't just push prices higher and higher without regard for obstacles. But, the general tendency is always to the upside when bullishness prevails, as it does again this week. That is revealed in this week's Covered Call/Naked Put Index (CCNPI) which, not surprisingly, remained positive. The index tends to be positive whenever the bulls retain control.

    Bullish traders are not all created equal - there are times that the bulls are so strong that they do appear zombie-like, ignoring bad economic news while soaking up every bit of good news. There are also times when the bulls are weak, as they are this week, which is revealed in the Long Call/Married Put Index (LCMPI). Weak bulls are fickle. They can produce surprising rallies, but the slightest worry over earnings reports or government actions can senzombied them running away. When they run, there is nobody to take their place except for bears. As of today, they are not running.

    Bullish traders can sometimes become frustrated by the market's failure to cooperate in sending prices higher. When prices remain stagnant for extended periods, the bulls sometimes take matters into their own hands, forcing prices higher. At times prices can rise dramatically, seemingly without any catalyst, but with the appearance that prices are merely going up because nobody wants to be left on the sidelines during a rally. This frustration is revealed by the Long Straddle/Strangle Index (LSSI). This week, the LSSI is normal, however it is very close to a level that indicates frustration among bulls. Frustrated bulls can spark some truly unexpected rallies, but they can also get so frustrated that they walk away. When they walk, the bears are more than happy to take their place. As of today, they are not yet walking away.

    What we are left with is a market dominated by bulls (CCNPI), with those bulls having little strength (LCMPI) and also becoming increasingly frustrated with the market's failure to break out of the range it has been stuck in for the past several months (LSSI). This is still a market with opportunity for growth, but a risky one in which to bet the farm.

    Option Index Definitions

    The intent of each option index is to provide a snapshot of the emotions of traders. It is these emotions that drive the markets over the long term, not the news; the news is merely a catalyst that feeds into market emotions that were already present.

    • The performance of Covered Calls and Naked Puts reveals whether traders feel bullish or bearish.
    • The performance of Long Calls and Married Puts reveals whether traders feel a bull market is strong or weak.
    • 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.

    (click to enlarge)

    Covered Call/Naked Put Index (CCNPI) - Continued BULLISH

    Because sellers of at-the-money covered calls or naked puts receive a premium from the buyer, either

    of those trades will result in a profit as long as the underlying price does not fall by a greater amount than the premium received. Generally, when covered calls or naked puts are profitable trades, it is an indication of a bull market. Likewise, when there is a bull market, it is often profitable to sell covered calls or naked puts.

    An analysis of the performance of covered calls or naked puts opened a moderately long time prior to expiration (such as 112 days) can be useful:

    • In a downtrend - Implied volatility is usually higher than usual and the premiums received on these trades are also higher. It is therefore possible for covered calls or naked puts to become profitable when prices are still falling, but no longer falling quickly enough to outpace the faster time decay of the unusually high premiums. Thus a positive 112-day CCNPI in a downtrend is often a bullish signal that marks the end of a downtrend, while a negative CCNPI generally signals that the downtrend will continue.
    • In an uptrend - Implied volatility is generally low and the premiums received are lower as well. Covered calls and naked puts become much more sensitive to corrections in an uptrend, because there is a smaller premium to offset any decline in the underlying stock price. Thus a negative 112-day CCNPI often indicates the market has experienced more of a correction than would be expected in a healthy bull market. A negative 112-day CCNPI in an uptrend is a bearish signal that may mark the end of an uptrend, while a positive CCNPI generally signals that the uptrend will continue.

    The 112-day CCNPI has been consistently positive for over 13 months now, with only a couple of minor exceptions, which is an indication of bullish emotions among traders. Traders "want" to be bullish now, but they need strength to actually act bullish. Determining the strength of these bullish emotions requires a study of the Long Call/Married Put Index (LCMPI).

    (click to enlarge)

    Long Call/Married Put Index (LCMPI) - Continued WEAKNESS

    Because buyers of at-the-money long calls or married puts must pay a premium, these trades will only result in profits when the uptrend occurs quickly enough to offset the loss of value due to time decay.When long calls or married puts are profitable trades, it is an indication of a strong bull market.Likewise, only when there is a strong bull market is it profitable to buy calls or married puts.

    An analysis of the performance of long calls or married puts opened a moderately long time prior to expiration (such as 112 days) can be useful:

    • At the beginning of an uptrend - Implied volatility usually remains elevated for some time after the previous downtrend has ended, causing the premiums paid to open long calls or married puts to be higher than usual. Long calls and married puts only become profitable when the market has gained sufficient strength to overcome the inflated premiums. Thus, when a previously negative 112-day LCMPI turns positive, it often signals that a bull market has gained strength.
    • When an uptrend is well underway - Implied volatility is generally low, and the premiums paid are much lower. Long calls and married puts only become unprofitable when the market has weakened so much that it cannot overcome the relatively low premiums. Thus, a when a previously positive 112-day LCMPI turns negative in an uptrend, it often signals that a bull market is weakening.

    The 112-day LCMPI has been negative for several weeks now, indicating that bullish emotions are likely to be weak. Weakness is sometimes temporary, however weakness that lasts for more than a few weeks often leads to a bear market. Long periods of weakness tend to limit rallies as traders become more inclined to "sell on strength", while also amplifying sell-offs as low-confidence bulls get "stopped out". Determining whether the bullish emotions, as shown by the CCNPI, and weakness of those emotions, as shown by the LCMPI, are justified requires a study of the Long Straddle/Strangle Index (LSSI).

    (click to enlarge)

    Long Straddle/Strangle Index (LSSI) - Nearly DUE FOR A BREAKOUT

    Because buyers of straddles or strangles must pay two premiums, one for the call option and another for the put option, these trades will only result in a profit when the market moves up or down very strongly, so that the gains exceed the combined premiums. When a long straddle or strangle returns a substantial profit it is an indication that traders were taken by surprise - they were complacent and those emotions were later proven to be unjustified when the market moved much more than they had expected. Likewise, when the market is complacent, it can be profitable to buy a straddle or strangle.

    When a long straddle or strangle results in a substantial loss, it is also an indication that traders were taken by surprise - they were overly-fearful and those fears were subsequently proven to be unjustified by the market's failure to move.

    An analysis of the performance of long straddles or strangles opened a moderately long time prior to expiration (such as 112 days) can be useful:

    • In any trend, up or down - The relatively high premium on these trades tends to make them rarely return a profit greater than 4%. Thus, a 112-day LSSI that exceeds 4% often signals that the market has come too far, too fast and may need a correction to satisfy those traders who were previously complacent and subsequently surprised by the move.
    • In a range-bound market - The relatively high premium on these trades tends to result in losses, but those losses seldom exceed 6%. A 112-day LSSI that is negative by a greater magnitude than 6% is an indication not only that many traders were previously fearing a sell-off, causing an increase in option premiums, but that such a sell-off did not materialize. Thus a 112-day LSSI lower than -6% often precedes a breakout, either to a lower price range that confirms trader's prior fears, or to a higher price range that completely puts those fears to rest.

    Although the LSSI is within normal limits this week, it is important to note that it is very near the edge of those limits. While not signaling that anything major is expected this week, the LSSI has the potential to move into a range that would indicate the market is "due for a breakout". Such a move in the index could happen within the next week or so, and such moves are historically followed by some major moves in the market in the weeks that follow. The LSSI does not provide clues to the direction of potential moves, but it does put traders on notice that they should be prepared. With the LSSI so near its normal limits, this index bears watching.

    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!"

    Related Options Posts:

    Last Week's Rally No Surprise To Option Indices

    Fiscal Cliff No Match For Covered Call Trading

    Covered Call Trading Just Will Not Stop Winning

    Jan 16 7:00 PM | Link | Comment!
  • Financial Astrology: Copper Stock In Focus

    By Karen Starich

    The following is an excerpt from the January 6th premium weekend update by Karen Starich. Astrology Traders provides specific dates and in-depth analysis of future events for the financial markets through weekly updates, trade alerts, and educational webinars. We now offer a free 2 week trial where you can sample our analysis before you are charged.

    Copper could be prime for a breakout. Mars (rules copper) is transiting Aquarius while Uranus (electricity) is transiting Aries. These two planets are now also in mutual reception which in my view is another sign that we are at the initial phase of new industrial growth. Copper could begin to move higher next week, and I will highlight January 10th-13th for a bullish move. Because of the mutual reception now I like a long position in copper at current levels. Consider a long position with Southern Copper Corp. (NYSE:SCCO) near Friday's close.

    (click to enlarge)

    Related Posts:

    Financial Astrology: Copper Ready to Break Out?

    Financial Astrology: Bond Update

    Financial Astrology: RIMM's Turnaround Story

    Jan 09 4:42 PM | Link | Comment!
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