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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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  • Brick-Wall Resistance May Develop Soon

    By Chris Ebert

    For the past several weeks, the same theme has been repeated here. That theme - that March would be a month in which the S&P either soared towards 2000 or else puttered out - has not changed.

    What has changed this week is that S&P suddenly sunk into Stage 3. It's technically still a Bull market, but instead of a Bull market without much clearly-defined resistance, the 1880 level now has a greater likelihood of acting like a brick wall.

    One of the major catalysts that pushed the S&P into Stage 3 was uncertainty and unrest in Ukraine. Should that unrest disappear, the S&P may again begin to soar. While the S&P might continue on its previous path toward 2000, it's now much more likely that it will encounter strong resistance, at least temporarily, if it rises toward 1880. An in-depth analysis follows.

    (click to enlarge)

    *All strategies involve at-the-money options opened 4 months (112 days) prior to this week's expiration using an ETF that closely tracks the performance of the S&P 500, such as the SPDR S&P 500 ETF Trust (NYSEARCA:SPY)

    You Are Here - Bull Market Stage 3

    Recognizing whether the stock market is currently at Stage 2 requires a quick analysis of the three categories (A, B, and C) of option strategies shown in the chart above, using a plus (+) for profitable strategies and a minus (-) for unprofitable ones.

    • Covered Call trading is currently profitable (A+). This week's profit was 2.7%.
    • Long Call trading is not currently profitable (B-). This week's loss was 0.7%.
    • Long Straddle trading is not currently profitable (C-). This week's loss was 3.4%.

    The combination, A+ B- C-, occurs whenever the stock market environment is currently at Stage 3

    Stage 3 is a market environment in which at-the-money Long Calls and Married Puts on the S&P are no longer profitable when opened 4 months prior to expiration. It takes a fairly strong Bull market to make such trades profitable - strong, like the one that dominated much of 2013.

    With Long Calls and Married Puts currently being unprofitable types of option trades, there is an indication that the Bull market is not as strong as it was just a few weeks ago.

    What Happens Next?

    This past week's transition from Stage 2 to Stage 3 marks a significant blow to the current Bull market. The change is not as severe as a Bull-market correction, but it is nonetheless significant.

    Stage 3 is known here as the "resistance" stage because it tends to mark a slowing of momentum for rising stock prices, so much so that recent high prices may tend to become brick-wall resistance in the future. Resistance at recent highs develops as traders become less and less confident that stock prices will ever exceed those highs.

    Once Stage 3 is underway, traders who bought stock at recent high prices, now feeling pressure to get out of those stocks if they ever return to break-even, tend to create selling pressure if stocks do return to those same highs. Such pressure does not normally accompany more-bullish stages, such as Stage 1 or 2, since traders at those stages are accustomed to stocks routinely making new highs after each dip. The "buy the dip" mentality becomes much less common when Stage 3 begins.

    When analyzing the market as a whole, the recent high of the S&P near 1880 is much more likely to become a brick wall if that level is approached over the upcoming weeks.

    (click to enlarge)

    So, what we have now is a market in which the S&P may stall if it approaches 1880 again. That is much different for a trader, in terms of risk vs. reward, than a market which, until recently, appeared to have the S&P headed towards 2000 without any obstacles.

    Stage 3 has occurred many times in the past 10 years, and can be seen on the chart of the LCMPI that follows. Each instance in which the LCMPI dips below zero marks the beginning of a new Stage 3; and each Stage 3 tends to be followed by at least several weeks during which the S&P has difficulty reaching new highs. The presence of Stage 3 correlates with resistance in the future.

    Some recent examples of Stage 3 are May-August 2012, November 2012 - January 2013, and August - September 2013. The effects of the earlier examples may be seen on the chart of the LCMPI. The effect of the most recent Stage 3 may be seen on the chart above, as the S&P struggled to push through the 1700 level this past September. The effect of not reaching Stage 3 may also be seen on the chart above, as the S&P encountered very little resistance at the 1850 level this past February. The absence of Stage 3 correlates with minimal resistance in the future.

    For the week ahead, here is what to watch for:

    • STAGE 1: If the S&P exceeds 1915 this coming week, Stage 1 will return, likely bringing lottery fever back to the market, which usually shows up as euphoric buying among traders. This could easily lead to a rally toward 2000 over the upcoming weeks. On the above chart, Stage 1 is above the blue line.
    • STAGE 2: If the S&P exceeds 1860 this coming week, but remains below 1915, Stage 2 will return. While Stage 2 is bullish, it is not nearly as bullish as Stage 1. So, although the trend in stock prices is generally to the upside, wild swings in stock prices sometimes occur as the bulls and bears fight it out. On the above chart, Stage 2 is above the yellow line.
    • STAGE 3: If the S&P remains below 1860 this coming week, Stage 3 will continue, which is often associated with the strengthening of brick-wall resistance near recent highs. If resistance at the recent high near 1880 becomes a brick wall, it would take some super-terrific economic news to give stocks enough momentum to break out above 1860 over the next several weeks. On the above chart, Stage 3 is below the yellow line.
    • STAGE 4: If the S&P falls below 1806 this coming week, Stage 4 will begin. This stage normally represents a major correction in a Bull market. Such corrections tend to seek out the dividing line between a Bull market and a Bear market. On the above chart, Stage 4 is below the orange line, and the dividing line between a Bull market and a Bear market is the red line.
    • STAGE 5: If the S&P falls below 1751 this coming week, Stage 5 would begin, marking the beginning of a Bear market that may last a few months to a year or more. On the above chart, Stage 5 is below the red line.

    The following chart provides a complete description of the Options Market Stages.

    (click to enlarge)Click on chart to enlarge

    For a more in-depth examination of the Options Market Stages, the following 3-Step analysis is provided.

    Weekly 3-Step Options Analysis:

    On the chart of "Stocks and Options at a Glance", option strategies are broken down into 3 basic categories: A, B and C. Following is a detailed 3-step analysis of the performance of each of those categories.

    STEP 1: Are the Bulls in Control of the Market?

    The performance of Covered Calls and Naked Puts (Category A+ trades) 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)

    Covered Call trading did not experience a single loss in 2013, and the streak endures so far in 2014, continuing a streak of nearly lossless trading extending all the way back to late 2011. That means the Bulls have been in control since late 2011 and remain in control here in 2014. As long as the S&P remains above 1751 over the upcoming week, Covered Call trading (and Naked Put trading) will remain profitable, indicating that the Bulls retain control of the longer-term trend. 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.

    • "If stock prices have been falling long enough to have caused extremely high implied volatility, as measured by indicators such as the VIX, and I can collect enough of a premium on a Covered Call or Naked Put to earn a profit even when stock prices fall drastically, the Bears have lost control." It's probably very near the end of a Bear market.

    STEP 2: How Strong are the Bulls?

    The performance of Long Calls and Married Puts (Category B+ trades) 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)

    Long Call trading was profitable for almost all of 2013 except for a brief break from August through early October, and remained profitable in 2014, until now. The return to losses this past week marks a significant shift in sentiment among traders, and could be a harbinger of weakening of the current Bull market. If the S&P fails to close the upcoming week above 1860, Long Calls (and Married Puts) will fail to profit, suggesting the Bulls have lost confidence and strength. 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, they are also 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 or Bears Overstepped their Authority?

    The performance of Long Straddles and Strangles (Category C+ trades) 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)

    The LSSI currently stands at -3.4%, which is within normal limits. Profits on Long Straddle trades will not occur this coming week unless the S&P exceeds 1915. Anything higher than 1915 indicates the presence of euphoria, often accompanied by lottery-fever-type bullishness, so the S&P exceeding that level this upcoming week would indicate that Bull market of 2013 was once again underway and the recent pullback was simply a pause in the uptrend.

    Excessive profits on Long Straddle trades, such as those exceeding 4%, will not occur this coming week unless the S&P rises above 1987. Despite the presence of euphoria if the S&P was to reach that level, anything higher than 1987 this coming week would be absurd and would likely to result in some selling pressure. Historically, such absurd bullishness has been associated with subsequent pullbacks and, occasionally, Bull-market corrections.

    Excessive losses on Long Straddle trades, such as those exceeding 6% will not occur this coming week unless the S&P falls to 1806. At or near that level a subsequent breakout is likely. That level is important to watch, as anything below it, should it occur, is likely to indicate a major Bull-market correction is underway, and the market would be at risk of breaking out into a lower trading range. As mentioned in Step 1, if such a lower trading range was to fall below 1751, it could be a very, very bearish signal.

    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 just been moving quickly, but at a rate that is surprisingly fast." Profits warrant concern that a Bull market may be becoming over-bought or a Bear market may be becoming over-sold, 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 trend has been ridiculous and unsustainable." No matter how much strength the Bulls or Bears have, they have pushed the market too far, too fast, and it needs to correct, at least temporarily.

    • "If I pay both premiums and suffer a loss of more than 6%, then the market has become remarkably trendless and range bound." The stalemate between the Bulls and Bears has gone on far too long, and the market needs to break out of its current price range, either to a higher range or a lower one.

    *Option position returns are extrapolated from historical data deemed reliable, but which cannot be guaranteed accurate. Not all strike prices and expiration dates may be available for trading, so actual returns may differ slightly from those calculated above.

    The preceding is a post by Christopher Ebert, co-author of the popular option trading book "Show Me Your Options!" He uses his engineering background to mix and match options as a means of preserving portfolio wealth while outpacing inflation. Questions about constructing a specific option trade, or option trading in general, may be entered in the comment section below, or emailed to


    Related Options Posts:

    Clocks, Stocks, Options Ready To Spring Ahead

    This March It's S&P 2000 Or Bust - Here's Why

    A Double-Top Now Could Be Very, Very Bad

    Mar 17 11:32 AM | Link | Comment!
  • Rumor's Of Pending Crises April 11, 2014

    By Astrology Traders

    Financial Astrological Projections

    I have suggested in the last couple of weekly updates to watch out for sudden reversals in the markets. The type of pullback we had yesterday fits that description. I should note that we were expecting the long term Dow signal to flip bullish this week, which it did, however, yesterday it whipsawed back to bearish, confirming my theory that the confidence gained in 2013 is likely disappearing.

    My takeaway here is that my projections for caution are becoming very real. I have also suggested a risk to financials going into this weekend, with March 17th bringing a risk of another MF Global type of event. Oddly Jon Corzine's son died under mysterious circumstances a couple of days ago at the young age of 31. As a reminder, Jon Corzine served as CEO for MF Global prior to its collapse. The intrigue with MFG continues to hover over the Fed and the US financials.

    April 11, 2014

    Information on the web is suggesting the US government is in violation of Basil II last Fall, which required a .03% rate increase per month November-January. The suggestion is that during the government shutdown in October the Fed agreed to extend the financing for an additional six months, keeping the US in business. The funding is due to expire in April unless the government comes up with some extraordinary measure to sell its debt.

    The timeline in April comes during the peak of a grand cardinal square with Pluto, Uranus, Jupiter, and Mars. The square aspect involves the US Sun at 13 degrees Cancer (security and status of the nation). This is extraordinary and has never occurred in the history of America.

    The risk to the markets is becoming apparent as the current trend is beginning to look very weak. We could still get another bump up in the markets near March 24th that could fool investors. I would not be surprised if the technical pattern flips bullish again.

    Quick trades in certain sectors may prove profitable. We will have suggestions in coming weeks as chart patterns materialize. March and April will prove to be difficult to trade and I advise caution adding too much leverage. Jupiter in conjunction to the US Sun will likely bring big swings on the indexes in coming weeks.

    On another note, I will say that every astrologer is looking at the same pattern, including those who are on the web advising about April 11th. I do not agree with the black and white analysis of this rare occurrence. There is a very important dispensation form 30 years ago that is in play at the same time. An esoteric meaning to this dispensation that brings a karmic return on exactly April 16th that will hinder, slow down, the power elite's agenda. The final dispensation is October 12-13th, it will be obvious to everyone how America has avoided a debilitating setback. A grand scale currency swap and shutdown of the financial system will get blocked--this does not mean there will not be a market correction.

    There is no avoiding the economic downturn as a result of the failed financial sector. We will have to endure years of hard work to overcome what has been set in motion.

    This is an excerpt from this weeks premium update concerning this pullback we are experiencing and when it will likely end. Within our service we provide trade setups complete with real time buy/sell trade alerts. We offer a complete 30 day refund policy, no questions asked refund on our service. Below is our trade performance on closed trades since joining Marketfy.

    • 27 winners with an average gain of 10.00%

    • 6 losers with an average loss of 7.805%

    Sign up here to see the different Astrology Traders can make in your trading.

    Mar 16 9:47 AM | Link | Comment!
  • Market Timing Signals: Mixed Bag

    By Jeff Pierce

    On March 11th the Dow finally went bullish via my market timing signal, as it was the last of the markets I cover to switch. Let's just say it barely had enough gas in the tank to push it green because today's sell off flipped it back to bearish as of today's close. Russia is sure doing a number on the markets with this push and pull action and I have a feeling that tomorrow is going to be no better with anxiety of weekend shenanigans that will likely keep traders on the sidelines.

    I try not to get to caught up with the macro events because 2 weeks from now we'll likely look back and say "what was the big deal", but it's probably best not to be too invested right now, but pick off select long opportunities that may get caught in the downdraft of any selling.I say that buying stocks is the way to go for now because 2/3 markets remain bullish and I just don't see enough reasons to short right now. I personally added two new long positions today inside of tradewithZEN and will look to add a few more tomorrow seeings how I'm severely under-invested at this point as I let the markets trick me in February thinking that we were going to get more of a pullback that didn't happen.

    So to recap my timing signal for Nadsaq and TSX are bullish, with the Dow I said, a mixed bag of sorts.

    Mar 15 3:31 AM | Link | Comment!
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