Tuesday, August 19, 2014

How Far Is This Current Stock Market Rally Likely to Go?

In a recent post I highlighted the rise in the equity put/call ratio to above 1.0 and suggested that we would see at least slightly lower lows followed by an inevitable swift rally with most of the gains in the first 2 weeks of the rally.

Well here we are now and it appears that so far things are playing out very much as suggested/expected.  Today will market the 8th day of the current rally off the 8-7-14 low.  And it definitely has been a swift and directional advance.  So now that we are in the time frame of where we may expect things to slow down or for a possible larger scale top to complete, let's look at some more details.....

This list shows all equity put/call readings greater than or equal to 1.0 since CBOE data available in 2003.  I had suggested that the Aug 2007 and June 2011 instances were the most technically similar in recent years with overbought and divergence conditions on the weekly time frame already being in place.

If we replicated the rally from June 2011 low to the July 2011 high, it would put SPY at about 204.00 this week to next week.  But again it may be more sensible to correct for volatility and to understand the tendency for final highs or secondary rallies to double top or fail to exceed an old top.  From a simple chart based standpoint as opposed to measuring in percent terms, the rally off Aug 2007 lows made a slightly higher high for the bull market, basically double topping then declining.  Off the June 2011 low, the rally was more brief and failed slightly below the prior high from May 2011.

So as we now see the QQQ at a new high, and the other indexes still lagging with concurrent divergences still present, I believe it is sensible to expect this move to stall near or slightly above the recent all time highs in SPY.

If prices decline below the recent low from Aug 7th, I think that would be a sign of broad market weakness.  So that could be a line in the sand to watch depending on your holdings and time frame.

Sunday, August 17, 2014

Multiple Time Frame MACD Bearish Divergence on QQQ Suggesting a Possible Bull Market Top

Multiple Time Frame MACD Bearish Divergence on QQQ Suggesting a Possible Bull Market Top

I have published a new technical analysis video covering the Nasdaq, VXN, banking stocks, and housing stocks in depth.  The trend channel and MACD technical analysis as well as broad scale index and sector non-confirmations suggest to me that a major top is indeed in process here in stocks.  That is my opinion anyway from an analysis standpoint.  As always, translating analysis into objective trading is another level, so simply use this info within an objective trading context.

Futures this evening are up, and it will be interesting to see this week whether there is a weekly top reversal candlestick in QQQ.  A gap up tomorrow/Monday followed by a significantly lower close on the week, would fit with the typical topping price patterns seen in markets.  If prices on QQQ this week close below last week's open @ 95.27 after a gap up tomorrow, that would be a weekly bearish engulfing pattern, and that would be a significant price bar given the technical analysis in my opinion.

97.94-98.35 would be the typical topping price range for QQQ given the hourly chart technical analysis in my opinion.  I personally have an order to purchase deep OTM puts on the SPY etf to take advantage of a possible top and sharp decline into the seasonally weak period of Sept-Oct in stocks.

Thursday, August 14, 2014

DBA Call Option and Technical Analysis

Click on Chart to Enlarge

This is an hourly chart of DBA, which is the PowerShares Agriculture fund.  I purchased some call options near the close of today's session.  I bought the Sept 26 calls for 0.50 a contract.  The spread was about 0.05 which is 10%, but given the possibility of a 100% + move in the options over the near term I settled for it.

The chart above shows a beautiful bullish divergence on the momentum as it hit today's lows.  But I would suggest looking at the multiple time frame set-up as well.  The daily MACD and momentum are showing classic bullish divergence as well between the two major lows visible on the chart above.  Additionally, the weekly stochastics is over sold and with some mild bullish divergence.  So it appear that today could be the trough of a potential multi time frame turn higher.

Looking at the last portion down of the chart above I have labeled a nice looking Elliott wave style 5 wave impulse.  So at this point given the obvious loss of momentum and the possible failed break below the July 11th low, it appears likely that we see at least a partial retracement of the last move down over the last couple weeks.  From looking at the daily chart, it seems that a move back up to the 27.00 level could be quite likely.

If prices do indeed rally here, and completely retrace the last two weeks downward move in LESS time than the decline took to form, I believe the logic would be that a new upward pattern was at play, and that we could probably expect prices to rally well above 27.00 in coming weeks.  The pink vertical lines show the current forward time projection as August 29th the date prices would need to move above 27.00 by in order to confirm this.

So given that possibility I just bought the Sept expiration calls anticipating a quick rally to 27.00, with possibly a move well above that.

My current exit plan is to simply maintain the option with no stop loss and am willing to hold until expiration even if it results in 100% loss.  That is factored into the amount risked/put into the trade.  I currently plan to exit half the contracts at 100% gain if prices rally modestly from here.  HOWEVER, if prices rally very swiftly (3-4 days) back above 27.00, then I will opt for holding all the contracts and use the daily chart as a possible exit indicator prior to expiration if a divergence develops.

So part of the logic is that a rapid retracement of this last decline would suggest a likely new pattern occurring, and with the 26 strike option, it would seems likely that the option would expire in the money and that the 26 level would be a significant support level.  And so I would like the opportunity to make a larger gain on the whole position if everything develops in ideal fashion.

Click on Chart to Enlarge

This chart is a daily chart with two projections up from this low that simply project the 2 prior significant rallies visible the chart up from today's low.  In both instances we see it would be likely that the option could expire in the money and probably make 100% gain along the way.  But if we see a significant rally even close to the green projection line, then a 400-500% gain on the option would be possible.  So while I don't EXPECT that, I want to plan for the scenario that makes the big money and maximize it by holding the whole position if price explode up from current levels indicating a possible intermediate low is in place.


FL Dual Time Frame Put Option Set-Up

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This is a daily chart of FL, Foot Locker.  Notice the daily stochastics in the overbought position at a lower high and the more time consuming and overlapping rally off the 7-17-14 low, in comparison to the prior decline off the high.  This creates a nice price logic set-up for a short sale or put option trade.  Now let's move down to an hourly chart to focus in on a trade entry for the set-up

Click on Chart to Enlarge

This hourly chart shows a recent momentum peak at the upper end of the recent range of the momentum indicator.  Now we are seeing price to push to higher highs, but the momentum indicator is reaching a lower peak.  The indicates a slowing down of the current action, with the distinct possibility the price will soon reverse to the downside.  So from this point, on a trading basis, an objective method is needed to enter, or simply enter during the divergence and place a stop above the resistance level which would be the highest point on the chart.

HOWEVER, the earnings release is next week, and so the potential exists for a significant gap or price movement.  So in this situation my reasoning is that making a trade just before earnings is essentially a gamble, and if the earnings moves the stock up rather than down as the technical analysis suggests to me here, then I basically have a coin flip in risk versus reward by shorting the stock.

But in terms of options, if price moves up and no significant decline materializes, the max loss is 100% of the option value, but if earnings comes out with a gap down and break of the recent July support, the option could very reasonably move 200-300% or even more over the next couple weeks.  So in this situation I am electing to try to purchase a put option as prices hit this resistance area, with the reasonable probability of a 3:1 reward versus risk on a Sept 50 put option.

I currently have an order to buy the put at a limit of 1.40.  The spread is about 0.20 on the option, and it appears that price would have to move another 20-30 cents up before the order would fill.

Please note that this is for education, and that you will lose 100% of the money in this trade if the trade is not successful.

SPY Call Option Exit

I exited the Aug 191 SPY call options completely at 4.25 and 4.40 respectively in half positions.

With only 1 day till expiration and a divergence on the 15 min momentum and a reversal bar at 11:00, I decided to exit the second half rather than hang on till tomorrow despite the obvious loss of momentum that can often last a day or more after a turn on the 15 min chart.

SPY Aug Call Options - Exit

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This chart is a 15 min chart of SPY.  I have held a couple contracts of the Aug 191 calls on SPY based on the VIX and put/call extremes I have recently highlighted.

So now options expire tomorrow and so I am looking at fine tuning the exit.  What I show above is an external retracement of the decline from Monday to Tuesday as well as an external retracement of yesterday afternoon's mild pullback.  There is an overlap of a couple fibonacci levels at 195.35.

I have had a limit order to exit half the contracts at 4.25 which would roughly correspond with the 195.25 level on SPY.  So this short term analysis confirms that as a reasonable short-term target.

I have another limit order to exit closer to a fill of the gap at 196.98.  The limit order is for 5.40 which is about the middle of the gap down from 7/31/14.  That would not even take a 1% rise in SPY to achieve that level, so it is within reason that it could be hit within the next two trading sessions.

The set-up for taking a put or inverse trade is not yet developed, though as we move through expiration I will be keeping an eye on that possibility.

Of note here, while I don't have quantification of this idea, I have consistently noted a tendency in this bull market for prices to generally rise into options expiration, and to experience the most significant corrections following options expiration and into the 1st or 2nd week of the next month.  So, if this little rally here is a sucker rally in a larger scale correction, I would expect the move to the downside to pick up as this month ends and September begins.  Nothing magic here, just one of the cycle at play in the market that can fill out the picture of an otherwise appropriate technical set-up.

Wednesday, August 13, 2014

SPY Time Pattern Analysis and Logic

Click on Chart to Enlarge

The review of SPY tonight will rehash a little of what I have pointed out in recent posts, and also add a pattern concept.

First off, as suggested in the last post, the short-term price logic continues to confirm a bullish trend.  The up moves are directional, large and fast.  The intervening downward move was small and "slow".  And again with today's move higher, the intervening downward move was completely erased in less time than it took to develop from high to low.

So the next thing to look for here in terms of when the trend is potentially ending is to look for a divergence pattern to develop.  So in the chart above I show a momentum indicator.  If price makes a higher high, but the momentum fails to make higher highs, that would indicate a slowing down of the market, which is the typical pattern that precedes a reversal.

There is an unfilled gap down above prices, and it is highlighted on the chart.  Sizable gaps have a strong tendency to fill within a couple week time frame.  And so as we see prices rallying here, that gap is an obvious target of potential attraction for prices, and may also offer a potential point of chart resistance.

The pattern concept I want to point out here is that when two successive moves in a pattern are similar in time, the next move is typically longer.  As an ideal ratio the next move may take about the same time as the total time of the prior 2 moves together.  That is what the vertical lines are showing as a time projection on the chart above.  That would suggest we may see price move generally high until Friday.  From my pattern based research, a typical ABC pattern has a median C leg that takes a little less than the total time of A+B.  However the AVERAGE C leg, takes about 1.17 times the time of A+B.  In any case, I am simply offering the suggestion here, that even if this move up here is counter trend in a correction, we may still have a couple days up in the current portion of the move.