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Pullback or Breakdown? (SPX, DJUSMT, DJUSRR) 10.12.2012

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But alas, the bounce was short lived and the SPX closed just above the open, eking out a negligible gain, and printing a massive candlewick. While some short-term bullish action may be gone, is there still a chance for a bounce or do we breakdown from here?

Since June of this year, the market, SPX, has been in a beautiful channel, trending and fading from one side to another, finding logical support and resistance. Depending on your views, many traders view angled trend lines as major support levels. However, horizontal support, according to some, trumps angled support any day. But perhaps should the two prevail at the same time, one could argue that this occurrence is a powerful support level. The chart below displays such a level, as we have recently sifted across the channel into the horizontal and lower channel trend line; and additionally the 50-day moving average

While this one chart is well and good, under the hood some key indices have the majority of their moving averages above them. See chart below.

Key:

Dow Jones US Trucking Index

Dow Jones US Industrial Transportation Index

Dow Jones US Railroads Index

Dow Jones US Marine Transportation Index.

50 DMA yellow

100 DMA blue

150 DMA purple

200 DMA gray

Perhaps it can be implied that one should move along with caution, for many of the transportation indices seem to have pulled back and according to Dow theory…this is not a good sign.

SPXChart

DJUSTK

Feel free to e-mail any comments, feedback, or general inquiries to…

Author mark@keeneonthemarket.com

Data from Thinkorswim

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Did the Options Market Get Too Bearish? (SPY SPX) 10.11.2012

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As the SPY comes into its 50 day moving average, what is the implied volatility saying in the derivatives market and is that a ‘tell’ we may be going lower.

The S&P 500 future is now $40 away from its October 5th high. Implied volatility (a measure of risk, supply and demand, relative price, and an input into theoretical models) in the October monthly options rallied up from 12.76% to the current 16.22%, or about 3.46 percentage points. IV (implied volatility), given the pump up because of the sell off, this increased premium traders can work with, but also changed the recent trading environment.

The previous example in the SPY is a natural go-to guy for many reasons. SPY is super liquid and represents the S&P 500 index. This ETF does have a setback…skew. Skew is a phenomena in major products that is a result of large selling of OTM (out of the money) calls and buying of OTM puts. While this may seem strange it is completely natural for large institutional holders with systematic risk, or market risk.

The data below displays the relative price of 5% OTM puts and calls in October with 8 or 9 days til expiration. The point is that the most recent observation is relatively expensive, or you get the most bang for your buck by selling OTM puts and buying OTM calls in a ratio. The puts premium being taken in and using that to buy calls.

 E-mail the author with any comments, questions, or any inquiry

mark@keeneonthemarket.com

Data courtesy of Thinkorswim