Tuesday, September 23, 2014

Bears Win!!!

After a hard fought victory in New York Monday night, the Chicago Bears defeated the Wall Street High Fliers (also known as the Jets) on a premier Monday Night Football showdown, 27-19.  The Stock Market Bears continued with the beat-down on Tuesday morning, taking equity markets down sharply for the fourth straight negative day for the S&P.  SPY, the ETF proxy for the S&P 500, closed down 1.14 to 198.01

The continued move down caused price to move to an oversold -2.50 level on the standard deviation scale. 

The standard deviation had previously been oversold on August 1, just 38 days ago, at -3.30. when the market last pushed towards lows.  SPY closed at 192.50 that day, bounced and then retested the low four days later, when standard deviation was down just -2.23.  While price touched lower at 192.07, the divergence from price,  with a higher low on the standard deviation, resulted in a buy signal and the market then surged on to new highs.

While it appears that we have had extreme volatility, based on the standard deviation, with price shooting up to +2.28 just a few days ago to the now -2.5 level, volatility has been extremely low and is just now starting to reverse and move up.

Volatility reversed on September 3, when SPY was at 200.5.  Volatility kept going down for 15 trading days to now, price drifted showing how my rule of selling premium when Size (volatility) reverses, works, especially if you sell slightly above the market.


On the weekly view, I am still contemplating the possibility of a three-week test of the high this Friday.  The high mark that SPY needs to surpass on Friday is 201.11.  If it fails to exceed that level, that would be a strong sell signal.  As we can see though, weekly price has had a very difficult time penetrating the 20 week moving average.  This week, it comes in around 196.

The weekly chart shows how much success price has had trying to break through the 20-week average. 


A tough call.  Stocks are now oversold and are likely to rebound.  Can SPY gather enough steam to get back up to the 201 level or beyond?  If it does make new highs, then you have to continue with the up trend.  If it drops and holds the 196 level, the uptrend continues. 

If price rallies and fails to exceed 201.11 on Friday, then that would be a strong sell signal.

If we keep going down, then go with it.

For the record, I am net short with a 25% of my position in "out of the money" calls and 75% "in the money" puts.


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