Saturday, October 24, 2015

CB Business as Usual - Markets Surge

Last week, we were looking at shriveling volatility but sure enough, European Central Bank President, Mario Draghi, confirmed that he will do whatever it takes to keep the party going.

China, not to be outdone, lowered their benchmark lending rate by 0.25% to 4.35%.  Party on.

Stock markets responded rallying more than 2% for the week.  SPY advanced 4.24 pts to close at 207.51.

Last week, we looked at the standard deviation chart and projected that perhaps SPY could move to 209 if standard deviation hit the top of a declining channel.

Almost made it.  A little more surge can reach this level but a continued big surge could move prices back to the 212 level, testing new highs.

We looked at this last week as well, the neck line on the weekly line chart.  Technically, when breaking a head and shoulders neck line, price generally rallies back to test.  If it fails, then continued downside can be expected.

Similar to our analysis last week, volatility on the short term is rising but on longer term measurements, it is declining.  This is not that abnormal though considering how dramatic the down move was in August.

Here, for example, is the 20 week volatility chart.  Still at a high level, it could quickly moderate to a +5 or less level.

This chart reflects the change of the moving average.  This indicates that the 20 week moving average is flateening out after declining sharply.  Right now, the moving average is at 203.76.  Assuming that it stays flat and the volatility declines, a 2 standard deviation move above the 204 moving average could bring prices to 212 - 214.

So, interesting things to come for sure.  Will the Fed players make some comments to pile on?  Another decent weekly move could shift momentum across all daily and weekly levels and move markets much higher.  But there should be enough resistance coming in at 209 and then again at the previous high levels. 

Just to be safe, I added some Nov 200 SPY calls to build on previously placed January 200-215 call spreads.  I also have some 200-185 November put spreads as I was expecting a possible move down to 185.  While the excitement is on the upside, I'm not yet ready to give up my puts.

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