The broad stock market, as measured by the Standard & Poors 500 Index ($SPX) was seemingly impervious to an increasing overbought condition. But today after moving to new highs, the buyers finally ran out of gas, and the market reversed downward sharply. The negative trend should last for at least a short while.
The equity-only put-call ratios have been the lone bullish holdout. But now, the weighted put-call ratio has given a sell signal.
The stock market is once again overbought, and we have done more research into what we hope will be effective systems for taking advantage of these conditions. Most of the article is devoted to creating a trading system around the “modified Bollinger Bands,” but market breadth and volatility are “overbought,” too. A recommendation is made on page 4.
Stocks can go down, and it now looks like they will. The market, as measured by the Standard & Poors 500 Index ($SPX) continued to rise at a dizzying pace until the Fed meeting ended on Wednesday. Now stocks are taking on a more bearish tone.
Typically, the market pulls back to at least the 20-day moving average in these situations, and usually overshoots that target. Currently, that 20-day moving average is at 1725.
For some reason, traders seemed to take the benign Fed meeting announcement as negative. At least they sold after the meeting ended. That’s the fourth time this year that a Fed meeting has induced selling, and in the previous instances, the selling continued for a while – weeks, in some cases.
From mid-morning just two weeks ago (October 9th) through Tuesday's close, the Standard & Poors 500 Index ($SPX) rose 115 points. That is impressive, but the advance has been so swift that it has created a number of overbought conditions that are on the brink of becoming sell signals. $SPX has support at 1730 and 1700.
Equity-only put-call ratios have rolled over to buy signals.
One of our customers recently asked a good option-related question regarding premium in index options. This is a fairly common inquiry so I figured my response is worth sharing with everyone. See the question and answer below.
Customer:
Hi Larry,
I see ES call premium is much less than put premium for equal distance strikes. Does this mean market is bearish biased?
We are pleased to announce the release of Option Workbench 2.2. This new version of Option Workbench contains several new features that make finding opportunities even easier and assist you in analyzing your risks before you trade.
The feature article this week lays out three of the seasonal patterns that we trade or observe in October and November. More will follow later in the year, and they will be the subject of another article at that time. The October Seasonal trade won’t be operative this year unless there is a larger pullback than the modest one we had last week.
It's almost that time of year once again for one of our most successful seasonal trades: the Heating Oil – Gasoline futures spread. This trade has had a steller track record over the years and has been followed closely in The Option Strategist Newsletter.
