At face value, it appears that the bulls may be having trouble holding onto the gains from the upside breakout to new highs by $SPX. But a closer look shows the glaring discrepancy between the Dow ($DJX) and the NASDAQ-100 ($NDX; QQQ). The Dow was the first of the major indices to register a new all-time buy $NDX has lagged badly behind, having last made a new all-time high in mid-February. $SPX is caught somewhere in the middle, because it has all the Dow stocks in it and most of the $NDX stocks as well.
This article was originally published in The Option Strategist Newsletter Volume 9, No. 13 on July 13, 2000.
Most option traders – even fairly novice ones – understand that options can be used to protect a stock holding against loss. However, when one delves into the specifics of establishing such protection, he usually forsakes the protection, often due to apparently high costs. In this article, we’re going to re-visit a subject that we’ve discussed before (protection), but try to bring some facts to light that might not be understood by many stock owners. The reason that we think this might be an apropos topic now is that it’s July, and July has marked a peak for the market in each of the last two years. There is some evidence (page 5) that a similar scenario might be unfolding again this year.
Bulls took charge this past week with a furious rally on strong volume -- what turned out to be one of the strongest 5- day periods on record. This market clearly still belongs to the bulls, and the only confirmation left is a close above 3950 to set off the next leg higher.
Equity-only put-call ratios continue to move higher, despite the broad market's big rally. These indicators are thus on sell signals and will continue to be as long as they are rising.
The heavy resistance in the 3870-3950 area has repelled several recent rally attempts. This past week, there was one day with a monster rally of over 125 points from one day's low to the next (trading) day's high. However, the last three days have wiped out that rally, and more. That remains as a formidable resistance area. Meanwhile, it seems likely that support at 3700 and perhaps 3630 will be tested. As long as those hold, one could contend that $SPX is trading in a very volatile manner within a relatively wide trading range, from 3630 to 3950, at the edges.
This article was originally published in The Option Strategist Newsletter Volume 5, No. 4 on February 22, 1996.
An understanding of equivalent positions is mandatory knowledge for option traders. Two positions or strategies are equivalent if their profit graphs have the same shape. For example, we have repeatedly stressed that covered call writing and naked put writing are equivalent. This can be quickly verified by looking at the profit graph on the right. Both strategies have limited profit potential, large downside risk, and can make money if the underlying remains relatively unchanged in price until expiration.
$SPX has finally broken down below support. A serious bout of selling occurred yesterday (February 25th), demonstrating for the first time since last September that the bears might actually have some gumption.
Below current levels, there is support at 3700 (the late January lows) and then the major support at 3630 (the Decembers lows). If $SPX falls below 3630, that would be a major bearish development and would probably indicate that we are in a bear market.