Just over a week ago, $SPX was probing the upper end of the trading range, a few days after a strong rally on Veteran's Day. But upside momentun slowed, and selling set in. Since then, the selling has fed on itself with ample aid from a series of unsettling news:
1) the continuing European debt crisis
2) the lack of results by the Super Committee
and 3) the MF Global bankruptcy.
When is it a good time to write naked options? When volatility is high and the market is “dangerous” or when volatility is low and the market is in a bullish mode? Or perhaps never, because one can always construct butterflies or condors to limit risk on all sides? In today’s article, we’ll take a look at these questions and more, because with $VIX remaining above 30 for over four months now, these questions are certainly pertinent...
It just doesn’t seem that this market can put a rally together. There were two attempts to do so this morning, and both failed. Yet, when $SPX probed below 1180, a strong buy program arose. So there are buyers around, but the aren’t likely taking positions to hold, merely to trade.
The bears seized control with heavy selling over the past two days. However, all is not lost, but the bulls certainly squandered what could have been a good opportunity. The $SPX lows today were 1209, with a close at 1216. This is just barely clinging onto the old support range (1215-1230). A rally from this level would be viewed as just another probe to the lower end of the wider trading range.
MORRISTOWN, N.J. (MarketWatch) — When the stock market, as measured by the Standard & Poor’s 500 Index, broke out over 1,220 about a month ago, it was a strong bullish signal. Most of the technical indicators agreed by registering intermediate-term buy signals as well.
...As a result, not only is the $SPX trading range (1215-1230 on the downside, and 1275-1290 on the upside) still intact, but it is actually narrowing. There is a downward-sloping trendline overhead, and an upward-sloping trendline beneath. Something is going to have to give here – and soon. The fact that volatility remains high and put volume remains heavy should be a contrary, positive indicator, but as long as the market continues to react violently to these European news "bits," there will continue to be demand for protection.
We have written about the subject of protecting a portfolio of stocks with derivatives several times over the years, although it’s been a while (Volume 19, Numbers 6 and 12 had articles on the subject). Recently, some subscribers have inquired about how to calculate the amount of protection they need.
For the second week in a row, a rising market was blindsided by negative "macro" news out of Europe and suffered a violent downturn as a result. What has been quite astonishing is the speed with which the last two declines have occurred. When all is said and done, though, support at $SPX 1215-1220 is still in place.
The equity-only put-call ratios are clinging to their buy signals. Market breadth continues to swing wildly from day to day. Most recently, it is back on a buy signal.
After the nasty decline early last week, the stock market pulled itself together and rallied. The Standard & Poor’s 500 Index bounced off the general area surrounding 1,220, and thus the selling that had occurred on Oct. 31 and Nov. 1 — severe as it was — merely looked like a quick retest of the 1,220 breakout level (see chart below). As the market then rallied back towards the 200-day moving average, the technical indicators began to strengthen to the point where all were on intermediate-term buy signals entering today.