Thursday session recap

All market internal indicators finished positive yesterday. A/D lines closed at close to 1000 on both the NYSE and Naz while breadth finished close to 70% positive for both exchanges. Cumulative ticks also finished positive at around 25,000 which is something it hasn't done for a while. Actually the divergence between the early morning tick action which started to turn before the price on the indexes, lead me to take a long trade on the TF (Russell 2000 e-mini futures). I chose the TF because Rob Hanna from quantifiable edges (of which I'm a subscriber) research has shown that the Russell shows a high level of bullishness at this time of the year relative to the other majors. Whatever the case, I got long at 768.9 and closed out at 773.7 for a nice gain of $480 per contract. It would have been more but such is one of my bad habits and character weaknesses in trading these highly leverage instruments I have not been able to control my fear/greed and moved my profit stop down from 775 so that I could go to sleep with the a profit in the bag. As always one should master the discipline that comes from trading the plan.

This morning when I woke up, I saw the news that MA and V had both lost 10% because of proposed legislation to cut credit card fees. I thought that this might be an opportunity to throw on my favourite BWB trades which are contrarian in nature and benefit from selling high skew. Alas when I went to check if I could construct any trades for Jan expiration I found that I couldn't which means that skew is low implying that this sell off is perhaps a once off and the market is not expecting much further downside. Perhaps a calendar might be worth investigating especially for those that understand the concept of weighted vega (see my mentor Mark Sebastian's many informative posts about this over at Option Pit).

Anyway the outlook for Option Ex today is bullish according to seasonal factors and other statistical factors. Note that strength on OpEx Friday may also induce weakness on the Monday as well. If you like to know what the probabilities are and are into this quant type of information then it pays to subscribe to Wayne Whaley's emails by emailing wayne@witterlester.com with subject ‘Add to Daily Email’, or vice versa for deletions.


My own feelings is that this market still looks a bit heavy and if it were not for all the bullish factors in play we would probably have already come back down and tested the 20 day moving average at 1214 on the ES. So I'm still hesistant to hold longs for longer than a day. Bonds continue to come under pressure as more stimulus and improving economic numbers as well as other factors lead the market to pricing in higher interest rates. A good blog on that by Surly trader is posted here. Again this is a natural part of the fundamental structural shift in the market where the market is no longer pricing in recovery but growth. In my opinion, I believe the equity bear won't be coming back until we start to see an inverted yield curve and that will only happen when the Fed begins to raise rates. Expect that to happen end of 2011 or early 2012, till then it's higher we go with the occasional 10% correction thrown in.


Posting will probably be light heading into Christmas and the New Year so with that I would like to wish all of you a Christmas filled with lots of love, laughter and food and a happy and prosperous new year!