Friday recap

Markets just chugged sideways on Friday in what was an extremely narrow range day on the SPX. Market internals all finished mildly positive but volume came in well below average. Cumulative ticks finished at +30,000. All of this seems to suggest that perhaps momentum is stalling at this point. I'm thinking we might get some short term weakness here. Probably  a days worth given buyers have been stepping in anywhere below 1170.

I am holding onto my earnings positions at the moment which are GS, ESI, NFLX, BIDU, AMZN. I will give a more detailed summary later today.

Thursday session recap

Well it seems that straight after I made that last post yesterday (after first 90 mins of yesterdays session), the market ran into some strong selling as sellers took over all the way to the close. It would appear that the a lot of people took the opportunity to sell into the morning strength judging from the fact that cumulative ticks finished at just under 0 after having peaked at +30,000. Volume was also extremely strong (30% higher than the 30 day average) especially after noon which shows heavy distribution, obviously not a good sign for the bulls. We've failed a couple of times to find buyers above the 1180 level on the SPX. In terms of market structure, failure to find any buyers up at this level again and prices could auction lower as sellers take control. Again, I don't think you should take anything for a given at this point. We could easily blow off to 1200 or we could retest 1150 on the SPX. Stay nimble and small I say!

Thursday morning update

Internals are extremely strong today. Cumulative ticks have trended up the whole session thus far. NFLX has been on an absolute tear and my position is gaining quite a few negative deltas. However the position is up a little bit now so I will hold given that we are at all time highs and I'm still about $5 off my short strike. AMZN is also up today so that's helping my trade. ESI is showing a nice profit too having reported and the stock did not move so all that vol has collapsed which is nice. I also went for a call BWB on BIDU with strikes at 115/120/130 for $0.11 credit and got filled. This is also showing a small profit and I'm thinking that the market is pricing in a $15 move at the most, hence my long strike at $115.

Overall its a pretty good day as all 4 positions are showing a profit. Time to look for some more earnings plays for tomorrow.

No follow through...

Well one day and that was it for the bears as all those buyers that had been waiting to take advantage of decent down day came back in. Still market internals whilst quite positive did not equal the previous day's falls. Cumulative ticks finished at 30,000 after flat lining at 1pm ET. A/D lines for both the NYSE and Nas were +1500, +1000 respectively, while breadth finished at 70% for both exchanges. Volume whilst higher than the 30 day average was well down on the previous day especially in the afternoon session which is where a lot of volume was sold the day before. I think the fact that cumulative ticks were unable to maintain any sort of buying pressure/sentiment in the afternoon is probably a clue that it's not all blue skies ahead for the bulls.

I'm expecting some further weakness and so are some of the quant studies. There are also some noticeable technical divergences appearing as well so this could well be the close to the swing high of the current up leg. I'm inclined to take a few sideways to bearish positions here as well as bet that volatility will rise in the coming weeks. This fits in nicely with my theory that the market is setting itself for a buy the rumour, sell the news after the FOMC meeting announcement. It wouldn't surprise me as this has happened many times before and is common market/herd behaviour. ie people come together like lemmings all expecting some pie in the sky news and the reality doesn't quite match expectations (after all no one knows how much the Fed is going to expand its balance sheet if at all).

On the trade front, I jumped into NFLX yesterday as well. I bought two BWB's, one on the call side and one on the put side. On the puts I bought the Nov 140/135/125 for $0.60 credit and on the calls I bought the 175/180/190 for $0.23 credit. NFLX reported last night and jumped from $153 to $164 after market. Interesting given the straddle was priced at around $22. I'm now in a decent position on this trade if NFLX continues its upward climb. I'm really starting to get a feel for these earnings plays on volatility skew and I'm going to refine my strategy somewhat with my strike selections. I have BIDU on my radar as potential candidate tonight and so will test it out on that. Given my sideways to bearish view I'm thinking of selling some call spreads on one of the major indexes depending on which one is overpriced. Buying some units here is also not a bad idea. More later........

Also some good posts on other blogs. One here from Corey at Afraid to Trade and one from Babak at Trader's Narrative.

Tuesday Recap & Quant predictions

NYSE breadth finished at 10.5% with the Nas doing a bit better at about 18%. A/D lines were both very weak on both with sub 2000 on the NYSE and sub 1800 on the Nas (Anything above and below 2000 and 1800 can be considered extreme on both exchanges). Volume was extremely heavy yesterday coming in well above the 30 day media. Cumulative ticks finished at -50,000 which in the overall scheme of things can be considered not that bad given we've seen negative ticks of greater than -80,000 before. Thus some of the quant studies are showing a short term bounce after yesterday's session. Other seasonal studies still showing further weakness for the rest of this week. However most of the other studies still favor stronger prices in the intermediate term time frame (1-3 months out). I'm still inclined to agree. Babak from Trader's narrative does a terrific job of summing up some of the reasons why here.

As for my current positions. I tried to exit the AAPL position not long after the open as the tape action shows there remains a lot of people who are willing to get long this stock in response to the gap down. No point holding  $4000 in margin on this play when my fly is unlikely to finish in the money at this point. Overall a small profit but I'll take nonetheless. The GS position is also showing a small profit and likewise the ESI position. I will probably try to exit the GS position fairly as I don't expect much weakness in it given its positive reaction to earnings and what happened to the broader market last night. For ESI I will hold through earnings.

I also entered into an AMZN Nov Put BWB for a credit of $0.41. Strikes are 150/145/135. Showing a small loss at the moment. AMZN reports tomorrow after market. I will be holding this through earnings as well.

Monday Recap & Tuesday Predictions

Well the market again finished higher. There was some strong afternoon buying and all market internals were positive, with cumulative ticks finishing up +35,000, A/D lines at about +700 for both exchanges and breadth was 70% and 55% for the NYSE and Nas respectively.

Again, the quant predictions are for lower prices given that the indices have finished stronger largely on the back of a few big cap names like AAPL which makes up 21% of the NDX finishing higher. Given that AAPL got whacked somewhat after hours due to lower than expected earnings, we may finally get the sell off that people have been waiting for. IBM also missed so those two names are weighing down the nasdaq futures which are down 1%. It’s a mixed bag with the ES only down 0.5% and the Dow only down 0.1%. Fairly strong considering that tech is being hit. We’ll see if correlations increase as the cash opens but things are kinda of interesting right now.

Tradewise, the positions are going fairly well. I suspect my AAPL BWB will do quite well with the drop in implied vols. Also ESI is staging a comeback which has put the trade up a little bit. Same story for GS which reports this morning.

Oh I'm also looking at another earnings trade on AMZN. I'm liking the 155/150/140 Put BWB for $0.45 credit.

Market makes a fool of everyone again!

Well we had weaker than expected production numbers and the market is up! Go figure....Perhaps it was further confirmation that the Fed will embark on QE2 when they meet next month and the market likes that? Well bonds are up today so you can write your own story about it. All the quants studies were pointing to limited upside and more downside. It's early days yet so we could still end up with this scenario. Market internals have come off the highs.

I was looking at AAPL before and noticed that the skew on it is incredibly high. I decided to enter into another BWB but this time to the upside so I bought the 360/370/390 Call BWB for $0.14 credit. Again too hasty with the entry as it is trading more around $0.23. It should be an interesting after market when AAPL reports. I'm expecting better than expected earnings but AAPL is already up around 5% since last week on anticipation. Could it really climb another 10-15%??

Monday predictions

Well the combination of weak breadth and slightly flat finish for most of the indices seems to have triggered some bearish signals for this week as mentioned by my quant subscriptions. Cumulative ticks trended lower all day and finished at -50,000 and volume was very strong on Friday if that is any guide.

Treasuries also got hammered last week so I'm not sure if that is another sign. Not sure if Big Ben's plan is going to work either. The Fed wants higher inflation and will surely get it but at what cost? Surely no one will want to buy UST's and the Fed will not just be the marginal buyer but the only buyer before too long. What happens then, they just keep buying the stuff and the USD becomes worthless? Is this an indirect shot at getting the Chinese to re-value the Yuan? Besides who benefits from higher inflation? The thinking is that this is so businesses can regain pricing power and increase the prices of goods to the consumer? Nice theory but they forget that the consumer is all tapped out and have too much debt. How can you possibly keep spending money you don't have? It's not like the Fed is giving us the money they are printing. Nope that's going to the US government to fund their liabilities which they can't meet by the way. Perhaps that is the real reason then??


Well given that the BOJ, the ECB and the BOE are all going to do it in one form or another it appears that the secular trend of all fiat currencies are going to become worthless. Gold to $2000 an ounce then?? Maybe.....at the rate we are going.....

Friday morning update

Hmmm.....sitting in front of my trading computer for the first time in a while, whilst the market is open. Maybe getting a bit itchy with the trigger finger having not traded "live" like this for a while so here's what I've done. I don't like the sell off in the long bond of late (perhaps traders are now betting the Fed purchase of treasuries won't be as much or the Fed won't buy at all!) but I've closed out my short put position. This only leaves me with the short call spread which I'm trying to close also. I've also entered into the ESI trade I wrote about earlier but for $0.13 credit (I was a bit hasty on this as you should be able to get filled for $0.23 or thereabouts). Also I just realised that ESI has earnings next week as well. Therefore I'm taking quite a gamble as the market is pricing in a hefty move and my breakeven is at $50.

As for the GOOG trade, it's pretty much trading at around even and I've got an order to close at $0.02 debit.

Market internals looking decidedly weak. Breadth and A/D lines are all trending down with the exception of Nasdaq breadth. Meanwhile cumulative ticks are trending straight down too. Interesting. Is this the pullback everyone's been waiting for?? Was the big move on Wednesday the blow off top?? VIX is back above 20 today.

Thursday session recap

It's interesting to note that volume was quite heavy yesterday and well above the 30 day median average. However we do have to keep in mind that it is OpEx week after all. Cumulative ticks finished squarely negative settling in at -30,000. Other market internals were weak as well but nothing to panic about for the bulls. I've been reading some research that suggests we could be in for a mild pull back next week based on seasonal factors. At this stage I don't think we are going to see any sustained large moves before the FOMC meeting. Market seems to be treading water and no one really wants to show their hand just yet. I think there's more than a few people just positioning themselves ahead of the meeting. Interesting that treasuries are selling off a bit. Perhaps there is a whisper that the Fed will not be buying as much as people expect? Maybe stocks will follow the path of treasuries?

As a side note, I'm looking at an opportunistic play on ESI. It got hammered along with a lot of other education stocks yesterday. Looking at selling some vol here and anticipating that it will fill the gap in a month or so. Looking at using the 60/55/45 November Put BWB trading for around $0.28 credit.

3rd quarter earnings play update

Ok, so I may have been a bit impatient with these trades as all of them got filled! On the GOOG trade, I got filled at $0.69 and with GOOG trading at 590 after market, this spread is likely to be trading around even which means I get to keep the measly credit. Nevertheless 3.45% ROI in a day ain't bad. It would be more if the dim witted folks at FINRA changed the margin rules on the BWB so that brokers would stop charging me double of what I can possibly lose! I will close out this trade today.

The other trades I got filled on was an AAPL Put BWB with strikes 290/280/260 for $0.13 credit and GS Put BWB with strikes at 150/145/135 for $0.05 credit. Both of these along with the GOOG are smallish positions. The plan here is to hold them through earnings and exit at anytime I can get 5-10%. Ideally what I'm hoping for is for a small downside surprise after earnings. You will notice that my breakevens on both trades are pretty conservative ($270 for AAPL and $140 for GS). I think the market prices the earnings moves pretty efficiently most of the time. For example with GOOG the at the money straddle price was around $40. So $40 plus $540 gives $580 but GOOG did do much better than expectations which is why it is at $590. For AAPL, the straddle price is around $23 which means the odds of AAPL gapping more than this is pretty low. Anyhow my sweet spot is right on the 280 mark so a move similar to this would be nice. Ditto for GS where the November straddle is priced at $11.

3rd Quarter earnings plays

Trying to get some BWB's on AAPL, GOOG and GS filled but with no luck. Going for put BWB's that are a few strikes out of the money. For example, I'm trying to get filled on a GOOG November put BWB with the strikes at 510/500/480 for around $0.70 credit.

Overall I'm bullish here on these names and even with a slight sell off I expect them to hold up pretty well. I just want to sell some volatility skew here if I can.

ZB Nov Iron Condor

Here is my ZB iron condor trade. As you can see it is looking pretty good at the moment. My plan is to close within another week or so. I want to be out before the FOMC meeting as I expect some volatility increase going into it. I will look to leg into another iron condor around that date.

Market summary

Some notable observations of late:

• Whilst market closed higher yesterday, cumulative ticks finished sharply lower a sign of institutional selling. No surprise we are bit weaker today.
• Lots of intermediate term signals have triggered according to my quants including new highs versus new lows, the major indices at multi month highs and some strong cumulative tick readings (ie +70,000 just last Friday when the market finished flat to down).
• Volatility is getting crushed. VIX versus VXV ratio is below certain bearish thresholds in the past. A low VIX to VXV ratio implies that the market is pricing higher volatility in the future (short term versus long term view of volatility)
• CBOE put to call ratios getting very low (below 0.60). A symptom of the overall bullishness of this market.    

Overall, the signs are there that the market is getting complacent and it has definitely priced in some type of QE2 from the Fed. The big question is how much? It could be a case of buy the rumour sell the fact as we get closer to the next Fed meeting on November 2nd to 3rd so keep those dates handy.

Lots of market participants are expecting some sort of a correction/pullback here. I don't think this will happen probably till after the FOMC meeting so I'm expecting a 3-5% pullback in early November. I think there is a very good chance given the pervasive bullishness that the market will bounce back strongly from any sell off as there is probably a majority of people out there waiting to buy the first real dip. I think a run up to retest the April highs is now well on the cards. After that who knows but one thing is for sure, this market is being conditioned or forced to be bought by virtue of the fact that as far as alternatives go, there is no where else to park your money especially when the central banks are hell bent on creating some kind of asset inflation. We would need some type of geopolitical event such as another sovereign debt crisis to spark some real selling in this market. Funny how we haven't really heard anything more about this in the media even though the underlying problems still exist. Anyway that's how the herd mentality of investors go. Out of sight, out of mind.

My best bet and plan is to sell volatility and go long deltas on any decent sell off. Not a bad idea to buy some cheap call spreads here either.

Earnings Tickers that I'm keeping a watch on

I like AAPL, GS, GOOG, AMZN, RIMM, PCLN and possibly a few others............

Fed intervention??

Here is a great and very interesting post about the statistical effects of the Fed's Permanent Open Market Operations (POMO). Hats off to Rennie Yang from market tells for bringing it to my attention. Also many thanks to Frank over at Trading the odds blog. You will note that this is one of the blogs on my blog roll.

Well the article is a bit long and there is some statistical jargon but the conclusion is that when the Fed intervenes in the markets within a cluster of dates, stock market returns have been skewed to the upside.

Also note that the last time there was a cluster of these POMOs was back in March to October 2009.

http://www.tradingtheodds.com/2010/09/permanent-open-market-operations-pomo/

Here are the dates of the POMO operations

http://www.newyorkfed.org/markets/tot_operation_schedule.html

I think it's safe to conclude that you cannot fight the Fed! Also I wouldn't be surprised about how much front running goes on at all the major trading institutions when the Fed announces these kind of actions/dates. As a side note, I'm currently reading Liar's Poker by Michael Lewis. I'd highly recommend it for a really funny and realistic insight into the culture of the institutional trading world and how it operates. Hard to believe that the securitization of mortgages occurred way back in the 1980's (one of the main causes of the GFC)!  

I would also keep the date of Nov 2-3 in mind as that is the next FOMC meeting and where everyone largely expects that the Fed will announce further expansion of its balance sheet (QE2). I would be weary of holding large positions in both bonds and stocks prior to this as a shock announcement (no QE2) could create some big volatility. I think it's fair to say though that the markets are pricing in another round of central bank stimulus. As a trader we should be thinking further ahead of the next wave. Most likely a big run up in gold as fiat currencies get devalued?? Also commodities look like a good inflation play. I think it's becoming increasingly evident that at some stage all this liquidity is going to drive the next boom. We here in Oz are already feeling the pinch because our central bank has hinted at raising rates in the near future and interest are already at 4.5%!!!

 

Safe trading everyone.

Earnings season just around the corner

First up markets finished lower and internals finished weaker but cumulative ticks managed to hold at 12pm and trend sideways the rest of the day finishing at -25,000 which can be considered insignificant.

Just a note that earnings season kicks off soon with Alcoa this Thursday so I'll be looking at doing some earnings plays mainly taking advantage of the skew that develops in the options of earnings companies. I'll post a few dates with some possible candidates in my next post.

Morning trade...

Heads up, cumulative ticks are trending sharply lower in the past 45 minutes. Volume is extremely low though so this may be another bout of profit taking before the next leg up. All the studies and commentary from all around the web suggests more upside to this market. Right now the market is struggling to clear the 1150 on the SPX. Perhaps today's action will suck in some more bears before we get a gap and go situation that will finally give us the thrust higher?? Who knows.....

 At this point in time, I did manage to leg into my ZB iron condor with short put spreads at 126/123 and short call spreads at 141/144. All done for a credit of $3937 on $14062 of risk. At this point in time the trade is up $473. I'm thinking of buying insurance on both sides here as I'm fearing a big move sometime further out. This market just seems a bit docile to me and I just don't trust it given what's transpired over the last 24 months. I'm betting volatility will rise at some stage......(you don't have to be a genius to make that statement!)