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Example Advisories

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Monday, February 15, 2010

The market seems to have stabilized and so far our remaining Feb bull put spreads are safe.  This is our last week for our Feb spreads and we'll notify you through email if we need to take any type of action.  If not, we're going to hold our spreads and let them expire worthless for the buyers, where they will be 100% profitable for us, the seller.

We're almost through Q409 earnings season and about 80% of the companies that have reported have beat estimates, which is good news.  Below are some of the more closely watched companies that report this week. 


Tues the 16th - Whole Foods
Wed the 17th - Owens Corning, PF Changs, Analog Devices, Applied Materials, Hewlett Packard, Nvidia
Thur the 18th -  Wal-Mart, Dell, Intuit
Fri the 19th -  JC Penney

Below are the charts for the DOW, SPY - an ETF that tracks at 1/10th of the S&P500 index, QQQQ - an ETF that tracks at 1/10th the value of the NASDAQ 100 index - NDX,  NYSE Composite Index, and IWM - an ETF that tracks at 1/10th of the Russell 2000 small cap index.

The daily DOW chart is shown below.  We can see that after the huge hammer candlestick that happened 6 trading days, the market stabilized at this level and is gently trending upward.  Friday was another hammer candlestick on above normal volume telling us that buyers jumped in at the end of the day and pushed the DOW back up to where it first opened, which is bullish.  The DOW is currently holding above the psychological level of 10,000, which is good news.  However, the DOW is still below its 100 day simple moving average (SMA) and 50 day SMA, and if the DOW continues to stay below the 50 and 100 day SMAs for an extended period of time, this then will be a bearish signal.  Per the indicators, the MACD is ready to have a bullish crossover, Stochastics is showing positive divergence per the slope of the line shown, which is bullish, and it looks like "smart money" is starting to flow back into the market as the A/D line is strengthening. If the 10,000 level fails to hold as support, the next target is 9,700, representing the October low, and then 9,500 which represents the 200 day SMA.  So far, it looks like the 10,000 level will hold as support.  For more on the technical analysis that we use please visit the Learning Center

 

The daily SPY is shown below (an ETF that tracks at 1/10th of the S&P 500 Index) and it's attempting to stabilize above 107 and the upward sloping trend line.  We can see that the hammer candlestick six trading days ago was on 2.2x normal volume, which was very bullish, and so far it looks like this might represent the bottom of this correction.  If the 107 level fails, there is an excellent chance that the 103 level will hold as support representing the October low and the 200 day SMA.  Per the indicators, just like what we saw for the DOW, they are showing some bullish signals.

 

Below is the QQQQ, an ETF that tracks at 1/10th the value of the NASDAQ 100 index - NDX.  The NDX comprises 100 of the largest non-financial companies that trade on the NASDAQ, many of which are well known high-tech companies.  We can see that the Q's also had a hammer candlestick 6 trading days ago on 1.8x regular volume, and so far this looks like it might be the low for this correction.  If the 43 level fails to hold, 41 is the next target representing the October lows and the 200 day SMA, and we believe there is an excellent chance that this level will hold.  The indicators are looking short-term bullish, like what we saw with the S&P 500 index and DOW.

Below is the NYSE Composite Index (NYA), which is a much broader indicator than just the 30 stocks that compose the DOW.  We can see that this index had a huge hammer candlestick 6 trading days ago and so far this looks like the bottom.  This index, however, is below the 50 day and 100 day SMAs, and the upward sloping trend line, which is not healthy.  We do, however, need to give this index a chance to recover.  It looks like there is a good chance that the 6700 level will hold as support.  

Finally, below is the daily chart for the IWM, an ETF that tracks at 1/10th of the RUT.  We can see that the IWM is rebounding, and more strongly that the other indexes.  It has already closed above the 100 day line, which is bullish.  So far it looks like 58 will hold as support.

Big Picture Analysis/Market Timing:

Below are a selection of macro-technical, macro-economic, investor sentiment, media sentiment and money flow indicators to give us a big-picture view of the health of the US economy and the stock market.  For a consolidated list of big-picture indicators that we monitor, please go to MarketTiming.

Implied Volatility on the S&P 500 Index (VIX) -  We watch implied volatility (IV), also known as the "fear index", on the S&P 500 Index to help us gauge the overall health of the US stock market.  We care about IV because if it starts to climb while we have trades open it could be a warning that a major storm is coming and that we might consider closing our spreads and move to the sidelines. 

Conclusion for IV on the S&P 500 Index:   Volatility increased by about 30% over the last few weeks.  A gradual, downward trending implied volatility, along with periodic and short-lived spikes is common as an economy gradually and unevenly recovers from a deep recession.  As long as the economic data tells us that the economy is slowly improving, and the data does look promising, we'll continue to expect these periodic spikes in volatility and live with these spikes when they happen.

 

Economic Cycle Research Institute (ECRI) Weekly Leading Index (WLI) -  ECRI is a respected independent economic research house that has one of the best track records in predicting when recessions start and end.  One of their key leading economic indicators is the Weekly Leading Index (WLI). For more on the WLI please visit the Learning Center.

Conclusion for WLI:   The WLI was trending upward through Dec 2009 and now is flattening out.  Overall, this index is showing reasonable strength telling us that the US economy is gradually improving.

 

Below are two inventory indicators. The first is aggregate business inventories and it shows that in Nov and Dec 2009, it was the first time in 13 months that US companies ramped up production and added product to inventories.  The inventories number, however, pulled back a little for Jan '10, which isn't shown, but this isn't a concern yet since recoveries are always uneven and choppy.  Overall, this is excellent news and sooner or later companies will have to start hiring to keep manufacturing production humming.

 

Below is the Inventories-to-Sales Ratio (IS Ratio).  The left Y axis represents "number of months worth of inventory based on current sales volume".   For example, in April '04 the IS ratio was about 1.28, telling us that based on the level of sales volume in April '04, if manufacturing production suddenly stopped, inventories would be depleted in 1.28 months.  We can see that the IS ratio is back down in the "normal" range as shown by the red area, and it's actually very lean with only 1.26 months of inventory in the system.  When consumer demand picks up even just a small amount, manufacturers will have to hire extra personnel to satisfy demand.  Note how high the the IS ratio climbed in Jan '09.

McClellan Market Breadth Oscillator -  The McClellan Oscillator is one of the more accurate and modernized market breadth indicators available today that is based on the advanced/decline line.   For more on this indicator please visit the Learning Center and read the entry entitled "McClellan Oscillator". 

Conclusion for McClellan Oscillator on the NYSE Composite Index:   As of Feb 12th, the McClellan Oscillator is near zero telling us that an equal number of stocks are advancing and declining on a daily basis, which is a neutral sign for the market.  (i.e. it's stabilizing)

 

Initial unemployment claims dropped a little last week, which is good news.  As long as initial unemployment claims remain above 400k, our economy continues to lose jobs.

 

Retail sales came in better than expected, growing 0.5% in January.  Because 70% of the US gross domestic product (GDP) comes from consumer spending, this is an important number to monitor. So far, it looks ok and retail sales is gradually improving.

 

Investor's Intelligence Bull/Bear Spread -  The B/B Spread is a well respected gauge of overall investor sentiment.  For more on this indicator please visit the Learning Center and read the entry "Investors Intelligence Bull/Bear ratio & spread".

Conclusion for B/B Spread Indicator:   As of Feb 10th, there are 8% more Bulls than Bears, telling us that traders and money managers are very cautious and they most likely still have an itchy trigger finger.

 

Overall Conclusion from the Big Picture Indicators:   The macro-level indicators continue to show that the US economy is gradually, but unevenly improving.  Therefore, we believe that most of the major indices will continue to stabilize and then gradually trend upward.

Below is the economic calendar for the next 1 week taking us to the end of our Feb trades:

The Week of Feb 15th:   The big ones this week are Industrial Production on Wed the 17th, and the Conference Board Leading Indicator and Philly Fed index (regional manufacturing output) on Thur the 18th.  For more on this economic calendar please go to http://www.briefing.com/Investor/Public/Calendars/EconomicCalendar.htm.

 

Possible Recommended Actions:

If you are auto-trading, you don't need to do anything other than make sure that the reserve cash is in your auto-trade account.  The auto-trade accounts have currently allocated 80% of the cash and we rolled the SPY Feb 103/105 bull put spread into March.  You should have 3 Feb spreads and 1 Mar spread in your account.

Per our existing Feb spreads, we recommend the following possible actions if the market pulls-back this week. For each recommended adjustment below, it's highly advisable to "pre build" your 4 legged roll orders and save them so if you need to roll a spread you will be able to roll it quickly.  As a reminder, when we recommend to roll a spread, in order to keep all of your maintenance "whole and in play", you will need to execute the roll in a single, 4 legged trade where you are closing out the existing spread and opening a new spread in a single order.  For more on how to do a 4 legged order please go to the Members Only Learning Center and read the 2 entries on making adjustments and rolling credit spreads.  In general, we are recommending to roll into March since the US economy is gradually recovering and the stock market will probably continue to trend upward, albeit gradually, after this correction runs its course.  If you don't believe that the economy is improving and that the stock market will continue to go down over the next few months, you then might consider rolling your spreads down into the same month, so you'll make a clean break out of February.  If you do this, however, your loss will be higher, but you will be making a clean break from February.  If/when you place a 4 legged roll trade, start the limit debit small, around 15 cent, and then increase the limit debit by a dime every 30 seconds until it fills.  When doing a roll, many times it will fill for a price that is outside of, and less, than the bid/ask prices that are shown.

If you have the RUT Feb 560/570 bull put spread -  If at anytime the RUT drops down to 573 we recommend to immediately roll it to a RUT March 550/560 bull put spread.  Below is what the 4 legged order (many times called a Condor order) would look like.  (this one we show rolling down into a March 540/550, but the March 550/560s should be ok)  Our goal is to roll into a relatively safe March strike prices that is at or just below the 200 day SMA and to pay the smallest debit possible to execute the roll.  If you would prefer to do the roll for even less, or maybe even a small credit, you could roll "right across" into March 560/570 bull put spread, for example, but these strikes have more risk of not expiring out-of-the-money (OTM) in March.  Note the limit price below is a "limit debit".  Most likely it will cost you a debit to do the roll, so this is where you want to put the price in.  Start your price low, for example 15 cents, and then slowly increase it until your roll order fills.  It's good to first do a "test" roll order of just a few contracts to see where it's filling;  then you can fill the rest once you feel comfortable with the debit price and strike prices that you are rolling into.

 

SPY Feb 103/105 bull put spread - If you have yet to roll these, if at anytime the SPY drops to 105.5, immediately roll your Feb 103/105 to a March 100/102 bull put spread, in a single 4 legged (condor) order.   The short March 102 put is placed right at the 200 day SMA, so this should be pretty safe.

For any other SPY spreads that you might have, keep an eye on them, and if the SPY index drops down to within 0.5 points of your short put leg, it's time to take action and to roll it into March.  It's recommended to pre-build all of your roll trades and save them.

We Recommend the following trades:

Let's hold onto what we have through expiration this week, unless we are forced to close something out early and/or roll it per the instructions above.

 


Sunday, February 7, 2010

The market is still in a correction and only time will tell how deep it will go before it hits bottom and starts to rebound.  The correction primarily got started with concerns about high levels of European sovereign debt, primarily in Greece, and the correction hasn't looked back.  Trade on Friday, however, produced a massive "hammer" candlestick, which is a sign that we could be near to the bottom.  We talk more about this below when we analyze the charts.  Because the market did initially pull back pretty hard on Friday, we were forced to roll our SPY Feb 102/105 bull put spread into March.  Because the US economy is gradually improving and that the US stock market is in a gradual UP-trend, we decided to roll the trade into March giving the trade more time, and at slightly lower strike prices, giving it a good probability of taking a small loss when it expires in March.  Our other February trades are still safe and we need to watch them closely until this correction is over. 

The Big economic news last week was the release of the monthly jobs numbers and it came in with the US economy losing 20,000 jobs in January, and the unemployment rate edging down from 10.0% to 9.7%.  Another big piece of news was that overall job loss since the beginning of the recession that was previously estimated to be 7.4 million lost jobs, was revised upward to 8.4 million lost jobs; so, overall job loss was worse than previously thought.  On the positive side, Cisco Systems released earnings last Wednesday where they beat analyst's estimates, and they guided UP for next quarter stating that they are seeing broad-based strength across all of their business units.

We are 2/3rds through earnings season and so far 78% of the companies that have reported have beat estimates, which is good news.  Below are some of the more closely watched companies that report this week.  Right now, however, since we are in the middle of a correction, if any of these earnings are positive, it probably won't help the markets much.

Mon the 8th - Electronic Arts
Tues the 9th - Cognizant Tech, Coca-cola, Pulte Homes, Baidu, NETGEAR, Walt Disney
Wed the 19th - Level 3, PF Changs, Boston Scientific
Thur the 11th -  Alcatel-Lucent, Pepsi-Co, Chipotle Mexican Grill, McAfee, Panera Bread, Varian
Fri the 12th -  Agilent, Ingersoll-Rand

Below are the charts for the DOW, SPY - an ETF that tracks at 1/10th of the S&P500 index, QQQQ - an ETF that tracks at 1/10th the value of the NASDAQ 100 index - NDX,  NYSE Composite Index, and IWM - an ETF that tracks at 1/10th of the Russell 2000 small cap index.

The daily DOW chart is shown below.  We can see that the DOW continued to sell-off on above average volume, it pierced down through its 100 day simple moving average (SMA) near 10,200 and on Friday had a huge hammer candlestick holding the DOW at the major psychological level of 10,000.  The 10k level also approximates the October high.  If the 10,000 level fails to hold as support, the next target is 9,700, representing the October low, and then 9,500 which represents the 200 day SMA.  Overall, we believe there is a reasonable chance that the 10,000 level will hold as support, and if it doesn't hold, then there is an excellent chance that 9,700 will hold.  If we had to bet our paycheck on how low the DOW will go, we probably would bet that the DOW will deflate down to 9700 before money managers and traders start to buy.  The professional money managers are working on their buy lists right now, and as soon as certain levels are touched, for example 9,700, the big money will start buying.  For more on the technical analysis that we use please visit the Learning Center

 

The last two days of trade on the daily SPY shown below (an ETF that tracks at 1/10th of the S&P 500 Index) were at 1.7x to 2.2x regular volume.  Last Thursday was a very nasty, solid red candlestick;  and Friday's trade was a long hammer candlestick on huge 2.2x normal volume.  Because this hammer candlestick day was on such high volume, it tells us that we are getting close to a bottom and there is an average chance that the 107 level will hold as support.  If the 107 level fails, there is an excellent chance that the 103.5 level will hold as support representing the October lows.  We wouldn't be surprised, however, if the SPY pulls back to 103.5 before resuming its upward climb.  Therefore, we need to be prepared for this.

 

Below is the QQQQ, an ETF that tracks at 1/10th the value of the NASDAQ 100 index - NDX.  The NDX comprises 100 of the largest non-financial companies that trade on the NASDAQ, many of which are well known high-tech companies.  We can see that the Q's also had a hammer candlestick on Friday at 1.8x regular volume, so there is an average chance that the 43 level will hold as support.  If the 43 level fails to hold, 41 is the next target representing the October lows and we believe there is an excellent chance that this level will hold. 

 

Below is the NYSE Composite Index (NYA), which is a much broader indicator than just the 30 stocks that compose the DOW.  We can see that this index had a huge hammer candlestick on Friday attempting to hold at 6800.  Many investors believe, at least the ones that were buying on Friday, that the NYA is undervalued and oversold at 6780 or less.   

Finally, below is the daily chart for the IWM, an ETF that tracks at 1/10th of the RUT.  We can see that the IWM sold off hard down to 59 and then had a huge hammer candlestick holding the index above 59.  So far, and especially since we recently had a hammer at 2x normal volume, there is a reasonable chance that the 58 level will hold as support.  If 58 fails to hold, the next target is 56, which represents the Oct low and the 200 day SMA and we believe there is an excellent chance that 56 will hold as support.

Big Picture Analysis/Market Timing:

Below are a selection of macro-technical, macro-economic, investor sentiment, media sentiment and money flow indicators to give us a big-picture view of the health of the US economy and the stock market.  For a consolidated list of big-picture indicators that we monitor, please go to MarketTiming.

Implied Volatility on the S&P 500 Index (VIX) -  We watch implied volatility (IV), also known as the "fear index", on the S&P 500 Index to help us gauge the overall health of the US stock market.  We care about IV because if it starts to climb while we have trades open it could be a warning that a major storm is coming and that we might consider closing our spreads and move to the sidelines. 

Conclusion for IV on the S&P 500 Index:   Volatility increased by about 30% last week.  A gradual, downward trending implied volatility, along with periodic and short-lived spikes is common as an economy gradually and unevenly recovers from a deep recession.  As long as the economic data tells us that the economy is slowly improving, and it does, we'll continue to expect these periodic spikes in volatility and live with these spikes when they happen.

 

Personal Income finally started to grow as shown by the orange line below.  This is important since the amount of personal income is highly correlated to how much one spends.  We can see with the blue line that personal spending also is rebounding.

 

Below is another view of personal spending; this one shows month over month growth.  Even though personal spending is improving, we need to be careful on how we interpret the data.  On the positive side, this tells us that US consumers are coming out of a deep freeze and are feeling more comfortable to spend money.  On the negative side, just because personal spending is improving doesn't mean that consumers will continue to spend if their incomes don't grow.  Therefore, the above personal income number is important to watch, and because it recently started to rebound, this tells us that personal spending should continue to grow, at least for the next few months.

 

Helping along personal spending is consumer confidence.  If the US consumer's income is growing, and if they feel more confident about the economy, they will spend more.  Below shows that consumer confidence continued to improve as of Jan 26, 2010.

 

Below the Institute for Supply Management's (ISM index) report that climbed to 58.4 and has held above the break-even 50 level for 6 consecutive months, telling us that manufacturing in the United States continues to expand.  Moreover, the employment sub-index, which is one of several sub-indexes that compose the ISM index, was up for the 2nd consecutive month telling us that manufacturers are slowly starting to hire.  Stage 1 in a recovery from a recession is for companies to get more work out of their existing workers, so productivity increases.  Stage 2 in a recovery is that companies can no longer squeeze additional productivity out of their existing workers, so they start to hire.  It seems that we are now moving into Stage 2 of the recovery.

 

The January jobs report came in with a loss of 20k non-farm jobs, showing that the economy is slowly improving and soon the US economy will start creating jobs.   We've lost jobs 21 out of 22 of the past months.  This is why the news media is calling this recession the "Great Recession", because we've been losing jobs for 2 years.

 

Below is a chart of the unemployment rate, showing that we might have peaked at 10%.

 

Below is the Hourly Earnings sub-index that is one of many sub-indexes within the monthly unemployment report, and this one is a point of concern.  Hourly Earnings is highly correlated to Personal Income, which is shown above, and if people are not able to work the hours that they would like to, they will earn less and spend less. 

 

Below is the Automated Data Processing (ADP) National Employment Report, and how it compares to the US Government's employment report that comes out by the Bureau of Labor Statistics (BLS).   ADP is one of the largest payroll providers in the US and provides payroll services to 360,000 companies, representing 24 million employees.  Because their sample size is so large, many economists like to also look at this report.  We can see that the ADP numbers track the BLS numbers pretty closely.  One thing, however, that stands out is how the ADP unemployment number is more negative around Aug and Sep 2008 than what was depicted by the BLS number, so this would have been a better early warning to move to the sidelines and/or to be extra careful of a possible stock market correction.

Overall Conclusion from the Big Picture Indicators:   The macro-level indicators continue to show that the US economy is gradually, but unevenly improving.  Therefore, we believe that most of the major indices will bottom out, worst case, during this recent correction, at its Oct low.

Below is the economic calendar for the next 2 weeks taking us to the end of our Feb trades:

The Week of Feb 8th:   The big one this week is Retail sales on Thursday the 11th.   For more on this economic calendar please go to http://www.briefing.com/Investor/Public/Calendars/EconomicCalendar.htm.

The Week of Feb 15th:   The big ones this week are Industrial Production on Wed the 17th, and the Conference Board Leading Indicator and Philly Fed index (regional manufacturing output) on Thur the 18th.

 

Recommended Action:

If you are auto-trading, you don't need to do anything other than make sure that the reserve cash is in your auto-trade account.  The auto-trade accounts have currently allocated 80% of the cash and we rolled the SPY Feb 103/105 bull put spread into March.  You should have 3 Feb spreads and 1 Mar spread in your account.

Per our existing spreads, we recommend the following possible actions if the market continue to pull-back. For each recommended adjustment below, it's highly advisable to "pre build" your 4 legged roll orders and save them so if you need to roll a spread you will be able to roll it quickly.  As a reminder, when we recommend to roll a spread, in order to keep all of your maintenance "whole and in play", you will need to execute the roll in a single, 4 legged trade where you are closing out the existing spread and opening a new spread in a single order.  For more on how to do a 4 legged order please go to the Members Only Learning Center and read the 2 entries on making adjustments and rolling credit spreads.  (We unlocked this document so you can easily get to it without needing to login)   In general, we are recommending to roll into March since the US economy is gradually recovering and the stock market will probably continue to trend upward, albeit gradually, after this correction runs its course.   If you don't believe that the economy is improving and that the stock market will continue to go down over the next few months, you then might consider rolling your spreads down into the same month, so you'll make a clean break out of February.  If you do this, however, your loss will be higher, but you will be making a clean break from February.  If/when you place a 4 legged roll trade, start the limit debit small, around 15 cent, and then increase the limit debit by a dime every 30 seconds until it fills.  When doing a roll, many times it will fill for a price that is outside of, and less, than the bid/ask prices that are shown.

If you have the RUT Feb 560/570 bull put spread -  If at anytime the RUT drops down to 573 we recommend to immediately roll it to a RUT March 550/560 bull put spread.  Below is what the 4 legged order (many times called a Condor order) would look like.  (this one we show rolling down into a March 540/550, but the March 550/560s should be ok)  Our goal is to roll into a relatively safe March strike prices that is at or just below the 200 day SMA and to pay the smallest debit possible to execute the roll.  If you would prefer to do the roll for even less, or maybe even a small credit, you could roll "right across" into March 560/570 bull put spread, for example, but these strikes have more risk of not expiring out-of-the-money (OTM) in March.  Note the limit price below is a "limit debit".  Most likely it will cost you a debit to do the roll, so this is where you want to put the price in.  Start your price low, like 15 cents, and then slowly increase it until your roll order fills.  It's good to first do a "test" roll order of just a few contracts to see where it's filling;  then you can fill the rest once you feel comfortable with the debit price and strike prices that you are rolling into.

 

SPY Feb 103/105 bull put spread - If you have yet to roll these, if at anytime the SPY drops to 105.5, immediately roll your Feb 103/105 to a March 100/102 bull put spread, in a single 4 legged (condor) order.   The short March 102 put is placed right at the 200 day SMA, so this should be pretty safe.

For any other SPY spreads that you might have, keep an eye on them, and if the SPY index drops down to within 0.5 points of your short put leg, it's time to take action and to roll it into March.  It's recommended to pre-build all of your roll trades and save them.

While we are having a correction, and if you have available cash, it's recommended to continue to bring in premium on the heavy down days.  Freezing like a deer in the headlights is not a recommended strategy in this situation.  As long as the underlying health of the US economy is gradually improving, and it is, we recommend to continue to "gradually collect" premium on the DOWN days.  Our goal is to build up a war chest of cash (premium) to help cover any losses that we might have if we are forced to close out some of  our spreads early.

We Recommend the following trades:

RUT Bear Call Credit Spread
on hold

RUT Bull Put Credit Spread
Sell to open Feb 550 put
Buy to open Feb 540 put - for a credit of 45 to 65 cents.  The short 550 put keeps us 1 strike below the 200 day SMA, which should be pretty safe.  Only attempt to open this spread on the DOWN days, which allows us to collect more premium.  If this spread starts to fill for more than 65 cents credit, suspend any further fills on it and click-down a strike to keep your credit between 45 to 65 cents.  Please take these recommended credit price ranges seriously....don't get greedy and click-down if it starts to pay more than 65 cents. 
Make sure not to put spreads that have matching strike prices in the same account.  For more information on why we avoid putting matching strike prices in the same account when using the RUT (or any index where we're opening 10 point wide spreads) please go to the FAQ page at and read the entry "Why do I need 2 accounts when trading the RUT?".

For those who want to trade the SPY we recommend the following trade.  For more information about trading both the SPY and the RUT, please visit the FAQ Page and read the entry "Should I trade both the RUT and SPY?". 

SPY Bear Call Credit Spread
on hold

SPY Bull Put Credit Spread
Sell to open Feb 100 put
Buy to open Feb 98 put - for a credit of 10 to 13 cents.  The short 100 put keeps us below the 200 day SMA, which should be safe.  If this spread starts to fill for more than 13 cents credit, suspend any further fills on it and click-down a strike to keep your credit between 10 to 13 cents. 

 


Thursday, February 4, 2010  (after the close)

We had nasty day today where the markets sold-off hard. The bad news is that the DOW has breached the 100 day simple moving average (SMA).  The good news is that the 10,000 level held, at least for now, today's sell-off was on average volume, and the underlying health of the economy is gradually improving; 80% of the S&P 500 companies are beating earnings targets, and Cisco beat earnings an guided upward, so this good information should sooner or later stop the selling.  The unemployment number comes out tomorrow, Friday, and let's keep our fingers crossed that it's not that bad.  Some economists predict that the rate will increase from 10.0% to 10.1%.  Even if it does come in bad, this information might already be priced into the market, so we'll find out tomorrow.

The daily DOW chart is shown below. We can see that the 10,000 level held, which is a major psychological level.  If 10,000 fails, then 9700 is the next target representing the late October low.  We wouldn't be surprised if the traders and money managers let the DOW deflate down to 9,700, and then they'll probably jump in and snap up shares.

 

The daily SPY chart is shown below and we can see that the 107.3 level failed and the next target is 103.5.   Because the upward sloping trend line was breached today, we wouldn't be surprised if it pulls back to 103.

 

The Q's looks similar where it breached its 100 day SMA and upward sloping trend line.  Moreover, this index sold off on 1.3x normal volume.  It seems that investors believe that this index is way overextended and investors are definitely running for the exits.  Because of the higher volume, this index will probably continue to pull back, maybe to the 41 level.

 

The daily IWM is shown below and today's price movement was substantial.  The good news is that volume has been decreasing, so the selling might start to taper off.  Regardless, there is a good chance that this index will pull back to 58, and worst case, in our opinion, to 56, the 200 day SMA and the October low.

 

The VIX popped up quite a bit, but within a reasonable and expected range when we are experiencing a strong sell-off.

 

Please make sure to move reserve cash into your accounts if you have yet to do so.  For our existing spreads, we recommend the following possible action if the underlying indexes continue to drop.  If you are auto-trading, you don't need to do anything other than make sure the reserve cash is in your auto-trade account.  For each recommended adjustment below, it's highly advisable to "pre build" your 4 legged roll orders and save them so if you need to roll a spread you will be able to roll it quickly.  As a reminder, when we recommend to roll a spread, in order to keep all of your maintenance "whole and in play", you will need to execute the roll in a single, 4 legged trade where you are closing out the existing spread and opening a new spread in a single order.  For more on how to do a 4 legged order please go to the Members Only Learning Center and read the 2 entries on making adjustments and rolling credit spreads.  (We unlocked this document so you can easily get to it without needing to login)   In general, we are recommending to roll into March since the US economy is gradually recovering and the stock market will probably continue to trend upward, albeit gradually, after this correction runs its course.   If you don't believe that the economy is improving and that the stock market will continue to go down over the next few months, you then might consider rolling your spreads down into the same month, so you'll make a clean break out of February.  If you do this, however, your loss will be higher, but you will be making a clean break from February.

If you have the RUT Feb 560/570 bull put spread -  If at anytime the RUT drops down to 574 we recommend to immediately roll it to a RUT March 540/550 bull put spread.  Below is what the 4 legged order (many times called a Condor order) would look like.  Our goal is to roll into a relatively safe March strike prices that are 2 to 3 strike prices below the 200 day SMA and to pay the smallest debit possible to execute the roll.  If you would prefer to do the roll for even less, or maybe even a small credit, you could roll into higher strike prices...like the March 560/570 bull put spread, for example, but these strikes have more risk of not expiring out-of-the-money (OTM) in March.  Note the limit price below is a "limit debit".  Most likely it will cost you a debit to do the roll, so this is where you want to put the price in.  Start your price low, like 15 cents, and then slowly increase it until your roll order fills.  It's good to first do a "test" roll order of just a few contracts to see where it's filling;  then you can fill the rest once you feel comfortable with the debit price and strike prices that you are rolling into.

 

If you have the SPY Feb 103/105 bull put spread - If at anytime the SPY drops to 105.5, immediately roll your Feb 103/105 to a March 99/101 bull put spread, in a single 4 legged (condor) order.  If you want to be even a little more conservative, you can roll into the 98/100, but it will cost you a larger debit to do the roll.

For any other SPY spreads that you might have, keep an eye on them, and if the SPY index drops down to within 0.5 points of your short put leg, it's time to take action.  It's recommended to pre-build all of your roll trades and save them.

While we are having a correction, and if you have available cash, it's recommended to continue to bring in premium on the heavy down days.  Freezing like a deer in the headlights is not the recommended strategy in this situation.  As long as the underlying health of the US economy is gradually improving, and it is, we recommend to continue to "gradually collect" premium on the DOWN days.  Our goal is to build up a war chest of cash (premium) to help cover any losses that we might have if we are forced to close out some of  our spreads early.

We Recommend the following trades:

RUT Bear Call Credit Spread
on hold

RUT Bull Put Credit Spread
Sell to open Feb 550 put
Buy to open Feb 540 put - for a credit of 45 to 65 cents.  The short 550 put keeps us 1 strike below the 200 day SMA, which should be pretty safe.  Only attempt to open this spread on the DOWN days, which allows us to collect more premium.  If this spread starts to fill for more than 65 cents credit, suspend any further fills on it and click-down a strike to keep your credit between 45 to 65 cents.  Please take these recommended credit price ranges seriously....don't get greedy and click-down if it starts to pay more than 65 cents. 
Make sure not to put spreads that have matching strike prices in the same account.  For more information on why we avoid putting matching strike prices in the same account when using the RUT (or any index where we're opening 10 point wide spreads) please go to the FAQ page at and read the entry "Why do I need 2 accounts when trading the RUT?".

For those who want to trade the SPY we recommend the following trade.  For more information about trading both the SPY and the RUT, please visit the FAQ Page and read the entry "Should I trade both the RUT and SPY?". 

SPY Bear Call Credit Spread
on hold

SPY Bull Put Credit Spread
Sell to open Feb 100 put
Buy to open Feb 98 put - for a credit of 10 to 13 cents.  The short 101 put keeps us below the 200 day SMA, which should be safe.  If this spread starts to fill for more than 13 cents credit, suspend any further fills on it and click-down a strike to keep your credit between 10 to 13 cents. 

 


Thursday, February 4, 2010  (11:20 AM ET)

Initial unemployment claims came in higher than expected, along with fear about high European national debt levels, helping the markets sell-off this morning.  The selling came despite Cisco's strong earnings that came in better than expected.  If you want to bring in a small amount of premium today, the RUT and SPY are both filling.  However, the monthly unemployment number comes out tomorrow, and it's possible that the unemployment rate will tick up from 10% to 10.1%, and if this happens the market could sell-off again.  So don't pick up too much premium today as we await tomorrow's big jobs number.

RUT Bear Call Credit Spread
on hold

RUT Bull Put Credit Spread
Sell to open Feb 550 put
Buy to open Feb 540 put - for a credit of 45 to 70 cents.  The short 550 put keeps us 1 strike below the 200 day SMA, which should be pretty safe.  It's best to open this spread on the DOWN days, which allows us to collect more premium.  If this spread starts to fill for more than 70 cents credit, suspend any further fills on it and click-down a strike to keep your credit between 45 to 70 cents. 
Make sure not to put spreads that have matching strike prices in the same account.  For more information on why we avoid putting matching strike prices in the same account when using the RUT (or any index where we're opening 10 point wide spreads) please go to the FAQ page at and read the entry "Why do I need 2 accounts when trading the RUT?".

For those who want to trade the SPY we recommend the following trade.  For more information about trading both the SPY and the RUT, please visit the FAQ Page and read the entry "Should I trade both the RUT and SPY?". 

SPY Bear Call Credit Spread
on hold

SPY Bull Put Credit Spread
Sell to open Feb 101 put
Buy to open Feb 99 put - for a credit of 10 to 13 cents.  The short 101 put keeps us below the 200 day SMA, which should be safe.  If this spread starts to fill for more than 13 cents credit, suspend any further fills on it and click-down a strike to keep your credit between 10 to 13 cents. 

Note:  We will not be placing any trades in the auto-trade accounts today since we've already allocated 80% of the cash, and we should wait until tomorrow's unemployment number comes out.

 


Sunday, January 31, 2010

The market is still in the mood to sell, regardless of how good recent earnings and economic data are.  As they say, we can't fight the tape and if the market wants to sell we need to go with the trend and protect ourselves against a falling market.  Because of the strong 5.7% gross domestic product (GDP) release, another justification for weakness is the fear that the Federal Reserve will start to raise interest rates earlier than expected. 

On the topic of protecting ourselves, please read How to make adjustments on credit spread options for a review or primer on different ways to adjust a bull put credit spread.  This information will be helpful as we watch the market this week and get prepared to possibly make some adjustments.  We'll keep you posted via email if any adjustments are required.

We are half the way through Q4 earnings season and so far 80% of the companies that have reported have beat estimates, which is excellent news.  This week 94 S&P 500 and 3 DOW components report earnings.  Below are some of the more closely watched companies that report this week:

Mon the 1st - Exxon
Tues the 2nd - ADP, Dow Chemical, UPS, News Corp.
Wed the 3rd - Time Warner, International Paper, Broadcom, Cisco Systems, Visa, Yum! Brands
Thur the 4th -  Master Card, NCR Corp.
Fri the 5th -  Beazer Homes

Below are the charts for the DOW, SPY - an ETF that tracks at 1/10th of the S&P500 index, QQQQ - an ETF that tracks at 1/10th the value of the NASDAQ 100 index - NDX,  NYSE Composite Index, and IWM - an ETF that tracks at 1/10th of the Russell 2000 small cap index.

The daily DOW chart is shown below.  We can see that the DOW continues to sell-off on above average volume, it's already pierced down through the 50 day simple moving average (SMA) and its upward sloping trend line, and now it's just below the 100 day SMA near 10,100.  If the 100 day SMA fails to hold as support, the next target is 9,700, representing the October low.  The Williams %R Indicator shows that the DOW is currently oversold, but this indicator could remain oversold for an extending period of time.  The market is currently driven by fear, and this fear will have to run its course.  Overall, we believe there is a good chance that the 10,100 level will hold as support, and if it doesn't hold, then there is an excellent chance that 9,700 will hold.  If we had to bet our paycheck on where the DOW will go, we probably would bet that the DOW will deflate down to 9700 before money managers and traders start to buy.  Most likely the professional money managers are working on their buy lists right now, and as soon as certain levels are touched, for example 9,700, the big money will start buying.  For more on the technical analysis that we use please visit the Learning Center

 

The daily SPY shown below (an ETF that tracks at 1/10th of the S&P 500 Index) has had multiple heavy down-days on 1.3x to 1.7x normal volume, has already pierced down through the 100 day SMA, and at the moment it sits right at its upward sloping trend line at 107.3.  This level also represents the September high.  Because volume was so high, and that it dropped so aggressively down through its 50 day and 100 day SMAs, this is a concern.   If 107.3 level fails, there is an excellent chance that the 103.5 level will hold as support representing the October lows.  We wouldn't be surprised if the SPY pulls back to 103.5 before resuming its upward climb.  Therefore, we need to be prepared for this.

 

Below is the QQQQ, an ETF that tracks at 1/10th the value of the NASDAQ 100 index - NDX.  The NDX comprises 100 of the largest non-financial companies that trade on the NASDAQ, many of which are well known high-tech companies.  We can see that the Q's broke down through its 50 day SMA, 100 day SMA and upward sloping trend line on about 2x normal volume, and it's now going to test the 43 level that represents the October high.  If the 43 level fails to hold, 41 is the next target representing the October lows and there is an excellent chance that this level will hold. 

Below is the NYSE Composite Index (NYA), which is a much broader indicator than just the 30 stocks that compose the DOW.  We can see that this index is testing its upward sloping trend line near 6900.   If 6900 fails, there is an excellent chance that 6700 will hold as support representing the Oct low.

Finally, below is the daily chart for the IWM, an ETF that tracks at 1/10th of the RUT.  We can see that the IWM continues to sell off and will be testing its 100 day SMA and upward sloping trend line near 60 this week.  If the 60 level fails to hold as support, the next target is 56, which represents the Oct low and the 200 day SMA.  We believe that if the IWM continues to pull-back, there is an excellent chance that 56 will hold as support.

Big Picture Analysis/Market Timing:

Below are a selection of macro-technical, macro-economic, investor sentiment, media sentiment and money flow indicators to give us a big-picture view of the health of the US economy and the stock market.  For a consolidated list of big-picture indicators that we monitor, please go to MarketTiming.

Implied Volatility on the S&P 500 Index (VIX) -  We watch implied volatility (IV), also known as the "fear index", on the S&P 500 Index to help us gauge the overall health of the US stock market.  We care about IV because if it starts to climb while we have trades open it could be a warning that a major storm is coming and that we might consider closing our spreads and move to the sidelines. 

Conclusion for IV on the S&P 500 Index:   The VIX spiked 55% last week, which is a large increase.  The last spike in implied volatility happened in late October and it spiked about 48%.  A gradually downward trending implied volatility, along with periodic and short-lived spikes is common as an economy bottoms and then gradually and unevenly improves from a recession.  As long as these spikes in fear are short lived, and so far they have been, we'll continue to feel confident to write credit spreads.  Currently, though, volatility is still elevated.

 

Q4 GDP smashed through analyst's estimates of 4.7% coming in at 5.7%.  As expected, though, 3.4% of the 5.7% came from firms replenishing inventories, and much of this inventory replenishment does not create jobs.  On the positive side, personal consumption expenditures of non-durable goods came in at 2% growth, beating estimates of 1.8% and contributing 1.5% of the 5.7% GDP number.  This is good news since personal spending usually makes up 2/3rds of the total GDP number.  Moreover, equipment and software came in at a strong 15.5% growth telling us that companies are starting to spend on durable goods.

 

Chicago PMI Index -  This mid-West regional index increased from 58.7 to 61.5 easily beating analysts estimates.  From this excellent result it tells us that the mid-West manufacturing sector is now expanding at a healthy pace.

 

Durable Orders ex aircraft and ex defense continue to rebound.  Businesses are beginning to spend again.

 

Overall Conclusion from the Big Picture Indicators:   The macro-level indicators continue to show that the US economy is gradually improving.  Therefore, we believe that most of the major indices will bottom out during this recent correction either at its upward sloping trend line, or its Oct low.

Below is the economic calendar for the next 3 weeks taking us to the end of our Feb trades:

The Week of Feb 1st:   In addition to personal income and the ISM index, the biggie this week is the jobs number (unemployment) coming out on Friday the 5th.  For more on this economic calendar please go to http://www.briefing.com/Investor/Public/Calendars/EconomicCalendar.htm.

The Week of Feb 8th:   The big one this week is Retail sales on Thursday the 11th.

The Week of Feb 15th:   The big ones this week are Industrial Production on Wed the 17th, and the Conference Board Leading Indicator and Philly Fed index (regional manufacturing output) on Thur the 18th.

 

We recommend the following trades:

Let's hold onto all of our spreads and we'll notify you through email if any adjustments are required.  It would be a good time to move in some reserve cash into your accounts just in case we need to make some adjustments this week.   If you are auto-trading, no action is required - we will make the adjustments in your account as required.

RUT Bear Call Credit Spread
on hold

RUT Bull Put Credit Spread
Sell to open Feb 540 put
Buy to open Feb 530 put - for a credit of 45 to 75 cents.  It's best to open this spread on the DOWN days, which allows us to collect more premium.  If this spread starts to fill for more than 75 cents credit, suspend any further fills on it and click-down a strike to keep your credit between 45 to 75 cents. 
Make sure not to put spreads that have matching strike prices in the same account.  For more information on why we avoid putting matching strike prices in the same account when using the RUT (or any index where we're opening 10 point wide spreads) please go to the FAQ page at and read the entry "Why do I need 2 accounts when trading the RUT?".

For those who want to trade the SPY we recommend the following trade.  For more information about trading both the SPY and the RUT, please visit the FAQ Page and read the entry "Should I trade both the RUT and SPY?". 

SPY Bear Call Credit Spread
on hold

SPY Bull Put Credit Spread
Sell to open Feb 100 put
Buy to open Feb 98 put - for a credit of 10 to 15 cents.  If this spread starts to fill for more than 15 cents credit, suspend any further fills on it and click-down a strike to keep your credit between 10 to 15 cents. 

 


Wednesday, January 27, 2009 (1:25 PM ET)

Here are the trades that are filling today.  You should have “clicked-down” by now to lower strikes, like what is shown below.  It’s always a good idea to be more conservative and not get greedy.  Please take your time in collecting premium this month, where you use maybe 15% of your cash on the days that these spreads are filling.  Advanced Q4 GDP is coming out this Friday, so the market will probably remain range bound to slightly negative until it is released.  Economists are expecting it to be strong, in the low 6% range, but the reality is that most of this growth was from replenishing inventories, so this strong number will probably be temporary.

RUT 540/550 bull put spread for about 47 cents.  This spread was filling for 60 cents credit this morning.

SPY 98/100 bull put spread for about 12 cents credit.  It was filling for 14 cents this morning.

Always try to get more credit when you place the order and then move your limit credit in 1 penny increments every 30 seconds until it fills.

When we "click-up" and "click-down" we hold onto all of our existing spreads, unless you hear otherwise from us.  If you're an auto-trade subscriber, there is no action required on your side; we do the trading for you.

 


Sunday, January 24, 2010

The market sold-off hard for 3 consecutive days, bringing the major indices down 5%.  Below we analyze several macro economic indicators making a case that this sell-off will be short lived because the underlying foundation of the US economy continues to improve.

Earnings season kicks into high gear this week where 130 S&P 500 and 12 DOW components report Q409 earnings.  Below are some of the more closely watched companies that report this week:

Mon the 25th - Halliburton, Apple Computer, Texas Instruments
Tues the 26th - Corning, Delta Airlines, EMC, Johnson & Johnson, US Steel, Grainger, Yahoo
Wed the 27th - Boeing, Caterpillar, Praxair, United Airlines, Flextronics, LSI Logic, Qualcomm
Thur the 28th - 3M, Cypress Semi, Ford Motor, Motorola, Nokia, Procter & Gamble, Amazon, Microsoft, Juniper Networks, KLA-Tencor, Sony, Taiwan Semiconductor
Fri the 29th -  Chevron, Fortune Brands, Honeywell, Mattel

Ninety two S&P 500 companies have released earnings to date, and 78% have exceeded analyst's expectation.  So far, so good.

Below are the charts for the DOW, SPY - an ETF that tracks at 1/10th of the S&P500 index, QQQQ - an ETF that tracks at 1/10th the value of the NASDAQ 100 index - NDX,  NYSE Composite Index, and IWM - an ETF that tracks at 1/10th of the Russell 2000 small cap index.

The daily DOW chart is shown below.  We can see that the DOW sold off on above average volume and has pierced down through its 50 day simple moving average (SMA) and its upward sloping trend line. The next target is the 100 day SMA at 10,100.   If the 10,100 level fails, the next target is 9,700, representing the October low.  The Williams %R Indicator shows that the DOW is currently oversold, but this indicator could remain oversold for an extending period of time.  Overall, we believe there is a very good chance that the 10,100 level will hold as support. But regardless, we need to be careful and let this correction run its course.  For more on the technical analysis that we use please visit the Learning Center

 

The daily SPY shown below (an ETF that tracks at 1/10th of the S&P 500 Index) has had two heavy down-days on almost 2x normal volume, and is already approaching its 100 day SMA.  Because volume was so high, and that it dropped so aggressively down through its 50 day SMA, this is a concern.  We can see that the 111.5 level failed to hold as support, representing the top of its consolidation channel, (i.e. it consolidated in a channel between 109 and 111.5 in  Nov and Dec) and its 50 day SMA.   The SPY is now going to test the 109 level, representing the bottom of it's upward sloping channel, and the Oct high.  If 109 fails, there is an excellent chance that the 103.5 level will hold as support representing the October lows.  Because the SPY pulled back on such high volume, it might pull back farther and possibly drop below its 100 day SMA at 109. 

 

Below is the QQQQ, an ETF that tracks at 1/10th the value of the NASDAQ 100 index - NDX.  The NDX comprises 100 of the largest non-financial companies that trade on the NASDAQ, many of which are well known high-tech companies.  We can see that the QQQQ broke down through its 50 day SMA on 1.7x normal volume, and will be testing the 43.5 level that represents the 100 day SMA, and the bottom of its upward sloping trend line.  If the 43.5 level fails to hold as support, 41 is the next target representing the October lows. 

Below is the NYSE Composite Index (NYA), which is a much broader indicator than just the 30 stocks that compose the DOW.  We can see that this index sold-off and closed near its 100 day SMA at 7050.  If the NYA breaks down through 7050, there is a very good chance that 6900 will hold as support representing the the bottom of its upward sloping trend line.  If 6900 fails, there is an excellent chance that 6700 will hold as support representing the Oct low.

Finally, below is the daily chart for the IWM, an ETF that tracks at 1/10th of the RUT.  We can see that the IWM is selling off, but it's still above the 50 day SMA.  If the 62 level fails to hold as support, the next target is 60 which represents the 100 day line and the bottom trend line.  If 60 fails, there is an excellent chance that 56 will hold as support representing its 200 day SMA and the Oct low.

Big Picture Analysis/Market Timing:

Below are a selection of macro-technical, macro-economic, investor sentiment, media sentiment and money flow indicators to give us a big-picture view of the health of the US economy and the stock market.  For a consolidated list of big-picture indicators that we monitor, please go to MarketTiming.

Implied Volatility on the S&P 500 Index (VIX) -  We watch implied volatility (IV), also known as the "fear index", on the S&P 500 Index to help us gauge the overall health of the US stock market.  We care about IV because if it starts to climb while we have trades open it could be a warning that a major storm is coming and that we might consider closing our spreads and move to the sidelines. 

Conclusion for IV on the S&P 500 Index:   The VIX recently spiked 55%, which is a large increase.  The last spike in implied volatility happened in late October and it spiked about 48%.  A gradually downward trending implied volatility, along with periodic and short-lived spikes is common as an economy bottoms and then gradually improves from a recession.  As long as these spikes in fear are short lived, and so far they have been, we'll continue to feel confident to write credit spreads.  Time will tell if this most recent spike will be short term in nature.

 

Initial Unemployment Claims came in higher than expected, but the 4 week SMA continues to slope downward and in the right direction, and we need to focus on the 4 week SMA since the weekly number is too volatile.  When initial claims drops below 400k, this is when the US economy will start to generate jobs.  So far, the US economy continues to shed jobs.

 

The Conference Board Leading Economic Indicator (LEI) -  The Conference Board is a highly respected independent economic research house.  One of their closely watched indicators is the Leading Economic Indicator, or LEI, which comprises 14 economic components.  For more on this indicator please visit the Learning Center.

Conclusion for LEI Index:   As of January 21, the LEI has increased for 9 consecutive months telling us that the economy continues to recover.

 

US Treasuries Yield Curve - The yield curve looks healthy as the bond market continues to predict higher interest rates in the future, which translates to a continued improvement in the US economy.

 

Philly Fed Index -  This index of regional manufacturing output has remained in positive territory for 5 consecutive months, telling us that this North East region's manufacturing sector continues to expand.

 

S&P 500 Earnings -  The charts below show that aggregate earnings and revenue per share are rebounding and are moving in the right direction.  Sales per share and earnings per share on 12/31/09 are estimates, but based on earnings results so far, these estimates most likely will be achieved.

 

Transportation Freight Services Index -  We can see total goods transported via rail, truck, air and waterway is gradually rebounding.

 

Overall Conclusion from the Big Picture Indicators:   The macro-level indicators continue to show that the US economy is gradually improving.  Therefore, we believe that most of the major indices will bottom out during this recent correction either at its respective 100 day SMA, or its October low.

Below is the economic calendar for the next 4 weeks taking us to the end of our Feb trades:

The Week of Jan 25th:   Most of this data is closely watched, especially the advanced Q4 GDP (gross domestic product) release.  Thus, any of these could move the markets - and when the markets move, this gives us an opportunity to bring in some premium.  For more on this economic calendar please go to http://www.briefing.com/Investor/Public/Calendars/EconomicCalendar.htm.

The Week of Feb 1st:   In addition to personal income and the ISM index, the biggie this week is the jobs number (unemployment) coming out on Friday the 5th.

The Week of Feb 8th:   The big one this week is Retail sales on Thursday the 11th.

The Week of Feb 15th:   The big ones this week are Industrial Production on Wed the 17th, and the Conference Board Leading Indicator and Philly Fed index (regional manufacturing output) on Thur the 18th.

 

We recommend the following trades:

RUT Bear Call Credit Spread
on hold

RUT Bull Put Credit Spread
Sell to open Feb 560 put
Buy to open Feb 550 put - for a credit of 45 to 75 cents.  It's best to open this spread on the DOWN days, which allows us to collect more premium.  If this spread starts to fill for more than 75 cents credit, suspend any further fills on it and click-down a strike to keep your credit between 45 to 75 cents. 
Make sure not to put spreads that have matching strike prices in the same account.  For more information on why we avoid putting matching strike prices in the same account when using the RUT (or any index where we're opening 10 point wide spreads) please go to the FAQ page at and read the entry "Why do I need 2 accounts when trading the RUT?".

For those who want to trade the SPY we recommend the following trade.  For more information about trading both the SPY and the RUT, please visit the FAQ Page and read the entry "Should I trade both the RUT and SPY?". 

SPY Bear Call Credit Spread
on hold

SPY Bull Put Credit Spread
on hold - the recent sell-off on the S&P 500 stocks was at very high volume, and they've pulled back faster down to the 100 day SMAs.  Let's watch this ETF over the next few days.

 


Friday, January 22, 2010 (2:50 PM ET)

Let's click our strikes down to keep our short put strike prices below certain support levels.  It's recommended to hold onto all of your existing spreads unless you hear otherwise from us.  Continue to slowly collect your premium maybe using 15% of your cash on each day that these spreads are filling.  We're only in the first week of a 5 week cycle.

We recommend the following trades:

RUT Bear Call Credit Spread
on hold

RUT Bull Put Credit Spread
Sell to open Feb 560 put
Buy to open Feb 550 put - for a credit of 45 to 75 cents.  It's best to open this spread on the DOWN days, which allows us to collect more premium.  If this spread starts to fill for more than 75 cents credit, suspend any further fills on it and click-down a strike to keep your credit between 45 to 75 cents. 
Make sure not to put spreads that have matching strike prices in the same account.  For more information on why we avoid putting matching strike prices in the same account when using the RUT (or any index where we're opening 10 point wide spreads) please go to the FAQ page at and read the entry "Why do I need 2 accounts when trading the RUT?".

For those who want to trade the SPY we recommend the following trade.  For more information about trading both the SPY and the RUT, please visit the FAQ Page and read the entry "Should I trade both the RUT and SPY?". 

SPY Bear Call Credit Spread
on hold

SPY Bull Put Credit Spread
Sell to open Feb 102 put
Buy to open Feb 100 put - for a credit of 10 to 14 cents.  If this spread starts to fill for more than 14 cents credit, suspend any further fills on it and click-down a strike to keep your credit between 10 to 14 cents.
Make sure not to put spreads that have matching strike prices in the same account.  Our last recommendation was the 102/104, so if you already have this spread in this account, you will need to place the 100/102 in a different account.

 


Wednesday, January 20, 2010 (1:35 PM ET)

The market is DOWN today so let's start collecting some premium for February.  It's recommended to gradually collect your premium over the next few weeks.  February is a 5 week cycle, and we're only in the first week, so we have plenty of time to collect premium.  For more on this topic please visit the FAQ Page and read the entry entitled "What % of my trading capital should I use in a single day?".  Because we are seeing weakness in some of the indicators, and because the market is priced for perfection, we probably will see more choppiness now, and this is good for us credit spread writers.

We recommend the following trades. 

RUT Bear Call Credit Spread
on hold

RUT Bull Put Credit Spread
Sell to open Feb 570 put
Buy to open Feb 560 put - for a credit of 50 to 80 cents.  It's best to open this spread on the DOWN days, which allows us to collect more premium.  If this spread starts to fill for more than 80 cents credit, suspend any further fills on it and click-down a strike to keep your credit between 50 to 80 cents. 
Make sure not to put spreads that have matching strike prices in the same account.  For more information on why we avoid putting matching strike prices in the same account when using the RUT (or any index where we're opening 10 point wide spreads) please go to the FAQ page at and read the entry "Why do I need 2 accounts when trading the RUT?".

For those who want to trade the SPY we recommend the following trade.  For more information about trading both the SPY and the RUT, please visit the FAQ Page and read the entry "Should I trade both the RUT and SPY?". 

SPY Bear Call Credit Spread
on hold

SPY Bull Put Credit Spread
Sell to open Feb 105 put
Buy to open Feb 103 put - for a credit of 10 to 15 cents.  If this spread starts to fill for more than 15 cents credit, suspend any further fills on it and click-down a strike to keep your credit between 10 to 15 cents. 

 


Monday, January 18, 2010

We hope everyone was able to take some time off on Monday in honor of Dr. Martin Luther King, Jr. to celebrate a man who helped promote equality for all human beings, regardless of the color of their skin. 

The January cycle is complete and the MCTO team brought in 5.5%.  For more on the January trades and returns please visit the ROI Page

Because we were feeling uneasy about the market possibly rallying after Intel announced its earnings, we recommended everyone to close out all/most of our short calls, just to keep us safe.  It's always wise to be safe rather than sorry when opening index credit spreads.  The rally, however, never materialized, and the market actually sold off on Intel's excellent results.  This was the first time in 5 months that the market sold-off on good news.  JP Morgan's earnings actually beat analyst's estimates, but the CEO made negative comments about future guidance, and the quality of their earnings were not that great.  Additionally, consumer confidence climbed but missed expectations.  Over the last 5 months, however, the market shrugged off negative results like this, and a little miss in consumer confidence was never a big deal.  So what we saw this time was institutional money managers selling on the good news of Intel blowing out their quarter with a 1000% increase in earnings and excellent forward looking guidance, which tells us a lot.  Intel is classified as a bellwether since semiconductors are high in the supply chain, so when Intel shows strong results, it tells us that systems companies that make the DVD players, laptops, servers, communications gear....etc. are ramping up production, and that the technology sector is expanding. The market, however, ignored this information and sold off.

This sell-off is actually good news for us credit spread writers.  We've been struggling over the last 5 months to open relatively "safe" spreads because we needed to be extra careful as we watched for market surges, or strong pull backs.  The market now sent a message that the indices are richly valued and that earnings, and top line revenue growth, are going to have to be very good to justify the current levels.  Therefore, the market will probably start to have more evenly distributed UP and DOWN days, giving us more opportunities to open our credit spreads.  (for the last 5 months we've had 5x more UP days than DOWN days)  We also will have to be more careful on the bottom bull put spreads, since a shot was fired "over the bow" (i.e. the market sold off after the excellent Intel results) so we could see some strong DOWN days.  Overall, when we see a market like this that probably will start trading more sideways and choppy, with still elevated volatility in the 17 to 22 range, this is good news for us and we should have very good returns over the next 4 to 6 months.

Earnings season begins to pick up steam this week where 57 S&P 500 and 5 DOW components report Q409 earnings.  Below are some of the more closely watched companies:

Tue the 19th - Citigroup, CSX (railroad), IBM
Wed the 20th - Bank of America, Morgan Stanley, Wells Fargo, Starbucks
Thur the 21st - Charles Schwab, Goldman Sachs, Xerox, AMD, American Express, Google
Fri the 22nd - Air Products, GE, Harley Davidson, McDonalds

So far, of the companies that have announced Q4 earnings, 18% have exceeded analyst's expectation.  Right now it's a little early to come to any conclusions.

Below are the charts for the DOW, SPY - an ETF that tracks at 1/10th of the S&P500 index, NASDAQ Composite Index, NYSE Composite Index, and IWM - an ETF that tracks at 1/10th of the Russell 2000 small cap index.

The daily DOW chart is shown below.  We can see that it broke up through resistance of 10,500 and so far it has continued to stay above this level.  Friday's sell-off on higher volume brought the DOW down to close at its 10 day simple moving average (SMA), but as long as it holds near the 10 day line it will still be classified as in a confirmed UP trend.  Per upside potential, and assuming that the DOW climbs up the new upward sloping trend line as drawn, the DOW could reach 11,100 by the 3rd week of February, which is the week of expiration for our February spreads.  We continue to show the original top and bottom upward sloping channels for reference.  The top trend line is probably no longer valid, but the bottom one is still valid and it could act as support during a pullback.  Because the market sold-off on the excellent Intel earnings results, however, the probability that the DOW will continue to climb the new, center upward sloping trend line is less.  Per downside potential, we show 3 possible support levels:  There is an average chance that the 10,500 level will hold as support, representing the top of the consolidation channel that started to form in Mid-November, where it might have switched from a resistance level to a support level.   If/when the DOW pulls back and if the 10,500 level holds as support, this will be a very bullish sign and we'll see a lot of traders opening long, bullish positions.  If the 10,500 level does not hold as support, there is a very good chance that 10,300 will hold as support representing its 50 day SMA, the bottom of its recent sideways consolidating channel, the bottom of its upward sloping channel, and the bottom of the 2 std. deviation Bollinger band.  If the 10,300 level fails to hold as support, there is an excellent chance that the 10,100 level will hold representing the Oct high that was a past resistance level and should now have switched to a support level, and its 100 day SMA.   If 10,000 doesn't hold, there is practically a 99% probability that 9,700 will hold as support representing the October 30th low.  The MACD , Relative Strength, and Chaikin Money Flow indicators are showing bearish divergence, telling us that as the DOW continues to climb the indicators are deteriorating, increasing the probability that the market could pull-back.  Overall, we believe the DOW will hold above 10,100, even during a heavy pull-back, if we have one.  For more on the technical analysis that we use please visit the Learning Center

 

The daily SPY shown below (an ETF that tracks at 1/10th of the S&P 500 Index) broke out of its range bound trading zone by breaking above 112, and it continues to hold above 112.   A potential up-side target based on the top upward sloping trend line, as drawn, and assuming that earnings are good and the SPY rallies over the next 30 to 40 days, is 118.  However, because the market recently sold-off on higher volume on the excellent earnings results from Intel, this tells us that the SPY probably won't "hug" the top upward sloping trend line, but will probably start to get more choppy and start trading sideways again.  Per the indicators, they are showing some bearish divergence, but are less clear as what was seen for the DOW.  For downside potential, there is a very good chance that the 111 level will hold as support representing the 50 day SMA.   If 111 fails, there is an excellent chance that the 109 level will hold as support representing the 100 day SMA, the bottom of it's upward sloping channel, and the Oct high.  If 109 fails, there is practically a 99% probability that the 103.5 level will hold as support representing the October lows.  If/when the SPY has a heavy pull-back, we believe that it will hold above 109.

 

Below is the NASDAQ Composite Index (COMPQ).  We can see that it broke above 2200, and continues to remain above this level, which is bullish.  This index also sold-off last Friday on higher volume, but remains in the upward sloping channel.   Per downside potential, we believe there is an average chance that 2270 will hold as support, representing the bottom of its upward sloping channel.  If 2270 fails to hold, there is a very good chance that 2200 will hold as support representing the 50 day SMA, and the bottom of the Bollinger Band.   If 2200 doesn't hold, we believe there is an excellent chance that 2160 will hold as support, representing the 100 day SMA, and the October high.  Finally, there is probably a 99% probability that 2040 will hold as support representing the October low.   If/when the market has a strong sell-off, we believe that 2160 will hold as support.   The indicators are neutral, and definitely more healthy than what we see with the DOW and SPY, reinforcing our prediction that 2160 will hold as support, even with a strong sell-off.

Below is the NYSE Composite Index (NYA), which is a much broader indicator than just the 30 stocks that compose the DOW.  We can see that this index broke up through 7200 and continues to remain above this level, which is bullish.  A potential up-side target by the 3rd week of February is 7650, based on the upward sloping channel as drawn.  Per downside potential, there is a very good chance that it will hold above 7200, representing the 50 day SMA, the Oct high, and the top of it's past consolidating channel.   If the NYA breaks down through 7200, there is a excellent chance that 7050 will hold as support representing the 100 day SMA, and that 7000 is a major psychological level.  Finally, if 7050 fails, there is probably a 99% probability that 6700 will hold as support representing the Oct low.

Finally, below is the daily chart for the IWM, an ETF that tracks at 1/10th of the RUT.  We can see that the IWM broke out above 62 and continues to hold above this level, which is bullish.  A potential target is 68 that represents the top of its upward sloping trend line.  But, because the RUT sold off on Friday on higher volume, the probabilities are lower that the RUT will continues to trend upward and "hug" the trend line. Per downside potential, if/when the IWM pulls back there is a good chance that 62 will hold as support, representing the Sept and Oct double-top highs.  If 62 fails to hold, there is an excellent chance that the 60 level will hold as support, representing the 50 day and 100 day SMAs, the bottom 2 std. deviation Bollinger Band, and that 60 is a major psychological level.  If 60 fails, then there is practically a 99% probability that 56 will hold as support representing the October low and its 200 day SMA.  Overall, we believe the RUT will stay above 60, even if the market pulls back hard. 

Big Picture Analysis/Market Timing:

Below are a selection of macro-technical, macro-economic, investor sentiment, media sentiment and money flow indicators to give us a big-picture view of the health of the US economy and the stock market.  For a consolidated list of big-picture indicators that we monitor, please go to MarketTiming.

Implied Volatility on the S&P 500 Index (VIX) -  We watch implied volatility (IV), also known as the "fear index", on the S&P 500 Index to help us gauge the overall health of the US stock market.  We care about IV because if it starts to climb while we have trades open it could be a warning that a major storm is coming and that we might consider closing our spreads and move to the sidelines. 

Conclusion for IV on the S&P 500 Index:   The VIX continues to trend downward, albeit in choppy fashion. As long as the spikes in fear are short lived, when they happen, and so far the spikes in the VIX have been short lived, we'll continue to feel confident to write credit spreads.

 

Initial Unemployment Claims came in a little higher than expected, but the 4 week SMA continue to slope downward and in the right direction. 

 

Economic Cycle Research Institute (ECRI) Weekly Leading Index (WLI) -  ECRI is a respected independent economic research house that has one of the best track records in predicting when recessions start and end.  One of their key leading economic indicators is the Weekly Leading Index (WLI). For more on the WLI please visit the Learning Center.

Conclusion for WLI:   As of Jan 8th the WLI increased to 132.1, telling us that the US economy continues to improve.

 

Aruoba-Diebold-Scotti Business Conditions Index (ADS) -  The ADS Index is a forward looking, high-frequency (i.e. it's updated weekly) macro-level diffusion index composed of a dozen economic indicators that track the overall health of the US economy.  For more on the ADS Index, please go to MarketTiming.

Conclusion for ADS Index:   This indicator is showing some weakness and conflicts with the strength shown by the ECRI.  Because we are seeing conflicting signals, we probably will start to see more volatility in the broad-based indexes, which is good for our credit writing strategy.

 

Retail Sales came in lower than expected and are a concern.  Many retailers were telling analysts that same store sales were strong through the Holiday shopping season, but these results tell a different story.  Even after stripping out volatile auto dealers, gasoline, and home building materials to get to "core" retail sales, it still was down 0.3%, which was very bad and unexpected.  We need to watch this closely as this could derail the US recovery.

 

More negative news, the manufacturing component within Industrial Production pulled back 0.1% in December, which was unexpected by analysts, and is reason for concern.  This index comprises manufacturing, utility and mining output.  Most of the December increase in the chart shown below is from utility output increasing by 5.9% in December, caused by a cold snap in December forcing many US residents to turn on their heat.  The most important component of this index is manufacturing output, and it came in negative.  This tells us that manufacturers are already slowing down their production in anticipation of a slow recovery.

 

Overall Conclusion from the Big Picture Indicators:   We are starting to see weakness in the US economy's recovery, where these mixed signals will probably start to create periodic, sudden sell-offs in the market.  We are still early into Q4 earnings season, but we can tell already that the market is on edge by the way it sold-off to Intel's excellent results, and believes that the market is priced for perfection.

Below is the economic calendar for the next 4 weeks getting us close to the end of our Feb trades:

The Week of Jan 18th:   The street will be watching the Building Permits/Housing starts data, as well as the Conference Board's Leading economic indicator, and the Philly Fed (manufacturing output).  In addition to this economic data, investors will be watching the Q409 earnings releases, which start-up this week with Citigroup and IBM announcing on Tuesday.  For more on this economic calendar please go to http://www.briefing.com/Investor/Public/Calendars/EconomicCalendar.htm.

The Week of Jan 25th:   Most of this data is closely watched, especially the advanced Q4 GDP (gross domestic product) release.  Thus, any of these could move the markets - and when the markets move, this gives us an opportunity to bring in some premium.

The Week of Feb 1st:   In addition to personal income and the ISM index, the biggie this week is the jobs number (unemployment) coming out on Friday the 5th.

The Week of Feb 8th:   The big one this week is Retail sales on Thursday the 11th.

 

We recommend the following trades

We'll be sending out an advisory early this week with our recommended trades.  Most likely we'll be jumping in sooner this month, especially with our top spreads.

 


Thursday, January 14, 2010 (1:55 AM ET)

Intel will be announcing earnings today, Thursday, after the bell and analysts are expecting their earnings to be up 650% over a year ago.  Even though they are making the comparison to the horrible numbers last year when revenues and earnings fell off the cliff, the news media probably will make a big deal about this and the market could rally 2% or more tomorrow.  In preparation for a rally tomorrow, it would be prudent to close out most of our short call legs that could be in danger if the market rallies too much tomorrow.  It won’t cost that much to close them out and we’ll all sleep better tonight. 

We recommend the following Immediate trades:

Buy to close RUT Jan 670 call - for a limit debit of 5 cents.  

Buy to close IWM Jan 67 call – for a limit debit of 2 cents.  You can move this limit debit in 1 penny increments, so if it doesn’t fill for 2 cents, try 3 cents.

Buy to close SPY Jan 117 call - for a limit debit of 2 cents.  You can move this limit debit in 1 penny increments, so if it doesn’t fill for 2 cents, try 3 cents.

For those of you who might have opened credit spreads with a short SPX Jan 1170 call or an SPX Jan 1175 call, it’s probably a good idea to close out these short legs also.

 


Sunday, January 10, 2010

We are down to the last week for our January trades and currently they are safe.  We'll keep you posted via email if anything needs to be done with our trades.  If not, let's hold onto our spreads and let them expire worthless for the buyers, where they will be 100% profitable for us, the sellers.

The big news last week was that the unemployment number came in weaker than expected.  Some economists were optimistic that December might be the first month to show positive job growth. Unfortunately, the number disappointed coming in with a loss of 85,000 jobs, and holding the unemployment rate at 10%.  The good news, however, was that the jobs number for November was revised upward to a net gain of 4,000 jobs, so November actually came in as the first month since Dec 2007 that the US added non-farm jobs.

 

Earnings season kicks-off this week and below are some of the more closely watched companies that are releasing this week:

Mon the 11th - ALCOA Aluminum (after the close)
Tues the 12th - Linear Technology (semiconductor); KB Home
Thur the 14th - Intel (after the close)
Fri the 15th - JP Morgan Chase (before the open)

Analysts are expecting Q4 earnings to be good, and if they are right this probably will be the catalyst that drives the market its next leg-up, so we need to be prepared for some movement in the indexes over the next 6 weeks.

Below are the charts for the DOW, SPY - an ETF that tracks at 1/10th of the S&P500 index, NASDAQ Composite Index, NYSE Composite Index, and IWM - an ETF that tracks at 1/10th of the Russell 2000 small cap index.

The daily DOW chart is shown below.  It broke above past resistance of 10,500 and time will tell if it holds above this level and continues to trend upward.  Thursday's and Friday's candlesticks were hanging men telling us that sellers stepped in early in the day, but buyers returned at the end of the day pushing the index up near its opening price.  Most stock technicians will tell us that this is a sign that the index is short term topping out.  Most likely, however, upcoming earnings season's results will dictate where the market goes from here.  Per upside potential, there are two possible targets of 10,860 and 11,000.   The first target of 10,860 is calculated using the theory of a measured move, which states that when a stock or index breaks out from a sideways, consolidation phase it will rally upward (or downward) a distance that is equal to the range of its consolidation.  In this example, the DOW has been consolidating between 10,240 and 10,550, which is a 310 point range.  Thus, when it finally breaks out to the upside, according to the measured move theory, the target would be 10,550 + 310 = 10,860.  The second potential target shown is 11,000 and is estimated from the top, upward sloping trend line, as drawn, assuming that the market rallies over the next 30 to 40 days from good earnings.  Per downside potential, we show 3 possible support levels:  There is a very good chance that 10,240 will hold as support representing its 50 day SMA, the bottom of its sideways consolidating channel, the bottom of its upward sloping channel, and the bottom of the 2 std. deviation Bollinger band.  If the 10,240 level fails to hold as support, there is an excellent chance that the 10,000 level will hold as support representing the Oct high that was a past resistance level and should now have switched to a support level, the 100 day SMA, and that 10,000 is a major psychological level.   If 10,000 doesn't hold, there is practically a 99% probability that 9,700 will hold as support representing the October 30th low.  The MACD and Accumulation/Distribution indicators are showing strength.  The Williams %R is showing that this index is overbought, but it could remain in this mode for many months as the market rallies.  Overall, we believe the DOW will hold above 10,000, even during a heavy pull-back, if we have one.  For more on the technical analysis that we use please visit the Learning Center

 

The daily SPY shown below (an ETF that tracks at 1/10th of the S&P 500 Index) broke out of its range bound trading zone by breaking above 112, and is trending upward.  A potential up-side target based on a measured move is 117.5 (113-108.5=4.5; 113+4.5=117.5)  We show 112 because this was the resistance level that the SPY needed to break above to confirm a new upward move, but the sideways consolidation range was 108.5 to 113 and this was the range that we used to calculate the measured move.  Looking at the top upward sloping trend line, as drawn, and assuming that earnings are good and the SPY rallies over the next 30 to 40 days, a potential target is also 117.  So we get about the same estimated target from both the trend line and the measured move calculation.  Per the indicators, they now are showing strength. For downside potential, there is a very good chance that the 110 level will hold as support representing the 50 day SMA, and the Oct high that was past resistance and now should be support.  If 110 fails, there is an excellent chance that the 108 level will hold as support representing the 100 day SMA and the Sept high.  If 108 fails, there is practically a 99% probability that the 103.5 level will hold as support representing the October lows.  If/when the SPY has a heavy pull-back, we believe that the SPY will hold above 108.

 

Below is the NASDAQ Composite Index (COMPQ).  We can see that it broke out above 2200 and is trending upward.  The indicators are bullish reinforcing the recent rally.   Per downside potential, we believe there is a good chance that 2200 will hold as support representing the 50 day SMA.   If 2200 doesn't hold, we believe there is an excellent chance that 2140 will hold as support, representing the 100 day SMA.  And if 2140 doesn't hold, there is probably a 99% probability that 2040 will hold as support representing the October low.  Overall, we believe that 2140 will hold as support if we have a strong pull-back.

Below is the NYSE Composite Index (NYA), which is a much broader indicator than just the 30 stocks that compose the DOW.  We can see that this index broke above 7230 and is now trending upward.  A potential target is 7600 per a measured move calculation. (7300-7000=300;  7300+300=7600)  Per downside potential, there is a very good chance that it will hold above 7100, representing the 50 day SMA.   If the NYA breaks down through 7100, there is a excellent chance that 7000 will hold as support representing the 100 day SMA, and that 7000 is a major psychological level.  Finally, if 7000 fails, there is probably a 99% probability that 6700 will hold as support representing the Oct low.

Finally, below is the daily chart for the IWM, an ETF that tracks at 1/10th of the RUT.  We can see that the IWM broke out above 62.5 and is trending upward.  A potential target is 69 that represents the top of its upward sloping trend line.  Per the measured move calculation, it predicts 67 as a potential target.  (62.5-58=4.5;  62.5+4.5=67)  Per downside potential, if/when the IWM pulls back there is a very good chance that the 60 level will hold as support, representing the 50 day and 100 day SMAs, and that 60 is a major psychological level.  If 60 fails, then there is an excellent chance that 56 will hold as support representing the October low and its close to the 200 day SMA.  Overall, we believe the RUT will stay above 60, even if the market pulls back hard. 

Big Picture Analysis/Market Timing:

Below are a selection of macro-technical, macro-economic, investor sentiment, media sentiment and money flow indicators to give us a big-picture view of the health of the US economy and the stock market.  For a consolidated list of big-picture indicators that we monitor, please go to MarketTiming.

Implied Volatility on the S&P 500 Index (VIX) -  We watch implied volatility (IV), also known as the "fear index", on the S&P 500 Index to help us gauge the overall health of the US stock market.  We care about IV because if it starts to climb while we have trades open it could be a warning that a major storm is coming and that we should consider closing our spreads and move to the sidelines. 

Conclusion for IV on the S&P 500 Index:   The VIX continues to trend downward, albeit in choppy fashion. As long as the spikes in fear are short lived, when they happen, and so far the spikes in the VIX have been short lived, we'll continue to feel confident to write credit spreads.

 

McClellan Market Breadth Oscillator -  The McClellan Oscillator is one of the more accurate and modernized market breadth indicators available today that is based on the advanced/decline line.  The A/D line tells us if certain movement in an index is broad-based in nature, or if just a few large companies that reside in the index are single handedly moving the index.  For more on this indicator please visit the Learning Center and read the entry entitled "McClellan Oscillator". 

Conclusion for McClellan Oscillator on the NYSE Composite Index:   As of Jan 8th, the McClellan Oscillator (middle chart) is gradually sloping upward telling us that more stocks are advancing than declining on a daily basis, which is a healthy sign for the stock market.  Moreover, the Summation Index (bottom chart), which also is based in the advance/decline line and provides a longer-term view and signals for major turning points, also is gently sloping upward, which is a bullish sign.

 

The ISM Index that tracks the health of U.S. manufacturing came in at 55.9 versus consensus of 54.3, which was good news.  A reading over 50 tells us that manufacturing in the US is expanding, and the ISM index has been over 50 for five consecutive months.

 

Factory Orders came in at a positive 1.1% growth rate telling us that the US economy continues to move in the right direction.

 

Interest Rate Spread Between Similar-Maturity Corporate Bonds and Treasuries  - This indicator is a gauge of the health of US credit markets and also is an effective early indicator of the health of the US economy.  When the interest rate spread is high as compared to historical levels, it implies a greater anticipated default risk of US corporations.  When the interest rate spread is low as compared to historical levels, it implies a low anticipated default risk of US corporations and a greater availability of credit.  For more on this indicator please go here.

Conclusion for the Corporate Bond vs. Treasuries Spread Indicator  - This indicator is deflating telling us that credit markets continue to improve, credit to corporations is beginning to flow, and it's almost back within the historical normal range.

 

On the negative side, home mortgage delinquencies are still climbing and are at historic highs.  This continues to be a huge problem, and so far it's not getting any better.

An additional negative is a severe contraction in revolving consumer credit, which comprises credit cards and personal bank loans.  Because banks are rapidly reigning in credit limits, increasing interest rates, and making credit extremely tight, consumers had $84 billion less credit in 2009 as compared to 2008, and as a result consumers will be forced to spend less.  Because consumer spending makes up 70% of the US gross domestic product (GDP) there is a good chance we'll see this contraction in consumer credit slow down the expansion of the US economy. 

 

Overall Conclusion from the Big Picture Indicators:   Other than continued record high mortgage delinquencies, 10% unemployment, and a severe reduction in consumer credit, the economy continues to gradually improve.  (Believe it or not)  In response, investors have bid up the stock market in anticipation that the economy will continue to improve.  However, because of predictions that unemployment will remain high through 2010, and the contraction in consumer credit will get even worse, this could derail the expansion that we are currently experiencing.  Thus, we need to remain cautious and be prepared for periodic, sudden sell-offs in the market.  Regarding the next 4 to 6 weeks, the market will find its direction primarily from Q4 earnings, and analysts are expecting earnings to be good.  I guess we'll find out over the next 6 weeks. 

Below is the economic calendar for the next 1 week taking us to the end of our Jan trades:

The Week of Jan 11th:   Retail sales on Thursday the 14th is closely watched and if its good the market most likely will rally.  However, Thur the 14th is the last day of trade for our January spreads, (for the RUT) so a market rally shouldn't impact our Jan spreads too much.  (note...our SPY option trades are active through Friday, so we need to watch them through the end of trade on Friday)   For more on this economic calendar please go to http://www.briefing.com/Investor/Public/Calendars/EconomicCalendar.htm.

 

We recommend the following trades

Let's hold onto what we have and let them expire worthless this week.  If we need to make any adjustments to any of our trades we'll notify you via email.

 


Thursday, January 07, 2010

The market is down today giving us an opportunity to bring in some premium.  Let's focus on the bottom, bull put spreads today.  It's recommended to go light on these....the short put leg is right at or just above the 50 day SMA, so it's a little more risky to place our short leg at this level.

We recommend the following trades.

RUT Bear Call Credit Spread
Buy to open Jan 680 call
Sell to open Jan 670 call - for a credit of 32 to 45 cents.  It will take an UP day before this spread will start to fill for at least 32 cents credit.  If this spread starts to fill for more than 45 cents credit, suspend any further fills on it and click-UP a strike to keep your credit between 32 to 45 cents.  If/when this spread starts to fill for at least 32 cents we'll send out an email alert.

RUT Bull Put Credit Spread
Sell to open Jan 600 put
Buy to open Jan 590 put - for a credit of 40 to 60 cents.  If this spread starts to fill for more than 60 cents credit, suspend any further fills on it and click-down a strike to keep your credit between 40 to 60 cents. 
Make sure not to put spreads that have matching strike prices in the same account.  For more information on why we avoid putting matching strike prices in the same account when using the RUT please go to the FAQ page at and read the entry "Why do I need 2 accounts when trading the RUT?".

As an alternative to opening a 10 point wide spread on the RUT, which requires $1000 of maintenance per spread, is to open a 2 point wide spread on the IWM that requires $200 of maintenance per spread.  IWM is an ETF that tracks at 1/10th of the RUT. The positive of opening a 2 point wide spread is that the required maintenance is lower allowing smaller accounts to participate.  The negative of using the IWM is that we have to open 5x the number of spreads as compared to opening spreads on the RUT, so commissions can quickly eat into our returns when using the IWM.  If you are paying much more than $1/contract in commissions, your returns will be impacted quite a bit.  Cheap brokers like eOption, OptionsHouse and TradeKing that charge 65 cents or less per contract are best when opening 2 point wide spreads.

IWM Bear Call Credit Spread
Buy to open Jan IWM 69 call
Sell to open Jan IWM 67 call - for a credit of 7 to 11 cents.  It will take an UP day before this spread will start filling for at least 7 cents credit.  If this spread starts to fill for more than 11 cents credit, suspend any further fills on it and click-up a strike to keep your credit between 7 and 11 cents. 

IWM Bull Put Credit Spread
Sell to open Jan 60 put
Buy to open Jan 58 put - for a credit of 10 to 12 cents.  If this spread starts to fill for more than 12 cents credit, suspend any further fills on it and click-down a strike to keep your credit between 8 to 12 cents. 

For those who want to trade the SPY we recommend the following trade.  For more information about trading both the SPY and the RUT, please visit the FAQ Page and read the entry "Should I trade both the RUT and SPY?".  We also open 2 point wide spreads on the SPY.

SPY Bear Call Credit Spread  (anticipating that the market will rally on Friday when the unemployment number is released, let's click this one back up to the 118/120 call strikes)
Buy to open Jan 120 call
Sell to open Jan 118 call - for a credit of 7 to 11 cents.   It will take an UP day for this spread to start filling for at least 7 cents credit.  If this spread starts to fill for more than 11 cents credit, suspend any further fills on it and click-up a strike to keep your credit between 7 and 11 cents.  

SPY Bull Put Credit Spread
Sell to open Jan 110 put
Buy to open Jan 108 put - for a credit of 10 to 12 cents.  If this spread starts to fill for more than 12 cents credit, suspend any further fills on it and click-down a strike to keep your credit between 8 to 12 cents. 

Note: If you are an auto-trade subscriber, this information is FYI only.  You don't need to do anything since we are responsible for the trading.

 


Monday, January 4, 2010 (11:10 AM ET)

The RUT Jan 670/680 bear call spread is filling for 38 cents credit or more.  

For the SPY, let’s click down a strike – we recommend the following trade:

SPY Bear Call Credit Spread
Buy to open Jan 119 call
Sell to open Jan 117 call - for a credit of 7 to 11 cents.  If this spread starts to fill for more than 11 cents credit, suspend any further fills on it and click-up a strike to keep your credit between 7 and 11 cents.  Right now it’s filling for 9 cents credit.

It’s recommended to overweight on the SPY and underweight on the RUT this month.   The small cap investors might try to play catch-up since the Russell 2000 index has been lagging the broad indices over the last few months.

For each trade shown above, always try to get more with your credit limit order, wait 30 seconds for it to fill and if it doesn’t, reduce your credit limit by 1 cent and try again.  Repeat the process until it fills.

 


Sunday, January 03, 2010

Happy New Year!  We hope that everyone was able to spend quality time with friends and family during this special Holiday, and through the year-end transition into a new decade.

The indexes continue to show bullish consolidation and a few attempted to breakout to the upside, but the rally failed as the market pulled-back on Friday.  Several economic indicators were released last week and they were good, providing the market further support.  And earnings season kicks-off on January 11th and analysts are expecting good results where this could be the catalyst to push the market to a new high.  We'll cover all of these topics below in more detail.

Below are the charts for the DOW, SPY - an ETF that tracks at 1/10th of the S&P500 index, NASDAQ Composite Index, NYSE Composite Index, and IWM - an ETF that tracks at 1/10th of the Russell 2000 small cap index.

The daily DOW chart is shown below.  It attempted to rally above past resistance of 10,500, but failed and pulled back to close at 10,428.  The DOW has been trading in a tight range between 10,240 and 10,500 since mid-November.  Per upside potential, when the DOW does finally breakout to the upside, two possible targets are 10,860 and 11,000.   The first target of 10,860 is calculated using the theory of a measured move, which states that when a stock or index breaks out from a sideways, consolidating phase it will rally upward (or downward) a distance that is equal to the range of its consolidation.  In this example, the DOW has been consolidating between 10,240 and 10,550, which is a 310 point range.  Thus, when it finally breaks out to the upside, a measured move target would be 10,550 + 310 = 10,860.  The second potential target shown is 11,000 and is estimated from the top, upward sloping trend line, as drawn, assuming that the market rallies over the next 30 to 40 days from good earnings.  Per downside potential, we show 3 possible support levels:  There is a good chance that 10,240 will hold as support representing its 50 day SMA, the bottom of its sideways consolidating channel, and the bottom of its upward sloping channel.  If the 10,240 level fails to hold as support, there is a very good chance that the 10,000 level will hold as support representing the Oct high that was a past resistance level and should now have switched to a support level, the 100 day SMA, and that 10,000 is a major psychological level.   If 10,000 doesn't hold, there is an excellent chance that 9,700 will hold as support representing the October 30th low.  The MACD and Chaikin Money Flow indicators are sending mixed signals and don't help us much.  Overall, we believe the DOW will hold above 10,000, even during a heavy pull-back.  For more on the technical analysis that we use please visit the Learning Center

 

The daily SPY shown below (an ETF that tracks at 1/10th of the S&P 500 Index) attempted to rally above past resistance of 112, but failed.  When the SPY does finally rally above 112, a potential target based on a measured move is 117.5 (113-108.5=4.5; 113+4.5=117.5)  We continue to show 112 because this is the resistance level that the SPY still needs to break above before it will rally to a new high, but the sideways consolidation range is now 108.5 to 113 and this is the range that is used to calculate the measured move.  Looking at the top upward sloping trend line, as drawn, and assuming that earnings are good and the SPY rallies over the next 30 to 40 days, a potential target is also 117.  So we get about the same estimated target from both the trend line and the measured move calculation.  Per the indicators, they are sending mixed signals, but the MACD is showing positive divergence and showing strength is building up.  For downside potential, there is an good chance that the 109 level will hold as support representing the 50 day SMA, the Oct high that was past resistance and now should be support, and the bottom of the recent sideways consolidation channel.  If 109 fails, there is a very good chance that the 107 level will hold as support representing the 100 day SMA and the Sep high that should now act as support.  If not, then there is an excellent chance that the 103.5 level will hold as support representing the October lows.  If/when the SPY has a heavy pull-back, we believe that the SPY will hold above 107.

 

Below is the NASDAQ Composite Index (COMPQ).  We can see that it broke out and created a new, upward sloping ascending triangle.  This rally also widened the 2 standard deviation Bollinger Channel, telling us that if the COMPQ were to correct, it could more easily correct down to 2140, which is the bottom of the Bollinger Channel.  The indicators are neutral and don't help us much in predicting which way this index will break out.   Per downside potential, we believe there is a good chance that 2120 will hold as support representing the 100 day SMA.   If 2120 doesn't hold, we believe there is an excellent chance that 2040 will hold as support, representing the October lows.  Overall, we believe that the 2120 level will hold as support if we have a strong pull-back.

Below is the NYSE Composite Index (NYA), which is a much broader indicator than just the 30 stocks that compose the DOW.  When this index does breakout above 7230, a potential target is 7600 per a measured move calculation. (7300-7000=300;  7300+300=7600)  Per downside potential, if the NYA breaks down through 7000, there is a excellent chance that 6700 will hold as support, even with a strong pull-back.

And finally, below is the daily chart for the IWM, an ETF that tracks at 1/10th of the RUT.  We can see that the IWM attempted to break out to the upside as it crossed above 62.5, but so far the breakout failed since it did not remain above 62.5.  When the RUT does finally breakout to the upside, most likely from Q4 earnings if they are good, a potential target is 69 that represents the top of its upward sloping trend line.  Additionally, the measured move calculation also predicts 69 as a potential target.  (63.5-58=5.5;  63.5+5.5=69)  Per downside potential, if/when the IWM pulls back there is a very good chance that the 59 level will hold as support, representing the 50 day and 100 day SMAs.  If 59 fails, then there is an excellent chance that 55 will hold as support representing the late October low and the 200 day SMA.  Overall, we believe the RUT will stay above 59, even if the market pulls back hard. 

Big Picture Analysis/Market Timing:

Below are a selection of macro-technical, macro-economic, investor sentiment, media sentiment and money flow indicators to give us a big-picture view of the health of the US economy and the stock market.  For a consolidated list of big-picture indicators that we monitor, please go to MarketTiming.

Implied Volatility on the S&P 500 Index (VIX) -  We watch implied volatility (IV), also known as the "fear index", on the S&P 500 Index to help us gauge the overall health of the US stock market.  We care about IV because if it starts to climb while we have trades open it could be a warning that a major storm is coming and that we should consider closing our spreads and move to the sidelines. 

Conclusion for IV on the S&P 500 Index:   The VIX continues to trend downward, albeit in choppy fashion. As long as the spikes in fear are short lived, when they happen, and so far the spikes have been short lived, we'll continue to feel confident to write credit spreads.

 

Investor's Intelligence Bull/Bear Spread -  The B/B Spread is a well respected gauge of overall investor sentiment.  For more on this indicator please visit the Learning Center and read the entry "Investors Intelligence Bull/Bear ratio & spread".

Conclusion for B/B Spread Indicator:   As of Dec 31st, there are 35.5% more Bulls than Bears, telling us that more money will most likely be flowing into the market than flowing out, or that the major indexes will most likely hold above certain support levels (e.g. the 100 day SMA) if/when we have a pull back.  Once the B/B Spread Indicator hits 40%, however, we then should consider using it as a contrary indicator where it could be a sign that a major pull-back is imminent.

 

The Conference Board's consumer confidence number increased to 53 coming in at expectations.  An increase in consumer confidence arguably promotes higher consumer spending, which in turn helps the overall US economy.

 

The Chicago PMI Index (manufacturing output) climbed again and all of its sub-components, except one, are above the neutral 50 level that represents expansion.

 

Initial unemployment claims, which is released weekly, continues to improve.  Economists usually monitor the 4 week average (orange line) and we can see that it is slowly improving.  When initial claims hit about 400k jobs, this usually represents equilibrium where there is an equal number of jobs being created and lost.  As a result, we are getting very close to the time when the US economy will start actually adding jobs. 

 

The S&P/Case-Shiller numbers came out last week showing that the decline in housing prices has slowed considerably.  Because Congress has extended the housing tax credit, and that mortgage rates are still very low, this index will probably continue to improve through Spring 2010.

 

DOW Jones Media Economic Sentiment Indicator (ESI)  -  The ESI a monthly assessment of the "tone" of content in 15 metropolitan dailies.  An example of "tone" would be scanning for the word "recession".  The ESI is a simple barometer based on a scale of zero to 100—the higher the number, the more upbeat the news and, by extension, the stronger the economy.  Dow Jones back-tested their media sentiment indicator to 1990 and found that it could signal critical turning points in the economy, sometimes a bit earlier than other economic measures.  For more information on this indicator please visit the Learning Center.

Conclusion for the ESI:   As of Dec 31st, the ESI continues to gradually climb, and or hold steady, telling us that the US economy is improving and moving in the right direction.  The positive tone in the media helps consumers and businesses to be less cautious when spending and hiring.

 

Overall Conclusion from the Big Picture Indicators:   The US economy continues to improve and most 50 day and/or 100 day SMAs of the major indexes mentioned above will hold as support if/when we have a pull back.  Moreover, most of this data is looking good enough to possibly justify the market to rally to a new high, and the next catalyst could be Q4 earnings that start to roll-in mid-January.

Below is the economic calendar for the next 2 weeks taking us to the end of our Jan trades:

The Week of Jan 4th:   The ISM Index (health of US wide manufacturers) released on Monday the 4th, and unemployment on Friday the 8th are both closely watched.  If unemployment comes in better than expected, it probably will fuel a strong, short lived rally.  Some economists are predicting that we might actually have a positive jobs number where up to 40k jobs were added in December, the first time the US economy has created jobs in 23 months.  The question we then ask ourselves is "how far will the RUT and SPY rally before running out of steam?".  We believe that they probably will rally for a few days, but investors most likely will not feel comfortable in buying too many stocks until they see how Q4 earnings look.  For more on this economic calendar please go to http://www.briefing.com/Investor/Public/Calendars/EconomicCalendar.htm.

The Week of Jan 11th:   Retail sales on Thursday the 14th is closely watched and if its good the market most likely will rally.  However, Thur the 14th is the last day of trade for our January spreads, so a market rally shouldn't impact our Jan spreads too much.  Additionally, Q4 earning's season kicks off on January 11th with ALCOA Aluminum releasing results.  There is a good chance that Q4 earnings will be good and this could be the catalyst that drives the market to new highs.  However, our January spreads will already be closed by the time there are sufficient earnings released.

 

We recommend the following trades.  It's best to try to open these within the first 45 minutes of trade each morning this week.

RUT Bear Call Credit Spread
Buy to open Jan 680 call
Sell to open Jan 670 call - for a credit of 32 to 45 cents.  It will take an UP day before this spread will start to fill for at least 32 cents credit.  If this spread starts to fill for more than 45 cents credit, suspend any further fills on it and click-UP a strike to keep your credit between 32 to 45 cents.  If/when this spread starts to fill for at least 32 cents we'll send out an email alert.

RUT Bull Put Credit Spread (Note that we moved up one strike)
Sell to open Jan 580 put
Buy to open Jan 570 put - for a credit of 40 to 60 cents.  It will take a DOWN day before this spread will start to fill for at least 40 cents credit.  If this spread starts to fill for more than 60 cents credit, suspend any further fills on it and click-down a strike to keep your credit between 40 to 60 cents. 
Make sure not to put spreads that have matching strike prices in the same account.  For more information on why we avoid putting matching strike prices in the same account when using the RUT please go to the FAQ page at and read the entry "Why do I need 2 accounts when trading the RUT?".

As an alternative to opening a 10 point wide spread on the RUT, which requires $1000 of maintenance per spread, is to open a 2 point wide spread on the IWM that requires $200 of maintenance per spread.  IWM is an ETF that tracks at 1/10th of the RUT. The positive of opening a 2 point wide spread is that the required maintenance is lower allowing smaller accounts to participate.  The negative of using the IWM is that we have to open 5x the number of spreads as compared to opening spreads on the RUT, so commissions can quickly eat into our returns when using the IWM.  If you are paying much more than $1/contract in commissions, your returns will be impacted quite a bit.  Cheap brokers like eOption, OptionsHouse and TradeKing that charge 65 cents or less per contract are best when opening 2 point wide spreads.

IWM Bear Call Credit Spread
Buy to open Jan IWM 69 call
Sell to open Jan IWM 67 call - for a credit of 7 to 11 cents.  It will take an UP day before this spread will start filling for at least 7 cents credit.  If this spread starts to fill for more than 11 cents credit, suspend any further fills on it and click-up a strike to keep your credit between 7 and 11 cents. 

IWM Bull Put Credit Spread
Sell to open Jan 58 put
Buy to open Jan 56 put - for a credit of 8 to 12 cents.  It will take a stronger DOWN day before this spread will start to fill for at least 8 cents credit.   If this spread starts to fill for more than 12 cents credit, suspend any further fills on it and click-down a strike to keep your credit between 8 to 12 cents. 

For those who want to trade the SPY we recommend the following trade.  For more information about trading both the SPY and the RUT, please visit the FAQ Page and read the entry "Should I trade both the RUT and SPY?".  We also open 2 point wide spreads on the SPY.

SPY Bear Call Credit Spread
Buy to open Jan 120 call
Sell to open Jan 118 call - for a credit of 7 to 11 cents.   It will take an UP day for this spread to start filling for at least 7 cents credit.  If this spread starts to fill for more than 11 cents credit, suspend any further fills on it and click-up a strike to keep your credit between 7 and 11 cents.  

SPY Bull Put Credit Spread
Sell to open Jan 106 put
Buy to open Jan 104 put - for a credit of 8 to 12 cents.  If this spread starts to fill for more than 12 cents credit, suspend any further fills on it and click-down a strike to keep your credit between 8 to 12 cents. 

 

 

 

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