MyTradingBlog

Schaeffersresearch.com: bullishly biased.  Fear remains on the Street (favoring the bulls).  Major indexes are up against the resistance levels (implying potential pullbacks). But year end potential rally exists.  In the quadruple witching week, markets tend to be more positive, with exceptions of AMZN and MCP which tend to be more negative in these expiration weeks.  For the AMZN and MCP shares I own, I should sell lower strike (ATM or ITM) calls for protection.

ChartAdvisor.com: bullishly biased.  With the major indexes against resistance, can the indexes breakout to the upside for a rally, or remain stuck in a trading range?  On the downside, watch for November lows if the markets go south.  On the upside, watch if the indexes can break out above the resistance levels.  If neither happens, we are still stuck in a trading range.

Schaeffesresearch.com: “Technical speed bumps remain overhead, and headline risks linger, suggesting hedging is still a prudent strategy. But a breakout above resistance levels could be very rewarding for bulls, as short-covering activity and an abundance of sideline cash could provide the fuel to drive equities during a seasonal period that favors the bulls.”

MID (892.06): is right under the 900 resistance. “The 900 area has been a major speed bump, as this round-number region marked a peak in 2007, and 907 is the index’s year-to-date breakeven. The good news is that pullbacks from this resistance area have been modest, with the MID finding support in the 850-860 zone — which marked a peak ahead of the 2010 “flash crash” and brief tops in November 2010 and August/September 2011.”

SPX (1263): 1257-1260 is the area to watch, “the SPX continues to struggle in the 1,257-1,260 area, which coincides with its 2011 breakeven, its lows in March and June, and a 61.8% retracement of the calendar-year high and lows.”

The COMP (2678.75): 2652 is this year’s break-even point.

VIX (30.04):  24, 30 and 36 are critical numbers.  Speaking of the VIX, we find it interesting that the late-October low in the 24 area was half the August peak at 48, while recent peaks on Nov. 1 and Nov. 9 at the 36 area marked a 50% advance from the trough of 24. So, as we said a few weeks ago, not only is VIX 30 significant, but so are VIX 24 and 36 as the market continues to bounce around critical technical levels. Therefore, if the VIX moves below 30, we would view this as an acceptable level at which you can purchase your portfolio insurance to help ride out any sharp, overnight declines.

Option (monthly) expiration week: the markets tend to be more volatile in expiring weeks.  SPX 1240 and 1250 may provide support, due to heavy put open interest.

My trade: the last week’s market retreat provided me some opportunities to catch up with the short positions that I started in early October (in hind sight, that was a mistake.  I admitted that I normally would flourish when markets panic.  But the late September and early October market movement even spooked me into selling calls at very low strikes.  I have been trying to unwind these short positions now).  Going forward, I’ll continue to re-position my portfolio towards neutral.  With most of my short calls deep ITM, I am not worried about the markets going down.  It’s the rapid upward movement that will add pressure (margin call) on my portfolio before my short positions are completely corrected.

ChartAdvisor.com believes the trading pattern has changed and it’s set up for a year end rally.  Near term the markets are overextended, ready for a pullback.  Those who missed the October rally may want to jump in to catch the last train towards the year end rally by buying the market dips.  True enough, yesterday and today’s markets are good opportunities to buy dips.

• SPY: support at 122.5
• QQQ: support at 57

Schaeffersresearch.com: also believes the market is bullish, but “three short-term risks to the bullish case include:

• The RUT is still in the red for 2011, and the MID is barely in the green, with the index’s first-half lows just overhead at 920. The fact that the MID is trading around a key round number with historical significance, which also happens to coincide with its year-to-date breakeven, is perhaps the No. 1 risk from a technical perspective. It will be of importance for the MID to make a more convincing move above 900 in order to squeeze more shorts.
• Another technical risk relates to the QQQ, a benchmark driven by many large-cap technology stocks. While outperforming impressively, it still has not taken out the 60 level, which is half its all-time high and has marked multiple peaks in 2011.
• A third risk is that much of the short covering related directly to the huge build-up of put open interest in exchange-traded fund (ETF) and index options is likely expended, as heavy put strikes that will expire in a few weeks are far out of the money and less sensitive to market gyrations. That said, short covering is still possible on individual equities, and those that are highly shorted with a strong technical and fundamental backdrop are likely to lead if the market continues to rally.

Schaeffersresearch.com: bullish, but notes that the indexes are trading near the top of the trading range, with significant resistance overhead.

Chartadvisor.com: no update this week (yet).

My take: The last 2 weeks have been equally surprising as the last 2 months: the markets shop up straight from the trading range bottom to the top.  Investors have as if forgotten all about the fear of European debt problems and the double dip recession in US.  The end of Sept and early Oct bottom was truly scary that I sold some naked options (more short options than long stocks, in a negatively biased covered call, for lack of a better term).  Naturally these net short calls are hurting my return on paper.  But unless stocks shoot straight up and never look back again, I use this strategy as an added layer of downside protection.

Ratio of my short/long  positions (always short calls and long stocks)

BIDU: 1.37/1, i.e., for every 100 shares of bidu that I am long, I am short 1.37 contracts of Bidu calls (strikes at 110, 115 and 120).

CRM: 1.083/1, with strikes at 110 and 130.

FFIV: 1.32/1, with strikes at 70, 75, 77.5, 80, and 82.5.

LVS: 1.09/1, with strikes at 40, 42, and 45.

MCP: 1.16/1, with strike at 35.

NFLX: 1.5/1, with strike at 110.

PCLN: 1/1, with strike at 450.

SLW: 1/1., with strikes at 30 and 33.

What’s my plan of trading: Most of calls are in the money now, and the market is overall bullish, so weekly options rolling up (i.e., buying the expiring ITM call and selling next weeks call of same strike for a credit) is my overall plan.  This strategy gives you the most ROI.  Unless the market goes up and never comes back, my negatively biased covered call should continue to generate time values on a regular basis.

Schaeffersresearch.com: Reasonably bullish as the indexes are trading at the bottom of the range and right above major supports.  “With equities pulling back to potential long-term support areas as negative sentiment continues to grow, now is a good time to add equity exposure to your portfolio for a potential rally back to the resistance areas discussed last week. But be careful if there is a break of support, as short-covering activity or a shift from other assets will not be as urgent, undermining the potential reward for the risk you are taking.”

ChartAdvisor.com: “The market is in a very dangerous position right now and traders should be looking to protect their capital rather than gaming a bottom.”  This site is generally more conservative and analyses fewer parameters than the Schaeffer’s.

VIX: 41.25

My take: It wasn’t a surprise that the market sold off last week, although the degree of the sell off is still a bit unsettling.  I think the probability of a bounce back from here is greater than going further below.  I’ll continue to hedge with short calls, although I will use OTM calls (which leave room for a rebound).  The key to investment success is that I look at the long term return.  If you need that money now, then stay out of the market.

Schaeffersresearch.com:

Chartadvisor.com:

Both websites are painting a similar picture: while the last week’s market movements is positive, the indexes are still within a trading range.  Most of these indexes are approaching the higher end of the trading range, making it vulnerable for a pullback.

VIX: vix has been showing lower highs and it closed below 31 last Friday.  The question is whether it will break below 30, a welcome trend for the bulls, or it will reverse, like in previous instances, to stay within the 31-4o channel.

My take: Market’s reaction to FOMC’s meeting on Wednesday is important to watch.  The market is expecting some stimulus from the Feds.  As the old adage goes, buy the rumor, sell the news.  When the Feds announce its decision, there may be a market sell off, in the backdrop of recent market advances.

Levels to watch:

SPX: 1225

Comp: 2652

DJIA: 11577

VIX: 30