MyTradingBlog

1. ChartAdvisor.com thinks the markets are uncertain now.  It may continue upward to eventually break out or go downward to breakdown the June lows.  It asks for patience and caution.
2. Schaefferesearch.com is, however, more bullish.  SP500 support 1295-1305.  Resistance: 1333-1340.  A higher VIX also favors bulls for now.
3. VIX: 19.53 at Friday’s close, remains at the higher end of the 16-20 range, a signal for bullishness.  “In the 2011 calendar year, a strategy of selling equities when the VIX approaches 15 and buying equities when the VIX advances above 20 has proven to be a rewarding timing approach.”(Schaeffersresearch.com)
4. Market moving factors:
   1. earnings report seasoning.
   2. US debt debate
   3. European fiscal problems (Italy now).  Don’t we all hate Europe by now?  Their problems seem endless.

My take on the above: cautious set up long exposure with hedging in place.  When choose stocks, follow these criteria that I set forth earlier.  For covered calls that will expire at the regular Aug cycle, you may want to sell calls out of money (due to the bullish forecast and very likely a post Aug 2 market rally).  If you are like me, interested in experimenting with new strategies, I am contemplating to try the following strategy: buy calls when bullish and buy puts when bearish.  In the past 6 – 9 months, I tried option spreads (almost always bull spreads), but I am abandoning option spreads now.  It is too risky.  I’ll try small amounts of call or put buying (not selling, the risk is too high) for fun.  I will choose those options with a longer term (1 -2 months to expire).  I will then close these options when the market conditions change, before expiration.  For example, with the current market condition as bullish, I am considering to buy calls of stocks or index ETF with at least 4 weeks before expiration.  When to sell? When VIX approaches towards 16 and when SP500 is closer to 1330-1340.  If you are long an option, try to sell them at least 1 week before expiration, as the time value will depreciate very drastically in the last week.  The bulk of my investment portfolio (>95%) is in covered call which is one of the safest and yet profitable investment strategies out there.

I personally also favor a bullish rating, although I expect further market volatility, esp. with the US debt debate.  I don’t expect the politicians are giving to give us an easy answer to the debt ceiling issue.  But the good news is Aug. 2 is coming soon and we’ll have an answer by then.  I anticipate that the US debt ceiling will be raised (US debt default is just too catastrophic for the politicians to handle and no one will win if that happens) with or without concurrent budget cuts and tax increases.  After Aug. 2, unless the European financial problems becomes major headlines again, we should see less volatility in and a smoother sail of the markets.

Happy trading.

rc

• Bernie Schaeffer’s montly Option Advisory Comment is my must read.  You can find this month’s here.  In summary, he is bullish for the remainder of this year.
• Monday Morning Outlook, and Chartadvisor.com.
• My advice: Monday’s market drop may be a good opportunity to start getting into the market, if you have been sitting on the sideline.  Again, the strategy that I prefer is covered call, with at the money or in the money strikes.

The markets have risen sharply during the last week, essentially erasing all the loss suffered during the previous 2 months or so.  The major indexes, as such, have reached the all time high of 2011.  It’s natural that a profit taking, or pullback is in store.  Markets never go a straight-line in one direction.  Plus this week is the July option expiration week and normally such a week displays more volatility.

• Schaeffersresearch.com and ChartAdvisor.com:

Both these 2 sites show hopeful signs in the market, while maintaining the inherent existing risks.  The message is that the market bearish sentiment is much more pronounced than the degree of the pull back in the market place.  This sets the stage of a market turn around.

• VIX: 21.1.  High

I’d still take a cautious approach to this market.  It is simply too volatile.  Although being oversold, but an oversold market can always get more oversold.  The approach I’ll take is covered call.

1. ChartAdvisor.com: “The markets continue to deteriorate, and while a bounce is likely soon, the markets can always become more oversold first…These are the markets that separate the traders who are consistently profitable from the revolving door of amateur traders. Undisciplined traders simply get eaten alive in this market.”  Interpretation: don’t start any new positions.  Stick to your trading principles.
2. Schaeffersresearch.com: More or less the same as ChartAdvisor.com.
3. Vix: 21.85, above all the 20, 50 and 200 day MVA.  However, VIX was as high as 35.32 in May 2010, and almost 30 in March 2011.  So there is room for more volatility.
4. Major market indexes: DJI and SP500 are all just above their 200 day SMA, whereas NASDAQ has already broke below 200 SMA.   The markets are at a critical juncture at this point.
5. Uncertain market moving factors: other than the Greek factor (Alan Greenspan thinks Greece will very likely become insolvent), the US debt ceiling is another major problem.  Obama and Boehner golfing together is a good sign that 2 parties are talking, at least).
6. What am I going to do?  Be safe than sorry.  Playing it safe.

While the markets are very oversold and technical indicators all point to an increasingly likelihood of a rebound, an oversold market can always get more oversold.