Options Expiration Friday

First let me say I'm not trying to convince anyone including myself (despite my fat finger AAPL trade) of the market's bullish nature, we all know I'm not in that camp, I'm looking and talking specifically about tomorrow.

First a review of options expiration. Most options are bought by retail and sold by smart money, 90% of options expire worthless and smart money gets to keep the premiums. Retail looks at options in most cases like a lotto ticket, addicted to the possibility of large gains, but just like Vegas, eventually the house wins.

While I have not updated the options analysis from Wednesday, it has looked the same all week, there are a huge amount of puts outstanding and it would be in Wall Street's best interest (as the writers of the options) to pin the market at "max pain", making the most amount of contracts expire worthless. Out Wednesday SPY analysis suggested that number is in the vicinity of $140 although it could go a dollar or so either side of that as the Puts and Calls at $140 are about the same, figure in transactions costs and premiums and a close even a bit below $140 could still make the $140 options worthless. With today's break of the SPX's 50 day m.a., if I were managing the market, I would use a quick upside reversal to knock out as many positions as possible in addition to pinning the options, it just makes sense.

As I mentioned, in looking at a number of stocks tonight, even one that dropped pretty good today, there are a lot of short term positive divergences. Longer term, the ground work for negative divergences of the bounce are already in place. I personally would not like the idea of shorting Friday strength over a long weekend, but that too would work to Wall Street's advantage if they intended on shooting the market down on Monday as many would be hesitant to short a 1.5% up move in the market on a Friday, again, from a Wall Street perspective, it just makes sense.

Here are a few charts that suggest there is room for such a mov; we already know that the volatility is in place for such a move so there's no stretch of the imagination there (If I included all of the charts I saw with short term 1-5 min positive divergences today, this post would have 50 charts more than it needs).

Commodities are brown, the Euro blue and the SPX green. Commodities performed a little more in line with the $EUR/USD correlation, stocks picked up on that extra breathing room in the late afternoon and the white box is where we saw the market averages put in positive divergences. It must be noted that these divergences tok place on the break of the SPX 50 day moving average, creating an abundant supply of cheap shares to pick up to support a bounce. Remember, they don't need to pick up a lot of hares to get a bounce started, they will distribute far more hares than they accumulated in to strength and all of these chart are short term only, as mentioned already, the longer term since April 10th has already laid the negative divergence ground work for the failure of the bounce. 

Earlier today I showed you the point in which the CONTEXT ES model was just getting supportive of some upside, you can see since then, the support for a move higher in ES and thus the market in to tomorrow is there. This is not a huge divergence, it is just enough to crate a move up tomorrow, one I will almost certainly be looking to short in to.

 ES slipped most of the day on 20% higher than average volume, however trade size was small, this is indicative of market manipulators trying to move ES higher and we have an after hours positive divergence in ES as well. Although we still have a long night and an EU open ahead of us, I must say, considering the Spanish auction results and the numerous US economic misses, the market held up reasonably well so I would think it can weather the EU open.


 Yields have been looking as they should for the move lower seen here in the SPX, they also have a small positive divergence to allow some breathing room for the market. If we look at a longer period since April 10th, you would see this indicator is FAR from bullish, but once again, we are dealing with indications for tomorrow only.

 As I reported today in the Risk Asset Update, the EUR/USD pair is supportive or at least is leaving open breathing room for the market in the short term, long term, not the case (meaning since April 10th).

 I don't know if this will come in to play or not, but there is a bullish ascending triangle in the EUR/USD pair, it is ironically close to the apex where an upside breakout would be expected, that would also give the market more upside breathing room and set up a head fake in the Euro that could easily fail on Monday.

 The $AUD as one of my favorite currency leading indicators has been leading the market lower as you can see, it has also reached short term reversion to the mean and made a higher low, this is also slightly bullish, again though, only in a very brief sense. The long term $AUD going back to mid-February or so, is very clearly bearish and explains why the market has been acting very toppy for the last month.

 Credit here is not wildly bullish, but it has left some room for a potential upside move tomorrow.

 Interestingly Energy has shown good relative momentum today and this could well be supportive of the market.

While financials have been out of rotation and have been dragging the market lower through the first half of today, reversion to the mean has been reached and there are higher lows, again, these are not wildly bullish, they do not change my opinion of the outcome of the bounce that has been very chaotic, but in the near term, are they supportive enough for a SPY pin at $139-$140 or so, yes.

Should we get this move up tomorrow, please understand that this would be a gift to short in to strength. I would likely try to add as much as I can in stocks that have good risk/reward potential and there are quite a few out there.

So lets see what the market does, lets be patient and if we get a gift from the market, lets consider taking that gift as we don't get many and we will be among a select few who realize what we are really looking at.

Since starting this post, the Es positive divergence has continued to build and ES is starting to respond favorably.

Good hunting to all of you!

Gut Feeling...

I've been browsing through a lot of charts, before I used 3C I could usually get a good feeling for the market based on how many bullish charts I saw or how many bearish charts I saw, of course that was back when technical analysis was still pretty new to the mainstream and Wall Street wasn't manipulating it like they do now.

In any case, from browsing a lot of charts since the close, I'm seeing more charts with short term positive divergences that suggest the market will indeed lift a bit more, I suspect this is the SPY $140-ish pin I am expecting.

Looking at longer term charts and 15 min charts, things are looking pretty grim. I don't know what catalyst might be used to talk the market up, but I feel relatively confident that we will see higher prices in the very short term (like tomorrow). From there, things are going down hill pretty fast.

Interesting little peak at the SPY close

 This is the SPY (green) v. the Euro, this is the intraday support or room for arbitrage that could allow the market to lift a bit, the point is the $USD on an intraday basis, is not blocking the SPY from moving higher and the SPY moved off its intraday lows to recover nearly 50% of the sell off from the open, not too bad for an hour and a half.

 The volume off the intraday low is curious.

 While the SPY 5 min positive divergence intraday is a bit bigger than this, note the area in which it went positive, at the intraday lows and again just before price and volume ticked up.

This is what a $140 pin would look like, you have to keep in mind transaction costs and options premiums so a clean $140 is not absolutely necessary. A move from here of +1.5% would do the trick and put us in the area of the area of max pain for options contracts. It would also set up a new bounce high and that would complete the emotional effect that started the entire idea of the bounce on April 10th and that was BEFORE 3C gave us confirmation that a bounce was likely. If I was running this bounce, this would be my ideal situation, of course I can't know everything these people know, but from what I see, this would give the best result, traders would be emotionally wrecked and with today's close, we also have a Harami reversal pattern confirmed. For candlestick traders, that move would through them in to a tail spin as well.

Is a +1.5% move possible in this market's volatility? Yes, we've already had two over the last 6 days. One last thing, take a look at the structure of the bounce since the local lows of April 10th, a small day up, a large day up and through resistance (longs likely wold have chased the breakout), a decent day down below support (longs would have likely sold and shorts would have come in), another smaller day down (making shorts comfortable, maybe adding), then a blast right back through resistance (longs are interested again, shorts are scared), an inside day (most probably expecting a big break down), an open today above resistance and a close below it. Now if that isn't a crazy volatile, tree-shaking bounce, I don't know what is. Thus far we are higher than April 10th and achieved several of the moves we were looking for.

So as I summed up the market in the last few posts, maybe I'm wrong about tomorrow, but since April 10th with all of that volatility, I think we've managed the chaos pretty well. It's time to start looking for the exits and in my opinion, a strong move up tomorrow would be an ideal time to look to move out the exit with positions in hand.

Congratulations to our long term member Allan who collected a pay day on the HGSI trade. I can only give analysis and show you what my indicators are showing, from there, I can't manage your trades, that's up to you and Allan did a fantastic job, he saw the bigger picture, he was patient and it paid off with a 1-day 100% move in HGSI, which made my day to hear someone caught that whopper.

I've been getting a lot of emails from members who are really progressing (by their own words and from what I have seen). I know we aren't going to get every move right, but there are some concepts and trends we have been noticing and using to our advantage and I'm very pleased to see members doing well, learning from mistakes, learning from the market and applying all of this to each of your individual trading styles.

As I said the other day, we have a great group of people and I'm really proud of all of you-wherever you are on your journey.

AAPL Update

I am ashamed to say I placed a fat finger trade on AAPL, meaning to enter a small position short the other day, I realized it was long, that's what happens when you rush and why I can't trade full time and take care of my members without sacrificing the quality of one or the other.

In any case, I'll hold AAPL long even though I did not want this position and look to flip it short ASAP.

Even though it's only a small position and the position itself is only down 4%, I'm willing to take the chance and hold it to try to flip it, it may not be the smartest move I've made, but this is why I'm willing to give it a shot.

 Here's AAPL below our two target lines, both of which AAPL already hit so those where the areas where shorting AAPL's strength made sense.

 I have a 1 min positive in AAPL

 and a 5 min relative positive, this is along the lines of what we saw in the major averages, that's it, that's my reason for holding, I'm looking for those divergences to give me a window to correct that fat finger trade. You really should see my black keyboard in which the black is worn off the keys (1 year old).

 AAPL's hourly chart speaks for itself, maybe later I'll have some fun and post it on an AAPL message board with my email and see how much hate mail I get!

The big picture in AAPL, parabolic moves are such traps, AAPL is already turning down from this weekly chart's parabolic move. Hopefully we'll get one last Hurrah!

Market Upate

 DIA 5 min leading positive divergence.

 The 15 min trend in DIA since March where the top was formed, I don't think I need to draw on this chart, but it should convey the depth of trouble the market is in.

 The close up of the 15 min that has been bothersome.

 QQQ 1 min is pretty much in line, but there have been several positive divergences as price has moved lower, they seem to be accruing on the 5 min chart like the DIA.

 This is not as sharp a divergence as the DIA, but it is a positive divergence in a timeframe that would make sense with strength in to tomorrow.

 QQQ 15 min , remember tech was out of rotation until the 16th, here we have a negative divergence in the Q's, any upside will make this divergence worse.

 SPY 5 min has a positive leading divergence, even though price ha moved down today, 3C's job is not to follow price, it is to contradict it when appropriate. With all 3 majors have 5 min positive divergences, I see no reason to ignore them.

 The 15 min SPY trend, again, no need for drawings here

And the more recent 15 min trend, negative over the last two days, any price strength will strengthen this divergence.

As I said, I see no reason at this point to write off the 5 min divergences and I think my compromise position of entering shorts in partial positions and leaving room for potential upside is the best strategy at this point. Truth be told, we should see a very nasty move down and while I want to give you the best risk/reward positioning available, I also don't want to miss the boat. If need be, I have no problem whatsoever adding to a short position that is moving in my favor.

BIDU Trade Update

I already have some coverage in BIDU by way of May $150 Puts, I would like to add a straight equity short to BIDU, the Pus are more for the failure of the head fake move, while the equity short would be for a longer term trade.

 Here is BIDU on what I have long suspected to be a head fake breakout of the large top triangle, the failure of support at the trendline should send BIDU down quickly in to the traingle and eventually below the triangle top.

 If you look at the big picture, this entire time BIDU has been above the triangle has been an excellent opportunity from a positioning and risk perspective. Sometimes, we lose sight of the big picture and become what I call, "Lost in the lines", essentially micro-managing.

 The hourly BIDU chart has warned from the start of the breakout above the triangle that it was a false move, this divergence has only grown much worse to a 60 min leading negative, which is very strong.

 The 5 min chart shows a relative positive divergence as BIDU touches the support area around $144.

There's a 2 min positive divergence as well and it appears as if BIDU is already responding to the positive divergence after having touched the support area. I will be looking to add some equity shorts in  BIDU, I'd like to do that on some strength and I will leave some room for potential upside gains, but if you look at the big picture, there's really no reason that BIDU couldn't or shouldn't be shorted in this area, intraday strength or not as we are not talking about short term options contracts.

ES CONTEXT Update

As the bounce started, ES was undervalued compared to the CONTEXT model, allowing ES to move higher off the April 10th lows, I warned that this would not last, CONTEXT would flip and the model would be lower than ES, over the last 3 days we have seen that occur.

As you can see the model's difference continued to expand with the model lower than ES, with the recent downdraft ES is now slightly cheap compared to the model. This is another one of those ambiguities in which fair value has been reached in ES as the model rises while ES falls, the reason for the rise is most likely the EUR/USD intraday arbitrage in which EUR'USD is as mentioned, mildly supportive of upside, it means the dollar is not blocking the market form further upside on an intraday basis. Again, it is up to the arbitrage algo's whether they want to take advantage of that.

There's very little doubt in my mind that we are at a "close enough " level for this bounce and thus the reason I have started phasing in to equity shorts, rather than short term options trades.

One thing to keep in mind is if there is a SPY pin tomorrow ($140 being the optimum level, but really anything higher would knock out more of the numerous put contracts with large open interest), the market would do best to stage one last shakeout move, meaning a move down today would pull shorts in, if there were a significant move higher tomorrow on an options expiration pin, it would knock those shorts out as well.

Risk Assets Update

So far HY Corp Credit is starting to dip, it's not as bad as I would expect to see at a reversal, but that has often changed in a day, it is the one risk asset that is holding up fairly well.

The EUR/USD is still mildly supportive intraday of upside gains, whether the market arbitrage algos take advantage of that or not remains to be seen, but that is still there intraday.On a longer term basis covering about the last week, the EUR/USD is negatively divergent so the longer term bounce theory from April 10th is showing what we would expect to see, intraday there's still room though for some upside.

The $AUD is diverging negatively, it continues to do so, this is what we expected to see toward the end of the bounce and it is there, so that checks out. Intraday it is in line with the SPX, meaning there are no short term indications from $AUD of intraday market strength like seen in the EUR/USD.

Yields have diverged negatively as expected as the bounce moved higher, there is a little bit of an intra day positive divergence that is mildly supportive of intraday upside as the EUR/USD is.

High Yield Credit is where it should be.

The bottom line is when looking at the bounce from April 10th nearly all the indicators are now negatively divergent, meaning we are probably very near the end of the bounce move and a transition to a downside move.

The only issue left to resolve is the very short term timing of exactness and I don't think that can reasonably be settled until we see whether the market chooses to pin the overwhelming number of PUT contracts out there, it would seem it would behove Wall Street to pin those contracts, but as I warned this week, the closer we get to the end of this move, the more "Every person for themselves" attitude the hedge funds will take, "he who sells first, sells best".

As you can see over the last several days, my approach has been to phase in to longer term equity short positions, not options so much, while leaving some room in the risk management to be able to add on any further potential gains that could come as a result of an options pin tomorrow. I'm essentially covering my butt if the pin doesn't come through with exposure, but still leaving enough room to add to that position at better levels.

Trade Idea-CAT (short) and Large Cap analysis

Cat is the #2 weighted stock in the Dow-30 at 6.34%, only behind IBM. I'll probably be entering a partial short position in CAT when I have a spare moment in the model portfolio, an equity short. I have a feeling I will not get the best price, but I have to get trades in where I can considering I have more important responsibilities to my members.

So here's CAT, which is a follow up of the Dow post and Large Caps in general.

 CAT has a descending channel making lower lows/lower highs or better known as a downtrend. Since the April 10th volatility shakeout, the most obvious resistance line (the top of the channel) has been broken, there's you short shakeout-what we expected. A failure of this "head fake" move should give CAT extra downside momentum when it breaks back in to the channel and I suspect it will probably bust through the bottom channel.

 The 60 min 3C chart has followed the trend very well, it has gone negative at all the bounces in the channel and it is leading negative at the break above the channel. For 3C just to confirm the move, it would have to be higher than where the last red arrow starts, it is not, so this is what we expected, distribution in to price strength.

 The 30 min chart confirms the same as it goes negative in to CAT's bounce highs.

 The 15 min chart should show a sharper negative divergence and it does, CAT's 3C 15 min chart is now leading negative below where the bounce started on April 10th-again this is a huge negative divergence.

 Now, here's where it gets interesting and seems to back up the beginning of the DIA post, despite that 15 min chart driving me crazy. We have a short term intraday 5 min positive divergence here, this "could" very well be used in a move up tomorrow on the options expiration pin that if it goes as suspected, would see the SPY around the $140 area (at least as of yesterday's open interest).

The 2 min chart is showing a sharper positive divergence as it should being a faster timeframe. This seems to go along with what I laid out in the DIA post about there being 1 last run tomorrow on an options expiration pin.

I will be looking for an opportunity (mostly time) to start a position (short) in CAT, it won't be a full position as I would have to leave room to add on a potential bounce either today or tomorrow, but at least I will have some coverage and as the market is probably going to be moving faster and faster as we move toward tomorrow, it may be the only chance I get to start a position here.

This DIA Chart is making me nuts

First let me say considering the Spanish auction and the negative reaction, the miss in Initial Claims, the miss in the Existing Home Sales, the miss big in the Philly F-e-d, etc, I am surprised the market has taken all of this in relative stride, that's my emotional reaction. On the other side of the coin, I know that Wall Street runs their cycles and the bad news will be priced in after they are done.

However, even with the market holding up better today than it should be, even with yesterday's analysis suggesting the SPY will pin as many options contracts as possible near the $140 area, this DIA chart is driving me nuts.

 Since our bounce started April 10th, it has technically done what was expected in crossing the red trendline to the upside. I haven't looked at the DIA options chain so I'm not sure where a likely pin would be, but assuming the markets move together and the Dow follows the SPX to some degree on an options pin, then the Dow-30 might look something like this tomorrow (yellow candle), which would be fine for the reasons the market bounce/volatility shakeout was run in the first place, the higher they can move the market, the more shorts they stop out, the more longs they trap. That all makes sense.

This 15 min DIA chart though is driving me nuts, this is way more negatively leading divergent than the last 3 failed bounces. I'm taking this as a sign of market weakness and just how much distribution has actually taken place in to the volatility shakeout and how bad a shape the market is in, but in the past, I would call this a reversal point nearly every time, thus even with all the above mentioned, the chart is making me crazy.

I'm not saying anything more here than what I've said, I suppose this is more venting than anything, but this chart looks bad.

I'm going to look in to the Risk assets ad the large caps.

We have an HGSI Winner!

I got the email, one of our members played the trade very well and cashed out today!

I love it!

JAZZ Trade Idea (Short)

Here's another one, remember we don't want to chase, we want to see weakness and let the trade come to us on our terms.

First lets look at the long term or strategic view, then we'll look at the tactical set up.

 At first look, JAZZ looks pretty strong, there are some RSI divergences, one very recent followed by a breakaway gap on heavy volume. It would seem that something is changing in JAZZ, but it is a bit difficult to define from this chart alone.

 Add a linear regression channel and it becomes more clear. JAZZ early in the trend was moving in the top half of the LN channel, strength. After the first break of the channel, JAZZ never recovered that same momentum and was stuck in the lower channel until the most recent break.

 The daily 3C chart tells the same story, nice powerful positive divergences early on in the trend, through late 2011 and 2012, the divergence is leading negative.

 A closer look at the daily chart, JAZZ broke down hard on a high volume gap, since it has filled the gap so the gap is not a likely target. We also have a bear flag in April, actually a bear pennant as the consolidation is a triangle, volume confirms this. TA traders are looking for the pennant to break to the downside and continue the bear flag's implied trend. I don't argue with the bearishness of the bear flag, I argue with the break of the pennant, I believe it breaks up and shakes out the shorts before continuing down, so if we can short JAZZ in to the strength of the upside break, we have a pretty decent position.

 JAZZ 60 min 3C confirms weakness in the area of the most recent top formation with a leading negative divergence.

 The shorter 15 min chart shows a positive leading divergence right at the bear pennant, suggesting the expected break to the downside, will actually break to the upside first, shaking out shorts and giving us a nice entry on price strength to short JAZZ.

This is a VERY volatile stock and Biotechs are not always my favorites, you may want to check if they have anything in the pipeline coming up for FDA review, but based on the 3C charts, as we just saw with HGSI, it doesn't appear that way. Since JAZZ is so volatile, I have a 5 day trend Channel stop on it, that puts the stop near $50, hopefully JAZZ can break out to the upside and lessen that risk , $46, $47 or something like that would make the trade a lot more appealing.

If you like JAZZ, I would set some price alerts to let you know if it is moving in our desired direction.

USO Update

Yesterday I entered some USO calls on some positive divergence, the EIA report came in with a build, although I have no idea what consensus was. In any case, shortly thereafter my calls got smoked as USO tumbled.

Did I sell the calls? No. Am I being stubborn? No.

Here's why I continue to hold USO calls.

 Here's the 2 min chart with a leading positive divergence, stronger than yesterday's

Here's the 5 min chart with a leading positive divergence much stronger than yesterday's. This is why I continue to hold the May calls.