I just want to address a few emails that I have been getting a lot of, if you know me, although it may not seem like it, you know that I don't use leverage unless I have to and I try to use the minimum amount needed for the job, I also have a very high standard for leveraged trades.
This is exactly the kind of market where people fall in love with options, at least the way we have been trading them and then conditions (which are transitory right now and lend themselves to options-increased volatility, choppiness, increased ATR, etc.) change and all of the sudden options trades are no longer working the same way, then before you know it you are betting what's left of your portfolio on a Hail Mary option trade to "Hopefully" get back in the game and the it's over-your options portfolio (or main portfolio) is gone.
Please do not romanticize options, there's a time and a season for all kinds of trades, if you match the asset to the type of market you are in you are always going to do better than sticking to one rigid plan, you also have to understand the plan/market/trade you are in.
In any case, lets try to take a more complete look at the market, some things probably won't be evident until later today as more and more options trades settle and the market can start acting like itself rather than a pin machine.
Speaking of which...
Two things to notice on the intraday NYSE TICK, the first is something we see often during an options expiration pin, very few stocks are moving because they are in the pin range like the NASDAQ for example. The TICK range of +/- 750 at the extremes is a very mild market with very few stocks making any moves, you can also get a rough feel for market direction, although very subtle.
As of this capture, the TICK was slightly more positive than the SPY, but both were nearly totally flat. There are certain options trades or writing options that can benefit from this action, but in general, I don't want to have much to do with it, it's an excellent time to figure out what's going on in the flat trade
as flat trade is dangerous trade.
We wanted to see the Q's above the 5min/50 bar m.a. and they did that, bit then went very flat, we were out of the calls well before we were caught in that volatility trap that eats option profits, even if a minor new high is made.
No when to use what indicators... The flat trade is not good to use trend following indicators like MACD, RSI is not my favorite, but a clear negative signal like this shouldn't be dismissed. The Stochastics pin is important to watch, generally in ranges you want to use Oscillators like Stochastics and in trends you want to use indicators like MACD.
The market averages are telling us what? *(Most of these were captures 30 mins or more ago so there can be some significant changes, I'll try to let you know).
DIA 1 min is showing the option trade amidst volatility, the green square is an area that I wasn't sure what it would turn in to, turns out just more choppiness and no useful signal other than the bigger picture that is already in place.
The 5 min chart shows NO INDICATION OF A POSITIVE TREND, it simply shows clearly the option trades we have been taking as the huge volatility is obviously controlled, likely as a last minute positioning mechanism.
The 60 min DIA chart shows the high probability of the Dow's direction for the next move. From left to right it shows the negative divergence at the introduction of QE3, then volatile lateral chop for about a month as indicators continued to fall apart and then the drop in the market despite it getting exactly what it had been screaming for many quarters-essentially since QE2 stopped. You see the positive divergence and accumulation as I have pointed out numerous indications of the November 16th lows that started the new cycle (remember a cycle consists of 4 trends, I believe we are at the tail end of trend 3 and starting to bleed in to 4 with the recent increased volatility).
Speaking of volatility, Trend #1 which was predicted before it started actually did serve a purpose, it had no volatility, it had no ATR, it made huge headlines and it sucked dumb money back in the market after their increasing exodus from the market the last year and a half. Sentiment indicators everywhere are at extremes, as I always say, "We rarely know why when we get the signal, we can be sure as to why, but we can't make money and be sure". Now we know why, simply look at the trend of the 60 min chart over the last 5 weeks.
IWM intraday 1 min still remains in line with price.
IWM 2 min still remains in a negative position.
This 15 min leading negative remains in the same position as the IWM moves through the increased volatility and ATR, this is a very characteristic and dangerous time in the markets, this is one reason why option trades are VERY short in duraation, especially long ones.
QQQ 1 min leading negative means 1 of 2 things, consolidation or correction, on op-ex you can guess which one wins at least until later in the afternoon. A 16 cent range!?!? If that's not a pin, I don't know what is?
The 3 min chart gives a better idea of what is going on behind the scenes, this is why flat ranges are so dangerous, you assume nothing is happening when it is one of the busiest times for institutional money.
The 5 min chart is quite clear about confirming the same.
SPY 2 min shows the short term volatility movement, there's a little more of a triangle forming in the SPY so there's an increased chance of some kind of head fake move, it may be useful as a tactical entry for something like SPXU long if it comes to pass, I'm just noting the price formation.
SPY 5 min during the volatility stage, you can already see a move that would be considered a good tactical opening for SPXU long or whatever asset you chose to short the SPX. It may turn out that there's a late day signal after most of the open interest in options is settled, that there's a decent Put trade available, we tend to find them late in the day on weekly option expiration Fridays, from the looks of the SPY generally right now, it would be near the top of my list along with the IWM which would have more to prove to me as a pick.
SPY 60 min, again, understanding the signal, the trade, the correct asset to use is essential. Using longer dated puts for this signal would be a disaster for example, phasing in, using either leveraged or non-leveraged assets is more reasonable as well as risk management.
I don't care how many times I have to say it, Tops, Bottoms and Reversals of Either are ALWAYS extreme moves with heavy, exponentially increasing volatility.
Futures...
ES 1 min is clearly negative, it continues this way.
ES 5 min which I was wondering about, is turning to the negative as I had hoped.
NASDAQ futures 1 min are clearly negative as they are pinned in place.
The 5 min is turning negative as I had hoped.
Risk Assets...
CONTEXT for ES is at a -20 differential, the largest I remember seeing, other than the Q's which we picked perfectly as the Call position of choice, the rest of the market is not making what would be in my view, extreme moves, stronger than usual, but not anything I'd write home about, this means risk assets are REALLY heading the exact opposite direction.
Even the SPY arbitrage model is showing the SPY rich to the model, no doubt owing to op-ex pins.
Just so we have perspective, the 3C chart for High Yield Corp Credit is about as ugly as the dislocation between it and the SPX, this 30 min chart shows the positive in November, right at the 16th lows in fact as risk assets move with the market as they should, the leading negative divergence below even the 3C lows of the 16th of November seal the fate of credit, even with a potential rally in credit.
This is the potential rally, the 15 min chart going leading negative as it turns from the SPX correlation and a leading positive now, still the dislocation is too large to overwhelm as is the longer term chart divergences and even the 15 min chart's if it is scaled out to it's longer term trend view.
This is the intraday HYG vs the SPY, not very good.
And the trend since essentially the volatility picked up so the smartest of smart money runs fast and hard as volatility which is always present at tops turns up, what does that tell you about the nature of volatility near tops? What does that tell you about the kinds of short term trades you take and how they should be managed? The same as 3 weeks ago or differently?
Junk Credit rallied perfectly with the market while it was in stage 2, when stage 3 started Credit took off the other direction, it is below the Trend 1 lows.
FCT as a good indication always is showing a similar indication.
Volatility...
After the but signal and the Bollinger Band squeeze, I said price would likely loiter in the area crossing above and below the mid point, it has, but it won't for much longer.
VXX intraday just so you know what is being done with what in these flat ranges.
UVXY-simialr, except leveraged, with a positive, a smaller run and a much larger leading 60 min positive, this fits with the VIX Bollinger Bands scenario.
Currencies-You never know what the catalyst will be when you first see these divergences, rarely do you know how they will act, but it seems clear currencies as I first realized in the EUR'USD will be most important as the carry trade baskets will likely be that which sends the market down VERY fast.
You already saw the pairs, now each individual..
Euro has recently seen weakness, Draghi made that worse.,
The yen went from clearly down to flat to the first day moving up-this is bad for the carry and market.
And the $USD up is almost always bad for the market as well as the carry trade basket as it is not a favorite on its own.
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