Qs tickle 49

It was a struggle, but the Qs hit our 49 target, before a modest anticipated retreat prior to the long weekend. It was a solid day, although the volume was a bit subdued. The Qs closed with a doji and have now flashed a 10/20 DSMA buy cross on a rising +.5 MACD. This signal should be good for at least 1 more up day, although at 49 we are at a solid resistance line, so I am prepared buy some QIDs for insurance and fight the good fight another day.

September has a reputation as "the cruelest month" and Adam over at the Daily Options Report noted the anticipation that September will be a volatile month, so gird your loins.

The VIX had a relatively slow day, with less than a 7% range, and closing on a long tail doji chasing a falling 10 DSMA. I can't read much from this pattern other that it doesn't contradict the Qs positive signals. The portfolio added some near Q/49s buy/writes this morning on the pullback.

Stock Traders Almanac

I've mentioned the Almanac several times in recent posts and received several e-mails from folks not familiar with it. Published annually for the past 40 years, the almanac provides a wide variety of statistical probability studies of seasonal, daily, hourly, etc. trading patterns on the SP500, Dow and Nasdaq. The typical day in the market trading profile based on 30 minute bars is worth the price of the book alone (p. 139). Some of the longer term expectational analysis setups have not panned out very well lately, but this is a study of probabilities, not certainties, otherwise the price would be a lot higher than $28. The 2008 version will be out in a couple months. or you can pick up a cheapo 2007 copy here that will carry till the end of the year.

This is an FYI post only..... I have no financial interest in this deal.

Qs show muscle

The curse of Thursday before Labor Day lives, but not for the Qs. Almost everything else was down . . energy, financials, gold, retail, housing, the DOW, the SP500, the IWM, but both the COMPX and the Qs (and SMH) managed to close in the green. Given today's overall negative market tone, the Qs are showing strength on increasing volume (first EOD volume finish above the 8 DSMA in 9 days). Historically, (my trusty Stock Traders Almanac) the NASDAQ has a 70% probability of of closing up the last trading day of August, and while I'm not betting the farm on this one (the Almanac has had less than stellar results this year), I think we will see Qs 49 before Qs 48. Of course, based on current volatility levels we could realistically see both Q49 and Q48 within Friday's range as risk managers bail prior to the long weekend.

The VIX had only an 8% range today, which it flashed at the open, then retreated, then clawed back up to close .50 off the high. This was an inside day hammer, with the VIX now fluttering around the 10/20 DSMA convergence, and still at the MACD zero line. The crystal ball is a little cloudy at this point and I'm reserving judgment on any likely next move until the day after Labor Day, which has a mixed history of performance.

Over the weekend I will begin a 4 part series on tells from NYSE and NASDAQ order flow.

What a surprise !

The markets did a complete about face today, performing absolutely the inverse of yesterday. Buying started strong out of the gate and never wavered for the rest of the day, closing just pennies off the high. It will be interesting to see if the market can hold at this level and avoid the curse of Thursday, which has been up only once in the last 10 years.

The Qs almost retraced losses for the previous 2 days and are poised back at the 50 DSMA and intermediate resistance and ready to launch a pre Labor Day assault on the 49th parallel again.
The VIX had another 10% day, accomplishing an abrupt reversal and closing at the MACD zero line once again.

We've got some news tomorrow, and that will doubtless provide the catalyst or damper for further market progress, although the more I look at market internals, the less I believe in event driven market performance and the more I believe in market manipulation. More on this over the weekend. Until then, the portfolio is now 85% net long.

VIX back to 20 DSMA

Qs volume picked up today, but few buyers appeared as the Qs retreated from the 50 DSMA to the 10 DSMA in a pervasive selloff. Both the volume and the selling accelerated into the last 2 hours, turning parabolic for the last 30 minutes and I don't think it's over yet. Both the RSI and the MACD are poised to fall further before an oversold signal flashes and we seldom get reversals at current signal levels.

The VIX made another 15 % jump today, blowing past the 10DSMA to close above the 20 DSMA. The frequency of these high volatility 10-15% daily moves has characterized August with fully 10 of the last 20 trading days showing 10% or greater moves. The MACD is now above the zero line and headed up so VIX 30 will be the next likely target.

This was a very weak day. The NYAD flatlined along .20 for most of the day before giving up any hope of a rally 90 minutes prior to close and finishing at a dismal .15.

The TICK was similarly weak all day, staying below the 5,20,3 MACD histogram zero line for all but 20 minutes during the noon hour.

VIX bounes on 6 week volume low

The Qs gave up some ground today, bouncing off the overbought 50 DSMA and doing so on the lowest volume in 6 weeks. 6% of the Qs total daily volume traded (down) in the last 10 minutes of the day and the selling can be expected to carry over into Tuesday.

As expected, the VIX retreated from the oversold lower band and rose almost 10% to close just off the daily high at 22.72 as it continues a move back to the 10DSMA.

The last 90 minutes of the market was decidedly negative with special virulence reserved for the last 15 minutes, punctuated with a closing TICK of -150 and a NYAD of .39.

Qs Jack-in-the-Box

The Qs showed surprising strength today, climbing to close at the daily high and at intermediate resistance. The Qs also closed at the 50 DSMA, a new 12 day high and at the MACD zero line. The fact that this was accomplished on the lowest volume in 30 days (88M) is not the only cause for concern.

The VIX continued its descent, now approaching the lower band and pushing through the MACD zero line. The RSI is flashing a solid oversold signal after today's action and , typically, we would expect a retracement (bounce up) at this level.

For those who are familiar with the Stock Traders Almanac, I note that they mention August 31st as the close of the shortest bear market in history which lasted 45 days and ended 8/31/98 after the S&P recovered from a 19.3% decline. If the market can sustain its current recovery, we may beat that record next week, however, Labor Day is typically a time for market volatility with next Thursday expected as a major threat, being up only once in the last 10 years. It will be interesting to see how the market sets up next week prior to the extended weekend.

Qs stumble; VIX oversold

The BAC move to prop up CFC had only an overnight impact as the pop fizzled at the Open. Woe to the after hours traders who paid up to a $5 premium on yesterday's CFC close in anticipation of a bigger pop today. The perception of a looming major financial crisis was evident today with the lack of market strength and/or direction. The markets seem poised awaiting the next shoe to drop.

The Qs strength couldn't carry though today after the Open, and after stumbling around much of the day, finished again at the 20DSMA on volume close to yesterday. Not a lot to note today in the Qs other than the overbought dinky top.

The VIX is flashing an oversold signal, still hanging 10% below the 20 DMSA.

VIX 10% below 20 DSMA

The Qs extended their gains today, still showing greater strength than the DOW, but accomplishing it on the second lowest volume in the past three weeks. The Qs are at the 20 DSMA. This is the 4th day up and the Qs are tickling the overbought band. After hours the globex is way up, presumably on BAC announcement to bail out CFC. This should create a large gap up in the morning and gap faders might take note of Tuesday's post.

The last 1 1/2 hours of the market showed consistent and sustained buying with upslope TICK and NYAD and significantly downslope VIX. Closing TICK of 841 is bullish.

The VIX has now retreated to close 10% below the 20DSMA. This is typically a signal of oversold levels, but these are not typical times. Lacking any intervening data, the BAC/CFC news will carry the markets flying in the morning, along with a continuing decline in the VIX. The question is will the gap hold?

One characteristic of market activity during the past month is that classic technical patterns have developed in a greatly accelerated mode. That is, MA crosses and RSI breaks that normally transpire over 4-10 days now occur in 1 or 2 days, ostensibly reflecting the elevated volatility. I suspect many traders, including myself, did not immediately catch on to the new warp speed paradigm of market dynamics, and were thus frustrated in the process. I also suspect that it's not over yet.

Qs close at 10DSMA

The Qs edged up to hit the 10DSMA today, unfortunately on lower volume than yesterday. The Qs did show more strength than the DOW, riding the whole afternoon session between R1 and R2 and closing strongly, again with none of the typical closing volume surge.

The TICK was interesting today ..... after running upslope 2 1/2 hours, it basically flat lined for the rest of the day, giving little encouragement to buyers.

The VIX has now retraced to the 20 DSMA and has reached support and short term oversold territory after a relatively low volatility day (lowest in 3 weeks).

The question is: was today positive (Qs) and (SPY), or negative (DOW)?

Based on Wednesday turnaround patterns, if we count today as negative, then tomorrow is more likely to be a positive day. That expectation is supported by the technical indicators, although as the VIX gets more oversold the likelihood of a return to selling looms and the current lack of volume argues for that scenario.

Filling the Gap

For those who prefer the excitement of playing gaps, Bespoke conducted an interesting little study on Friday's gap behavior that's worth a look.
Gap studies seem to have become very popular lately.
Here are a few recent print articles on the topic:
June 2007 Active Trader magazine: One Day Jumps - by David Bukey
August 2007 Active Trader: Opening Gap Trader - staff writers
January 2007 Active Trader: Gauging Gap Opportunities - by David Bukey
July 2007 Technical Analysis of Stocks & Commodities magazine:Laps and Gaps - Larry Connors
Also in July 2007 TASC: Premarket Prediction- V. Wang

Holding pattern

The Qs showed a doji today and the VIX had a wide range close low bar at the 10 DSMA. The RSI and MACD readings of the Qs suggest continued movement towards the 10 DSMA. As mentioned previously, that goal is a pretty good bet. After that.... the games afoot.

Volume was considerably subdued, the second lowest in the past 3 weeks. The previous low volume reading (6 days ago) was also accompanied by a doji that was the harbinger of 3 dramatic down days.

The markets may find renewed strength short term, but major reversals do not typically occur in a smooth slope and action in the financials today indicate that not everyone is buying the buzz. The dreaded W bottom (or variation thereof) is a much more likely scenario so caution is advised until the market shows real momentum.

Facts of Life

The above picture is, of course, Norman Rockwell's Facts of Life. Here are a few of them that you ought to be aware of based on Thursday's exciting trading activity.

NYSE Closing Summary
Trade Date 8/16/2007
Number of Issues..... 3,591
Advance-Decline Ratio.... 0.6
NYSE Trades ....8,908,020
NYSE Volume....2,989,836,240
NYSE Dollar Volume ....115,188,118,914

Retail Buy Trades ....152,848
Retail Sell Trades ....204,524
Total Retail Trades ....357,372
Retail Buy Volume....53,008,213
Retail Sell Volume.... 76,575,492
Total Retail Volume....129,583,705

Program Trading
Index Arbitrage Program Trades ....576,924
Non-Index Arbitrage Program Trades ....6,231,010
Total Program Trades....6,807,934
Index Arbitrage Program Volume ....111,238,364
Non-Index Arbitrage Program Volume ....1,534,370,009
Total Program Volume....1,645,608,373

NYSE Broker Volume Top 5
Nasdaq Execution Services.... 794,915,984...... 19.70%
Goldman Sachs Group....339,484,455....... 8.40%
Merrill Lynch....269,748,370....... 6.70%
UBS....213,478,481....... 5.30%
Morgan Stanley & Co....205,736,575....... 5.10%
Lehman Brothers Inc....195,926,832...... 4.90%

.

Program trading accounted for 55% of total NYSE volume.

Retail trading accounted for 4% of total NYSE volume.

Program trading accounted for 76% of NYSE trades.

Retail trading accounted for 4% of NYSE trades.

These are typical readings, although retail trading is normally 5-6%. If you want to track the NYSE data on a regular basis, go to the NYSE site. Lots of free data and some pricey real time databases for the pros to help them develop program trading algorithms to challenge your skills. (Also see August 10th post).

VIX touches 10 DSMA then heads back up

Amazing how quickly this market turns ... in large part thanks to the overnight FED intervention to lower loan rates .5 percent. And they decide to do it on options expiration. What a coincidence! All the trading gurus that proclaimed Thursday the bottom are now high-fiving and yucking it up. Enjoy it while it lasts.
The Qs shot out of the gate at the open, along with the rest of the market and after an early retracement, chugged along back up to close solidly just off the high of the day, with no Friday afternoon fade. Volume backed off a bit to 223M, which is at the 20 day median.

The VIX is considerably harder to understand. After opening down 6.50 from Thursday, the VIX rose for 2 hours as the general market declined, then basically went into a funk for the next 3 hours as the market chugged up. Then at 5 minutes to noon, the VIX exploded up .80 while the rest of the market was basically dead. I'm still looking for an explanation for that phenomenon and the subsequent behavior of the VIX as it actually continued to rise into the close. VIX got down to the 10 DSMA in one day from a level yesterday that looked like a long, long ways off. Now that the market makers have had their way with the rest of us it will be interesting to see if we get a follow through on this strength Monday or whether VIX will head back to the upper bollinger band. This seems more like a probability than a possibility as the VIX finally closed at 29.99, more than 10% above the 10 DSMA.

VIX hits 37.50 but closes down 6.70

The Qs sailed right through the 200 DSMA at the open (45.40), continuing down to 44.40 before showing a 5 minute bar hairy bottom at 10 (pst), finding a tenuous base and cycling up to finish at 45.62. The 1.52 daily range and the huge volume (362M) only begin to hint at the wild ride that traders experienced today. It was even more frustrating for Schwab clients when the entire SSPro trading platform, the website and the phone lines went dead for about 20 minutes today around noon, and while I could get quotes from other data providers I was unable to access my account and make trades. NOT A HAPPY SITUATION, SCHWAB and I can't wait to talk to Chuck about that.

Once again the VIX was the story.... hitting 37.50 at one point with the DOW down almost 350 points. The range on the VIX today was 7.06 . . . that's a very big number! The VIX is still riding the upper Bollinger band and is not exteremely overbought after today's retracement. When the VIX does retrace to the 10 DSMA, then it's time to gird your loins and prepare for renewed volatility.

I'd like to bang the drum along with our friend above and a lot of the trading gurus, but being risk adverse I'm withholding judgment on whether this was the bottom for a few days. I've got a hutch that the VIX may make another run at 37.50 before we see a real turnaround as we are beginning to see some sector rotation in the face today's action. VIX redux may not happen until next week and I'm looking for select setups to profit for that eventuality.

Hair Raising VIX

The Qs continue to falter, dropping through support at 46, closing on the low and now headed to the 200 DSMA at 45.30 on increasing volume unless we get a breather here soon.

The story, of course, is the VIX, now at a 4 year high after hitting a stunning 31.76 today and then pulling back just a tad for the close. The weekly VIX chart is attached just to show how some of these parabolic short term VIX doubles have resolved in the past (May 06, March 07) although the current MACD readings suggest this is something different as the VIX remains only modestly overbought.

Loose Snake

Looks like the spitting cobra mentioned on Monday did get out of the bag, and it wasn't pretty. Next stop for the Qs is in the 46 range and the weak indicator signals along with the NOT oversold reading argue for that target to materialize. Whether 46 will provide support, or just a jumping off point to lower levels remains to be seen.

Contrary to the previous post suggesting expiration week might provide lower VIX readings, this has not come to pass, so far. With retail, housing, financials, energy and gold all taking major hits, it's a real leap of faith to believe the markets can turn around and hit new highs any time soon. The VIX, despite the current lofty levels, is not in overbought territory, and while continuing to give hints that a retreat to the 10DSMA is imminent, these initial spurts have turned into wide range head fakes with no indication that this pattern is about to end. I continue to sell near ATM/OTM calls on the marginal rallies and buy back on the slides, although there is not much juice left in these with 3 days to expiration..

Twisted Markets

Still trying to make sense out of the current volatility? You're not alone. Some of the most savvy and experienced traders are hard pressed to find order in this market. A few have attempted to formulate a game plan, and Larry Connor's recent post is worth a look. I have followed Larry for years, before he became the main man at TradingMarkets.com. His early statistical analysis works on trading, including Advanced Trading Strategies and How Markets Really Work, are great baselines for understanding the basic nature of the markets and have provided the foundation for many system traders. Much of the info on TM is subscriber/fee based, but there is also lots of free stuff, including the commentaries.

VIX hammer

Regarding my little WMIH trade, looks like the 37.50s were the place to be, not the 40s. Nevertheless, that was a good 3 day play and I will close the trade, wait for WM to rebound some, and then probably sell the 37.50s. The financials are getting slammed again......

The big breakout this AM turned out to to be a bust and I sold ATM Sept. calls twice as the Qs approached 47.80. Seems like I'm in good company as Clueless found a similar trade attractive. The Qs finished with a short doji, and although up for the day, are not looking all that cheery on the lowest volume in 2 weeks.

My consideration that the Qs might actually get back to the 49 line is based on the VIX, which has now retreated from wildly overbought territory to just overbought. While my first reaction is to play a return to the 10DSMA within a day or 2, the VIX has been like a cobra in the bag lately ... every time you think things have quieted down and look in the bag, it spits in your eye.
Based on the newly resolving BB pattern I am inclined to think that 20 might be the new 10 for some time to come (when and if it ever gets down to that level). As always, caution is advised. Check the Vix and More sidebar on the right for typical expiration week dynamics, although this doesn't quite qualify as a "typical week"

WAMU (WM): An option pricing lesson

Above are the 1 & 2 day 10 minute charts of WM and the 1 day 1 minute chart. The 2 day chart shows where WM opened and closed on Friday relative to Thursday.

My goal was to sell some of the Sept. 40 calls (WMIH), to pick up some premium. Based on the fundamental weakness (and perceived risk) in the financial sector, the odds of WM rebounding above 40 in the next 5 weeks appears slim (this is my opinion, only .. see disclaimer sidebar).

At Thursday's close WMIH was trading 75/85. I had hoped to get a pop up on Friday, but the frogs got loose and as we all know Friday's open was frightful.

WMIH opened 50/70 Friday. We got an S2 bottom kiss at 9:42am (34.52), then reversed at 9:50 and climbed to 36.00 by 10:08am, where WM formed a squat bar for the next twelve minutes. I know the market makers like to play this thing .. one favorite game being to lift the ask just before reversing down.

At 10:15 WMIH was 75/85, so I entered a Sell order at .90 (just trying to play the game, as we had been squatting for 8 minutes and were due for a turn).

The spread went 80/90 at 10:17 as WM hit 36.04. I adjusted my price to .85 and got a quick fill, and the spread immediately dropped to 75/85. I decided to sell some more if I could get my price and entered a new .85 order.

Over the next couple hours WM slowly climbed to 36.45, but my order sat unfilled as the spread actually declined to 70/80.

WM got a quick sell off 12:30-12:50 with the spread 65/80.

For the next 1/2 hour WM climbed up again and at 1:38pm, with WM @ 36.22 and the spread 75/85 I dropped my Sell order to .80 and was filled at 13:43 with WM @ 36.00. Now that was weird .. the price went down,but the option went up.

Over the next hour WM retraced back to S1 (35.64) with a 60/65 spread.

For the final 90 minutes WM again climbed to make the high of the day (36.53) at 3:35, with the spread 65/75.

WM then sank to 36.00 at final close with the spread 60-65. Final adjusted close was 35.75 so the adjusted spread is probably 55/60.

Bottom line. .. I managed to sell the WMIH close to my target relative to the market. The market makers have a bad habit of changing the volatility value on a whim, with resultant option spreads to fit their pricing models. Many times these pricing models are difficult to decipher or to foresee ... which is what makes trading complicated (see previous post for attitude adjustment tool). I suspect we will see the value of WMIH decline rapidly for the next week, regardless of WM's performance. My experience is that calls tend to be relatively expensive the week before expiration and relatively cheap the week following expiration. This is part of the market maker game to make rollovers a bit more expensive for you. At the same time, mid-expiration spreads are typically smaller than either the week before or week after expiration.

VIX means volatility

For those traders who are feeling a bit battle weary, confused, dazed and/or paralyzed at the trigger, I have included a nifty little attitude adjustment tool to help you regain your otherwise finely tuned trading brain functions. I have personally used it recently (and frequently) with some success.

As foreseen by everyone with a globex feed, the markets opened with a thud today and the VIX promptly popped up to 29.84 in the first 18 minutes, giving up some ground around midday and then running around 29 for most of the afternoon session. VIX and More has some interesting insights on today's VIX action and Bill helps explain how the VIX could stay elevated in the face of a rising market. For those (like me) whose lives center around watching 2 minute bars develop, there were definitely some strange divergences between the VIX, TRIT and NYAD bars, which are normally closely correlated in a binary fashion. I suspect at least a portion of this squirrelly behavior was the product of option market makers setting up for expiration week and on Saturday I'll post an in depth look at how this little game played out in WM (luckily I had my handy head banging tool close by).

The Qs actually held up pretty well after the overnight tumble and stomach churning first hour. The 3/7 DSMA was a touch, but not a cross, so I am still net long my big Qs position, now hedged 30% @ 46, 50% @ 47 and 20% at 48. I don't intend to load up on any more of these prior to expiration and am waiting to see how the current doji resolves. (Same EOD pattern for Qs and VIX). The tactical buying cutoff was really Tuesday .. after that theta accelerated, (regardless of the VIX) and each subsequent day until expiration is progressively less attractive due to the diminishing payoff. For now, I'm in a holding pattern.

VIX at new high

Just when you thought it was safe to go back into the water, this happens. Above is me (donut) and Mr. Market (Jaws).

That "one problem" I mentioned yesterday turned out to be a real doozie. The volume that was missing yesterday was back with a vengeance today and it was all selling.

The 3/7 DSMA cross is on the verge of recrossing as the Qs closed 10% below the 5o DSMA, although relative to the rest of the market the Qs held up well until the close, when it collaspsed on high after hours volume.

The VIX was the story today, with a 3 point gap up at the open, then clawing up to a new intraday high to close right at the upper bollinger band, while showing of no signs of being overbought and the MACD histogram now above the zero line.

Technically, these indicators do not bode well for the market and the globex is extremely negative (-1000)+ at 9pm pst. We may get a drop and pop at the open, or we may just get a big drop, so extreme caution is advised tomorrow. Given the unpleasant news that has been popping up lately and the market aversion to the associated risk, we may see an afternoon sell off as traders opt to fore go weekend news and unpleasant surprises by exiting the markets.

VIX hits 20 DSMA

Two positive indicators today.

The Qs 3/7 DSMA cross was solidly up, confirming our buy signal yesterday. With the pullback in the last hour, we are now set up to continue the rally tomorrow.

The VIX came down to the 20 DMSA precisely. I was surprised that it happened so quickly, but the VIX is now showing a complete rollover with the MACD histogram advancing below the zero line. Again, the close was not at the lows, so the setup is for further VIX decline, with the 16 range possible, but the 18 range more likely before a short term retracement.
Carl Futia has some interesting charts today. Take a look. His July 30th post on the domed house pattern was dead on, and he's looking for the next turn around Sept. 15th. This weekend I'll post some VIX studies that support that projection.

One problem is that most observers believe we have seen the bottom (or quick double bottom) and are now headed back to 14,000+. The sustained level of buying today of pretty much everything supports that notion. The TRIT and NYAD both stayed solidly bullish all day, with the exception of that lighting sell off (and you think the markets are random?) so that the generals could run the stops and pick up some cheaper inventory. However, volume today was not exceptional, which suggests that not everyone is buying into this rally. Any bad news, or other perceived excuse, could cause a little panic here if buying dries up and reverses. The wide range days we have seen lately may subside for several days in setup for next week's expected expiration rally.