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Lower open ahead

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Stock futures paint a lower open after last night's earning's warning from JP Morgan (NYSE:JPM) $21.54 and less than robust earnings from software maker Oracle (NASDAQ:ORCL) $9.03.

Stock futures did rebound from their morning lows after economic data showed the U.S. trade gap shrinking to $34.6 billion, as exports increased for the fifth straight month.

Exports of U.S.-made goods and services rose 1.3% in July to $83.2 billion, the highest in a year, while imports fell 1% to $117.8 billion.

June's record trade gap was revised lower to $36.8 billion from the $37.2 billion estimated a month ago.

In a separate report, the Labor Department said consumer prices rose 0.3%, which was slightly above economist's forecast for a 0.2% gain. August's 0.3% rise in consumer prices came as energy prices jumped 0.6%. The core rate, which excludes the more volatile food and energy components rose 0.3%, which was also above economist's forecast for a 0.2% gain.

After this morning's CPI data, December Gold Futures (gc02z) jumped $1.80 to $319.90.

S&P futures are back near their lows of the morning and trading down 8.0 points at 864.50. NASDAQ futures are down 8 points at 889.50 and Dow futures are off 68 points at 8,110.

Fair value for the S&P 500 today is $1.40. That price will not change during the session. HL Camp & Company has their computers set for program buying at $2.20 and set for program selling at $-1.60. Fair value for the NASDAQ-100 today is $5.00.

Sell programs may have been an alert to failed rally

In last night's Index Trader Wrap at OptionInvestor.com, I discussed some computerized "sell programs" at that morning's premium execution level of $-1.32 may have been a trader's alert that something was up, or should I say down, as it relates to the morning rally in the S&P 500 Index (SPX.X).

Here's a 5-minute bar chart of the $prem, which is simply a tick- by-tick measure of the premium levels that are given out each morning in the 09:00 EST Update and below the $prem chart is a 5- minute bar chart of the S&P 500 Index (SPX.X).

I only found this last night, as I, the lazy trader, didn't set my premium alerts yesterday on my q-charts trading station, so I had no clue that a bunch of sell programs were being implemented. My loss is not getting an aggressive bear's short, in the SPY around $90.50, which ended up closing at $87.81 by session's end.

However, subscribers have always "wondered" just how computer generated buy/sell programs can impact trading and perhaps give a "heads-up" to price action in the SPX and sometimes dictate broader-market action.

Sell Program levels and SPX comparison - 5-minute intervals

Yesterday morning, HL Camp & Company had their computers set for program buying at $2.30 and set for program selling at $-1.32. To "visualize" these level, I've placed horizontal levels at both. Wow! Buy programs were in at the open, but at the 09:40 bar, a sell program was generated when the upper Premium of S&P 500 futures ($PREM) hit $-1.32. The chart below shows the S&P 500 Index (SPX.X) taking a -3.15 point loss in that 5-minute bar. Then, about 10-minutes later, another sell program was triggered as $prem hit $-1.32 again. 10-minutes went by, then another $prem was hit at $-1.32. See how the SPX continued to fall with each sell program.

Then, almost as if for "good measure" another sell program was generated at $prem of $-1.32 at around 10:30 AM, right near our upward trend on the SPX, as if to say "your going to break it, and here's a sell program for good measure." Index traders that have followed our recent Index Traders Wraps all of a sudden begin to understand a potential "difference" between aggressive and conservative trend. Kind of "weird" isn't it?

Then all the way over to the right, bears gave bulls what looks to be one last punch in the mouth by session's end with a final sell program at around 15:40 (03:40 PM EST) just before the market closed for trading.

All of this is a "little late" perhaps, but it's a good thing I didn't profile any bullish trades in the market monitor at OI this morning.

While "too late" for yesterday morning, its not too late for the future.

In our Index Trader's Wrap from Monday evening, we noted heavy open interest at the SPX 900 strike in both puts and calls and that sure seems to be a "fish" level where the first sell program was triggered.

Now, the SPX 08/05/02 low close near 835 has been a bearish swing-trader's target of mine since the evening of 09/11/02.

Now I'm going to make another open interest observation where we see the third most heavy amount of open interest at the Sep. 950 call strike and fourth most heavy open interest at the Sep. 800 put strike.

Since the SPX is well off the 950 level (this doesn't mean it can't trade there by Thursday), I'm going to do this.

With a target of 835 SPX, I want to be able to use the above $prem observation from yesterday's trading, to perhaps guide a bear in his/her bearish trade.

While I don't deem it PARAMOUNT that a trader has to use buy/sell program levels to trade successfully (heck, I never really used this tool until the last couple of months) a bunch of buy programs near 835 or 800 (just in inverse of today's sell programs near 900) might be helpful.

Am I saying the SPX is headed for 800 by Thursday? No sir. These OEX option traders in the pits will do their best to try and make sure they squeeze out any gains they can from the Sept. 800 put buyers and naked sellers.

As such, I sometimes like to take the mid-point of strikes, to try and figure out a potential level where the SPX might try and settle on Thursday's Index expiration. The difference between 800, which is certainly "in play" and most heavy open interest of 900 has 850 right in the middle.

On my trade station, setting alerts at the $prem levels for the next several days, along with SPX alerts at 900, 850 and 800.

Then if I start getting some correlative alerts between $prem and SPX levels, it may guide me on what to be doing.

Even though my bearish swing-trader's SPX target from last Wednesday's Index Trader's Wrap was 835, I'm not sure a bear should be willing to try and squeeze out 15 SPX points if 850 is traded and we start seeing some "buy program" execution levels being triggered.

At the same time, if 850 is achieved and we see some "sell program" execution levels traded, then thinking could turn toward a potential 835 test.

Again. This "sell/buy" program execution level stuff is just one tool, that a trader/investor may use from time to time to help them make some decisions during a day.

It may have helped a bull stay out of trouble yesterday morning, and may have kept a bear in his/her trade just a smidge longer despite a higher open after Monday evening's Iraq news.

Anyway. I've gotten a lot of e-mail from subscribers about these "buy/sell" program trading levels and maybe this helps us understand how they came into play and may come into play in the future and be useful to a trader.

I'll put this in the "Bailey's Basics" section of the web site at both premierinvestor.net and OptionInvestor.com for review.

Jeff Bailey
Senior Market Technician
Option Investor

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