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Recent SUBSCRIBER E-MAILS that I will answer, and riff on, today are of possible general interest relating to trading.

SUBSCRIBER E-MAIL:
"You write as if the Q's & Ndx were separate entities. Are they not "joined at the hip?" Since Microsofts special $3 per share dividend, the NDX price is usually within a point or two of this formula:

1.015 x 40 x QQQQ price = NDX price.

Do you agree with this relationship and if so is there any event on the horizon that might change it?"

RESPONSE:
I do tend to analyze Nasdaq 100 (NDX) charts and the QQQQ Nas 100 tracking stock to some extent AS IF they were/are separate markets. And, of course as you point out, they are 'joined at the hip'.

Yesterday (12/13), the Q's closed at 42.045, so plugging this number into your formula results in a 'theoretical' NDX price of 1707, which (as you say) was within 2 points of the 1705.7.

I tend to compute the ratio of QQQQ to NDX from time to time, such as on the weekly close, if I want to come up with a 'theoretical' QQQQ price. Since the Q's 'track' the NDX, I tend to look at the Index of the Nasdaq 100 stocks first, as I am usually am most interested in how closely the Q's are tracking its underlying index on any given day after that; e.g., the NDX 12/9 close of 1692.6 divided by the QQQQ close of 41.7 = (a ratio) of 40.59. Yesterday's (12/13) NDX close was 1705.77. If I divide last week's closing ratio of 40.59 by the 12/13 NDX close I would expect the 12/13 QQQQ close to be approximately 42.02; it was 42.04.

The implied question here I think is why analyze each chart as a separate entity? Mainly, its just easier to calculate support and resistance for QQQQ in terms of what I see on the QQQQ chart rather than calculate it off NDX support and resistance numbers. Of course these levels are going to be very nearly the same.

In answer to your stated question, I agree that the formula you give is the right approximate relationship for computing QQQQ prices based on any given day's close in the Nas 100 NDX Index.
And, I don't see anything that will change the NDX/QQQQ relationship anytime soon; e.g., such as a special dividend as was the case of Microsoft. However, I don't always have my ear to the ground on what an NDX component stock might have up its sleeve.

The other aspect I would mention about tracking the charts separately and why, on any given day, there might be some variation between QQQQ and NDX prices, at least for a short period, is the effect of stops or buy or sell stop-loss orders that might heavily in place above or below a significant support or resistance level for NDX. While arbitrage activities will always tend to keep the QQQQ price within an equivalent relationship to NDX, we don't have completely 'efficient' markets at all times.

S&P futures premiums sometimes get significantly greater, or significantly less, than its theoretical value due to overly bullish or bearish short-term EXPECTATIONS for the trend of the market. Arbitrage-related (long stock versus short SPX futures) wouldn't occur without these occasional above 'fair value' futures to 'cash' premiums.

QQQQ may also get 'ahead' of or 'behind' the underlying NDX index price at times during a trading session. The index (NDX) is simply tracking the 'last' price of the 100 stocks composing it. (The largest stocks are weighted more of course as is true of any capitalization weighted index.) So, at times, especially intraday, QQQQ may rally or decline ahead of the underlying NDX index either due to bullish or bearish EXPECTATIONS (e.g., based on a Fed announcement, etc.) for the market or due to STOPS being 'run' before arbitrage activities bring QQQQ back in 'line' with the underlying NDX index.

TRENDLINES on the two charts, NDX and QQQQ, should show potential technical support and resistance levels in the SAME area or the same level, per the example provided in the charts that follow.
If the trendline you've drawn on the QQQQ chart doesn't reflect the equivalent NDX trendline as far as where it intersects, you likely need to re-draw the QQQQ trendline; or vice-versa. The fact that might be slight differences in the way you MIGHT draw the different trendlines, also reflects slight variations in the way the two instruments trade.

NASDAQ 100 (NDX) and QQQQ DAILY CHARTS
There are two levels in the Nasdaq 100 (NDX) in the following chart that I've highlighted as important technical support as noted by the green up arrows. One is at the 21-day moving average, an important 'benchmark' for trading options; this versus longer term investing in stocks, where the 200 day moving average is perhaps the key benchmark average.

The second lower arrow highlights an even more pivotal technical support at the up trendline, which is an extension of the straight line connecting three lows in Oct. This trendline is an example of an 'internal' trendline; one drawn through the MOST number of points, rather than only through lows that are only the lowest lows in this case. The trendline bisects or 'cuts through' one low. Never mind, this trendline is the one that counts as we're looking for the PREDOMINANT angle of ascent.

This trendline's current intersection as noted at the horizontal (level) dashed line on the chart above [directly underneath today's trading (not shown)] is at 1633. If 1633 was pierced, especially on a closing basis, the current intermediate-term UP trend would be in question.

Use of Friday's (12/9) NDX/QQQQ numeric ratio of 40.6 would see us divide 1633 by this number for a result of 40.22. You'll see on the QQQQ daily chart that follows this one, how close this is where the QQQQ up trendline intersects.

You may say that this is no big deal, but it helps to 'confirm' that you have the 'right' (i.e., equivalent to NDX) trendline support point on the Q's; and, the level where QQQQ sell stops may build up. You'll note on the QQQQ chart below that the trendline intersection is at 40.25, or within a hair's breath of 40.22. I actually re-drew my QQQQ up trendline when I saw that I had not drawn this trendline in just the same way; i.e., as an internal trendline connecting the most (3) number of lows.

The other very significant reason I also chart QQQQ separately, rather than just transposing support and resistance levels on the charts, is for the times that subtle, but key, differences are seen with the Relative Strength Indicator ('length' = 13) or RSI and the On Balance Volume Indicator or OBV.

Occasional good buy or sell 'signals' are given when the RSI makes a higher low at or near a possible bottom, when prices are still trendline down or moving sideways. If you go back up and look at the first chart regarding RSI versus price action at the point where the RSI line is circled, there was a second RSI low point about equal to the first low; meanwhile NDX was still trendline lower. A possible bullish 'divergence', but not as clear cut as the bullish RSI divergence noted on the QQQQ chart immediately above and highlighted by the light blue circle.

This was a subtle difference but signs of a bottom or top are often subtle, but potentially rewarding when you buy calls or puts before an OBVIOUS trend reversal.

The study of volume is a ancillary technical study relative to the trend and possible trend changes. Is volume expanding in the direction of the trend? It should to 'confirm' the price trend. OBV is a specialized study of volume that highlights when the trend may be shifting direction. We are concerned with the DIRECTION of the OBV line only; whether it's going up or moving down.

In the A and D areas circled in the OBV line above there were upward shifts in the direction of the OBV line just prior to when it became obvious by, for example, a breakout above down trendlines. In the B and C areas, the reverse was true just before or around the time of the onset of corrections. Again, subtle changes, but indicator changes often 'confirm' what we're seeing in price action.

SUBSCRIBER QUESTION ON TRADING DIFFERENT INDEXES; ALSO, MY 'SENTIMENT' MODEL
"I trade OEX index options and a friend recently asked me why I trade OEX instead of the S&P cash index options? I said well......'I don't know, that is what I have always traded for the indices'. He asked what is the advantage from one to the other. Again I replied 'I'm not sure'. So, my question to you... is there a difference or advantage from one to the other?

[Part 2]
I have recently changed software providers from Qcharts (which I had for about 6-7 years) to Aspen Graphics. The 2 main reasons I went to Aspen is for the Tom DeMark TD Sequentail study and YOUR call/put study that I can get through them. Plus a few bells and whistles that the Aspen program offers.

I position trade OEX options for the bulk of my trading. While I am waiting for the better OEX trades with good risk to reward ratios I also trade stocks, stock options and the S&P emini. I now can have Aspen write the formula to YOUR call/put indicator. YIPPIE! :).

The formula is: CBOE daily equity options ONLY (NO index options). You divide the equities call volume by the equities put volume to get a daily value, correct? Then you add a 5 period simple moving average to the study, correct? I need to give all the info correctly to Aspen, that's way I want to make sure I have the correct info. They also asked me if I could send them a "current chart" with the study on it to help them. Leigh could you please send me a snap shot of your chart with the study for them?

I told them that you use TradeStation and the formula was written for TS. Aspen's formula writing is different from TS, but they said it will still help them to write it in the Aspen language."

RESPONSE:
TRADING OEX VERSUS SPX OPTIONS:
1.) I am uncertain what your friend means about why you trade the OEX instead of the S&P 'cash' options; I assume he means options on the S&P 500 (symbol: SPX). Futures traders have historically mostly traded the S&P 500 futures; i.e., a contract that 'settles' based on the cash value of 500 times the numerical value of the S&P 500 Index. The 'cash' index to them is the underlying Index of 500 S&P stocks or SPX. OPTIONS on this Index of course trade actively on the CBOE.

So, I suppose the question becomes why one would trade options on the S&P 100 or OEX versus the S&P 500 or SPX. The answer has usually been because the dollar value of a one index point change is $100, versus $500, making the OEX options cheaper to trade. The volatility of an index of the stocks of the 100 biggest companies is often less (true lately), which many view as an advantage. OEX options volume also dwarfs SPX.

Big institutions are invested heaviest in the biggest cap stocks and their best hedge is the OEX, making them significant volume players. My trading mentor, Mark Weinstein (not the public advisor), used to trade the OEX in the thousands on expiration day for small price swings; well, sometimes pretty big price swings! Who was on the other side of those trades? Institutions!

CREATING MY 'SENTIMENT' INDICATOR:
Your question #2
There is no 'formula' to give you on this one. My call/put 'sentiment' indicator is achieved by simply division daily of the daily CBOE equities call volume by daily put volume which I get via an e-mail or off the CBOE website. The result is a call to put volume ratio; e.g., 1.91 yesterday, 12/13.

I then enter this number into a 'custom' data item I named 'CPRATIO' in my TradeStation application. This item then plots or graphs like any other. I usually then apply a 5-day moving average to CPRATIO, but it's not usually critical to the study, more of general interest.

The question is then, can Aspen pull off the CBOE daily equities call and put volume numbers from their datafeed, compute this ratio and give you the ability to chart this as one of their indictors. ALTERNATIVELY, can you create (manually) a 'custom' data item in the Aspen graphics software, then chart it. I used to use their software some years ago and helped them create some indicators then, but this was not one I 'gave' them. I actually kind of hope they don't create this one that everyone can start using:-

** E-MAIL QUESTIONS/COMMENTS **
Please send any technical and Index-related questions for possible use in my next Trader's Corner article to Click here to email Leigh Stevens Support [at] OptionInvestor.com with 'Leigh Stevens' in the Subject line.

** Good Trading Success! **
 

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