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Is It Time Yet?

HAVING TROUBLE PRINTING?
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Imagine that you've been watching a rally and you think it's extended too long. Some market watchers began feeling that way just before September's option expiration. The SPX looked as if it had outrun its short-term support. It had been testing possibly significant long-term resistance, too, and doing it with pronounced price/RSI bearish divergence. The VIX had punched to new recent lows and then rebounded off those lows. Many mentioned negative news that the market just hasn't digested yet, but soon must digest. The SOX did not participate in the Nasdaq's rally.

Contrarians had begun shorting the markets, and that included many retail traders who chose the cheapest options, September's. Some of those got caught when September's options expired without a significant downturn in the markets. A simple chart might have saved them. Take a look at a couple of charts snapped at the close of trading on September 13, when the conditions described above existed.

Annotated 10-Minute Chart of the SPX:

Annotated 10-Minute Chart of the Nasdaq:

Annotated 10-Minute Chart of the Dow:

If charts of the TRAN, Russell 2000 and Wilshire 5000 were posted, their behavior at the close on September 13 would have mimicked this action. The RLX's behavior was similar.

What can we tell about these charts? The break back above the 10-minute 100/130-ema's on September 11, the Monday of opex week, was a sign that upward momentum had increased. That signaled danger in assuming that bearish positions would work. Of course, would-be bears might point to the straight-up rise that had far outstripped the potential support of the 10-minute 100/130-ema's by September 13. Those averages have clearly been important in providing either support or resistance, so bears might reason that the SPX, Nasdaq, Dow, TRAN, Russell 2000 and Wilshire 5000 were all due for either sideways consolidation while those averages rose underneath them or an actual pullback occurred to test their support.

A more cautious trader might have pointed out that however logical that conclusion might be or how likely such action was based on recent historical evidence, these indices were still clearly bouncing from the 10-minute 21-ema's as of the close on September 13. Indices were maintaining their strongest rally mode, not even pulling back to the stronger and more important support of the 100/130-ema's. As long as that kind of momentum continued, any eventual testing of the 100/130-ema's support was likely to be accomplished by a sideways/sideways down movement rather than a stronger pullback. As long as that kind of momentum continued, it was dangerous to assume bearish positions would profit.

Another conclusion might be reached, drawn from the strange congruence of the actions on these indices. This was clearly program, institutional or--if you're the suspicious type--even PPT (plunge-protection team) buying. Someone or several someones with deep pockets were buying baskets of stocks each time indices hit certain key support levels.

Would you really want to bet against those someones, especially with options that were about to expire? Would you really want to enter a trade based on a VIX move, when it's well known that such VIX moves can presage a market movement by days or sometimes even weeks, and when a low VIX can go lower? Should you factor in any possible option-expiration influences on the VIX's behavior anyway?

On the night of September 13, I mentioned all these points in the Wrap. I told traders to watch those averages the next day, but cautioned that a likely action would be some disorganization, a trading back and forth across the 10-minute 21-ema's that wasn't as much a violation of that average as it was a knitting of prices across it, indicating some disorganization. Since both the daily candle's shape and the opex Thursday pin-them-to-the-action behavior that typically begins about mid-morning on opex Thursday hinted at possible consolidation, and since such a period of disorganization was sometimes seen in consolidation, bears shouldn't be too quick to believe that a minor violation of the 10-minute 21-ema's meant a plunge was next. It wasn't.

Annotated 10-Minute Chart of the SPX:

Those who held September puts through that Thursday, when they stopped trading, were not to be rewarded with a drop that would re-inflate the value of those options that were out of the money.

Watching such a chart would have saved traders from entering short-term positions with September puts any time opex week. Traders would have had a clear benchmark that told them that upward momentum remained strong. Many other signs might have been pointing to the need for a pullback, but watching prices bounce from these averages showed it wasn't happening.

That violation of the 10-minute 100/130-ema's wasn't to occur until Tuesday of this week.

Annotated 10-Minute Chart of the SPX:

This is how the 10-minute chart looked at the close of trading on September 19. When I wrote the Wrap that night, Tuesday, I pointed out this action and told readers to watch how the SPX reacted with relationship to those 10-minute 100/130-ema's the next morning. If the markets were to pull back and the SPX to actually gap down and open beneath them, then it had likely just overrun that resistance. If it continued climbing, then the retest of likely resistance was unsuccessful in establishing that resistance.

Conservative traders would have been rewarded for their patience in waiting for the results of the retest. The resistance didn't hold.

Annotated 10-Minute Chart of the SPX:

It wasn't until Thursday that the SPX was to fall finally complete all steps that indicated at least a short-term trend change: falling through those 10-minute 100/130-ema's, rising to retest them, and then falling back again, with those averages serving as resistance.

Annotated 10-Minute Chart of the SPX:

The retest of the 10-minute 100/130-ema's was more pronounced on the OEX, which I was watching at the time of the retest Thursday afternoon, because it had been the big-caps that had been leading the rally, to some extent. The OEX rose exactly to the 100-ema and fell back.

I won't have watched the action on Friday because a trip will have taken me away from my computer, but if I'd been watching, I would have paid particular attention to the action of the SPX with relationship first to the 10-minute 21-ema and then the 100/130-ema's. I'd have expected those 100/130-ema's to eventually be retested, either Friday or Monday. Bears should hope that any such retest occurs with a sideways/sideways-up movement that allows the falling 100/130-ema's to play catch-up, rather than a swift rise such as that seen on the September 19. Such a swift rise would have hinted that the bullish fervor hadn't yet been worked out of the markets.

These charts were each snapped as the action occurred. The charts that referred to the end of the day September 13 were snapped at the end of the day, for example. The chart that referred to the post-FOMC action was snapped at the end of the day of that decision. Each of the other charts was snapped at the end of the day to which they referred. I wanted you to see that I wasn't scrolling through charts, picking out something that worked, but rather starting with the action as it unfolded and following it through.

There's nothing too technical on these charts, just a simple examination of price action with regard to key moving averages, with those averages discovered through a testing of various time periods. Sometimes you don't have to be too technical. A study of these charts would have saved some from jumping into bearish trades too soon, especially with options about to expire.

If you did that, I'm certainly not chastising you for doing so. Been there and done that in the past, so who am I to chastise anyone? Many indicators suggested that it was time for a trend change. I'm merely suggesting a tool that might help you better time such trend-change plays.

Nothing is foolproof, either. Friday, when I'm gone, the SPX may shoot right back up, with bullish fervor reestablished. Stops are always needed, no matter what the charts say.
 

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