Today I'm responding on three questions from OIN Subscribers on 1.) Resolution of the current Market trading range
, 2.) Taking intraday
call-put 'sentiment' readings and 3.) Exiting too soon by not exercising patience in a trade.
(1) MAILBAG QUESTION:
"... i hear forecasts that the market will break out above its trading range. only a matter of time and so on. how do you see it going? "
I started my most recent Saturday 'Index Wrap' (4/18/15) with this first chart, that of the weekly S&P 500 (SPX). I was highlighting the technical 'divergence' that exists when prices are trending sideways and the related Relative Strength Index indicator or RSI is going in a different direction. 'Relative strength' (RSI) is DECLINING in this instance. With this kind of 'technical' divergence, with the index going either sideways OR up, with RSI declining, the Index in question will tend to:
(1) have trouble sustaining rallies and the market settles into a sideways trading range. This type of price/RSI divergence suggests that SPX is 'throwing off' its prior overbought condition by its sideways move. Over time the prior dominant trend (UP) will resume once the RSI falls to a neutral mid-range reading, which has occurred.
(2) conversely, there is a break BELOW the trading range and the RSI again falls to an oversold extreme as in the price/RSI divergence highlighted PRIOR to the current situation.
USUALLY, sideways 'consolidations or lateral price trends will resolve to the UPside and the major or dominant trend resumes.
Going back to a prior period (1998-2000), the following weekly SPX chart shows an example of the major uptrend RESUMING after the Index trended sideways in a trading range (and for a period substantially longer than the current market). This after the 8-week Relative Strength Index had declined substantially, although this indicator didn't reach a 'fully' oversold extreme; e.g., at or below 30.
By its sideways consolidation SPX had 'throw off' its prior overbought condition. Of course, a major bear market did take hold after the last big rally shown in this chart!
Looking back (2006-2008), my next chart provides another instance when a lengthily sideways trend began after SPX hit the top (resistance) end of its broad weekly uptrend price channel. Prices were going up into that point, but on declining 'relative strength' per the RSI indicator.
In this example, the potentially bearish Price/RSI divergence occurred ahead of a substantial sell off. Notice that the rally back TO the low end of SPX's price channel 'acted as' resistance and prices fell after that; support or support trendlines, once penetrated, tends to act as RESISTANCE on a subsequent rally.
(2) MAILBAG QUESTION:
"According to your last Trader's Corner articles we had a good set up on a recent Friday to add/begin long exposure. But how can we know, before the market Close, the actual number of the CPRATIO?"
You can go to the CBOE website and get HOURLY equities call and put volumes - by 2, 2:30 pm in Chicago (central time zone) the call to put volume ratio is often if not always how it's going to end the day.
If you go to: http://www.cboe.com/data/intradayvol.aspx and scroll down to the hourly equities call and put volumes. You'll see that the Exchange keeps running intraday total for calls and for puts. On any given hourly figure you can divide call to put volume figures up to that point. Below is a snapshot of today's (4/21/15) figures.
At 2 pm, total equities call volume was 849,421 versus put volume of 689,131. Divide 849 by 689 and the call-put volume ration (CPRATIO) was running 1.23. By 3 pm the hourly summary ratio was 1.22.
Much of the time the CBOE final call and put volume figures are close to what is showing late in the afternoon. Today wasn't the best example of that, as the final daily volume figures resulted in an equities call to put ratio of 1.5.
Since I'm most often looking for 'extremes', and 1.2 to 1.5 is a 'mid-range' reading, we could tell by 2-3 pm (Chicago time) that that was the case.
(3) MAILBAG QUESTION:
"I saw your response when you posted it. Thank you. You are correct; my tendency (a.k.a. handicap) is to get out of winning trades too quickly.
In this case, my exit was very intentional and not regretted even though my VIX option continued moving in a favorable direction after I exited. I understand (and accept) that options may not move in concert dollar for dollar with directional moves, but it freaked me out when I couldn't rely on closing the position on par with how much it was already "in the money".
I realize that VIX options are a bit different but they have trends for sure. VIX options may not move as much in tandem as a stock index option might at a given point in time. Especially if VIX hadn't yet made much of a move relative to your trade entry. I'm not talking about 'over-staying' (risking more than a reasonable or small loss) but 'under' staying.
Later on, as you witnessed, VIX made a more substantial move that you didn't profit from due to an early exit from the trade. You were right on the trend direction but didn't let the trend develop to profit from being right. No 'fault' implied in this.
My NUMBER ONE trouble/regret in the early years when I begin trading index futures (later, index options) was that I was often right on the direction of the market but once I ENTERED the trade, I started second guessing myself on my judgment, especially when the trade didn't go my way early on.
I had to observe over time the number of times that I was correct in my strategy and expected trend direction, but got scared out of the trade once my trading dollars were at stake. Over time, I learned from the number of instances when I was right in my assessment of the trend, but wrong in early exit and not sticking with my trade plan.
A second lesson reflecting my own early trading experiences was to take the trade based on MY thinking, but exiting it prematurely because I then started believing other opinions on a stock or index that reflected an opposite view. I finally realized that if I lost based on listening to someone else, I wasn't really going to learn from MY mistakes. I can't learn why someone else was right or wrong in THEIR analysis as well as I could from my own post mortem self-assessment.
GOOD TRADING SUCCESS!