Average person with a full time job and interest of the market. Prefer reading trading blogs over trading books. Grew up near Rochester, MN & now live near Gettysburg, PA.
For more information visit http://redman59.com/
Yesterday I was away from the desk for most of the day and had to rely on my phone for quotes and how my positions were doing, have to love technology. Anyway, I made it back for about the last hour of the trading day. Checking the social stream intermittently and seeing the index quotes the day wasn’t looking good. I always like when we have days like that as all the stats come out and the stream is definitely more active. Coming back and sitting at the desk I looked at the chart of the SPX and posted on that I thought today was a better day to take off shorts if you were in some and hold your longs if they are working. Below is a chart of the SPX and what I was looking at:
Notice the pattern of blue highlighted boxes. Since this uptrend we have had around 4 days of selling followed by buyers stepping in. Watch for the lows of that 4th down day to hold.
The yellow dashed line is the trendline since the 6/4 bottom, still holding well
The 50sma (blue line) still sloping up and price holding above
We saw a significant low close in the McClellan Oscillator (purple ovals) and you can see on the chart the price action when we had other significant lower closes on the McClellan Oscillator
This so far is a 40 point range after we saw the breakout on 9/6
Something else I found interesting is what happened with the VIX with the SPX selling. Below is a 15min intraday chart (my intraday preference for VIX) of the last two days. The VIX is on top and the SPX is on the bottom. Notice what happened (blue highlighted box) to the VIX when the SPX made a bottom and based around that bottom. The VIX in turn dropped over-4% from high to low while the SPX only gained 0.30% from low to high. On a ratio basis volatility took a hit. This is characteristic of traders not rushing to buy protection, in turn not expecting increased volatility to the downside.
I can’t ignore that we have seen an increase in distribution days and we may see more downside. But when looking at other underlying factors shown above there is no reason to panic or get caught up in the news or the increased flow of traffic on the stream. Sometimes you have to step back and analyze other factors and stick with what has been working…until it doesn’t.
Last night I ran a screen with the goal of finding some small/micro-cap stocks that do not receive a lot of attention. In addition to a low market cap I was also looking for low-priced stocks that were displaying fundamental and technical strength. I charted six stocks and they can be found below in alphabetical order with the message I included with them on the stream and below the chart is fundamental data provided free courtesy of FINVIZ:
1) CAP (CAI International Co.) – small-cap rental-leasing name, good fundies, saw b/o after multi-attempts on 74% >avg volume
2) COBZ (CoBiz Financial Inc.) – regional bank, like it >7.20, long-term shows in large bottoming base
3) FVE (Five Star Quality Care Inc.) – weekly chart, coming into resistance, like pullback to 5, some in industry recently upgraded
4) KONA (Kona Grill Inc.) – micro-cap restaurant, momentum picking up, like a b/o >9.25 w/volume
5) MASC (Material Sciences Corp.) – weekly chart, haven’t heard of this micro-cap, like the fundies & chart pattern w/long base
6) ZIXI (Zix Corporation) – weekly chart, micro-cap, like it >2.50 & above 3.00 looks good for 10% run, 21.5 short ratio
To see their continued performance click on this link to the FINVIZ site to where you can see their chart and also sort by other technical and fundamental data.
There is no doubt that AAPL still remains a talked about stock especially with those cheering for the outperformance of GOOG and the inability for AAPL to gain ground recently. Looking at the last time that AAPL corrected, I am seeing some similarities to which I find intriguing. Here are some notes about the last time that AAPL saw a significant correction:
High on 4/16/2012 to low on 5/18/2012 compromising of 29 trading days
High of 644.00 to low of 522.18 (-121.82 pts, -18.9%)
Below are side-by-side comparisons of the last time we saw this correction (on left) and to what we are seeing now (on right). Click the chart to enlarge for better view and notes.
The following can be noted from top to bottom on the charts, the highlighted boxes for price and Relative Strength are of the same days:
Once we undercut the 10 EMA, we had a big up day that tested/came close to testing the downtrending 10 EMA, closing below both instances
Relative Strength (using the Russell 3000) undercut its RS Average and the big up day created a near test of the RS average but did not close above
Both charts are seeing an increase of volume near the top with days having above average volume (using 50 SMA), indicative of indecision and topping patterns
So with these notes and just overall observation of the chart it looks like we are seeing some similar price, volume, and indicator action. I do want to say that I am not calling the top in AAPL. I just noticed some similarities and things like this should be taken into consideration if you are looking to jump in AAPL. Even though AAPL is one of the most manipulated stocks we also have to keep in mind that human behavior does not change and this pattern could definitely repeat itself.
Below is a chart with two buy targets:
625, near the current 100 EMA (which I consider a long-term buy the dip area in momentum stocks)
571, marking the same percentage correction as last time, comes in near current 200 SMA, for me it’s a no questions asked buy no matter what area
Overall it’s almost hard to think that AAPL would see the 200 SMA but nobody can predict the future, but it would be hard to believe that buyers would not show up some where around there. Again, not calling the top in AAPL but I’m hoping to see some further selling at least to the 100 EMA so I can get in this for some longer term trades or at least put on a covered call strategy using LEAPS. Also keep in mind that AAPL has earnings October 25, 2012 after hours. This could create a scenario to where we could easily see the test of the 100 EMA play out if AAPL has a negative reaction.
Over the weekend I was going through some charts and then decided to pull up a long-term chart of the $SPX. The time frame is a monthly chart going back to our last signficant top in 2007. What I like about these longer term charts is that they can be simple and reduce a lot of noise as far as looking at the candle body and buying/selling tails. What I found interesting about where our price was on Friday’s close is the reference to where it is at to the prior price action. I drew a line at the level of interest as I saw this as a good support and resistance line (currently showing 1437.92)
Some notes about support and resistance and why I chose this level:
this is an area and not to-the-penny
“Ifa support or resistance level is broken, it signals that the relationship between supply and demand has changed” -StockCharts
serves as an awareness and I use it as a risk allocation
Specific to chart:
SPX broke out in April 2007 and the highlighted level was tested multiple times in 2007 and held, closing above each time
Closed below the highlighted level January 2008
May 2008 high tested the highlighted area and failed, candle pattern was confirmed to down side the next month
Nearly 4 1/2 years later we are testing that highlighted area again
Looking at this chart we can see that some churning can be expected as we are at a past signficant area. Stated in a bullet above, support/resistance can be used as an awareness. I personally would look for lighter allocation here as I expect some volatility to pick up. We are at an area of indecisiveness and I find it hard to have a major bias on direction here. I am looking for around a 5% pull back (around 1370) before adding more exposure. I am also watching to see how the market reacts on a volatility basis with a pull back. Also keep in mind your time frame. This would hold more weight to longer-term holdings and in deciding to take profits or allocate more on a portfolio basis. This would not hold as much significance to day or swing traders looking for those quick-hit trades. This mostly serves as an awareness to expect some indecision.
If you are interested in easy to follow longer term timing methods, I have written two previous articles that show two methods that have beaten the SPX. This was at the time of their writing and have not been updated since (both written 5/21/2012).
Watching the stream today it seems there is a growing number of skeptics and traders betting on the downside. It is definitely easy to get caught up in the day-to-day news, trader sentiment, or statistics of past seasonality. Keep in mind these are all subjective reasons for market direction. One way I try to mitigate all the noise is to keep in mind the weekly chart of the indices and the fact that we are seeing individual long setups in stocks work with volume supporting the moves (ie. GS, MOS, LNKD, CAKE).
Looking at the weekly charts of the indices it is hard to be bearish. Most notable is the $RUT which was previously a laggard but has caught up and is now seeing consistent tests of resistance. Also we have seen money rotate out of the $DJIA and allocate into riskier assets. When looking at the weekly chart I chose the $SPX as it is probably the most widely followed. Looking at the chart it is really hard for me to be bearish here, remembering that being bearish and looking for a pull back are two different opinions.
Note the following on the weekly SPX chart:
see more pressure from the downside for a move to the upside (subjective)
breakout (2nd) out of an ascending triangle (dotted gray line measures the resistance)
breakout 2nd time was met with increasing volume (bullish)
remain above rising 10 and 40-week moving averages
previous undercut of rising 40-week moving average (yellow box) saw immediate buying
rising volume on move up met with declining volume on recent move down
the recent weeks move down is not volatile but very orderly, as in where tops are usually met with volatility
In my opinion if we see a pull back from these levels I am looking at the 1365 area. I like this area for reasons that it seems many factors from below come into play: the rising trendline, the 40-week moving average, and the support line (gray dotted line from ascending triangle top). Also this will be a good test as we would undercut the 10-week moving average probably shaking some out.
Also I remember in the past that when we saw these grinds higher there were complaints that the financials were not participating. Looking at the $XLF (Financials Select Sector SPDR), this chart is looking bullish to me as we are seeing tighter consolidation after a breakout from a more volatile range. I am concentrating on the 14.80-15.00 zone to hold and a break below that will change my perspective on the financials. Daily chart below:
Over the course of the day one thing that I have noticed is that many stocks are starting to see their 50 day simple moving average catch up to price. Going back to simple rules from Investors Business Daily, the 50 day simple moving average (used interchangeably with the 10 week moving average) can be a key turning point to further price action.
Buy Signals
“…during a big price run a stock will periodically pull back to its 10-week moving average line to take a short rest. Then after it finds support at that line, it will resume its climb.”
“That support comes from big institutional investors who will often step in to buy shares during a pullback to a 10-week moving average line. And their buying will then push the stock’s price back upward.”
“If you missed out on a stock’s initial breakout, its first and second rebounds from its 10-week or 50-day moving average lines give you a chance to buy shares.”
Sell Signals
“If you see a stock fall below its 50-day moving average line on its heaviest volume in months, it’s a sign big investors are selling, rather than buying.”
So with this information I decided to run a scan that looked at stocks with the following criteria:
Market Cap greater than $300 million
Low was less than 50 day simple moving average
Close was greater than 50 day simple moving average (telling me some buyers stepped in)
Relative Strength line (comparison to Russell 3000) was great than its 21 day simple moving average (weeds out the stocks that have been previously weak).
The overall results of the screen can be found here (sorted by volume) courtesy of FINVIZ.
Overall I wasn’t too impressed with the stocks that it returned as there were no real big names. Also this was a quick scan just to see what stocks were displaying the criteria and also it can be used as a watch list as to how they perform in the future. If there is continued selling after today’s bounce in these names then obviously institutions are not quite interested here. Keep in mind this is not a buy list but more of a wait-and-see list. Also with these stocks I would prefer to see heavy volume as a further sign of institutions supporting price action. I just wanted to show a way of taking market observation (50 day simple moving average catching up to price), coupled with prior education (IBD rules), and plugging it into some scanning software to see what the results were.
Below I listed some of the stocks that I liked more than the other returned stocks. Each stock can be enlarged by double clicking in order to get a better view of the notes on the chart. The stocks are listed alphabetically.
While running a scan that looks for high probability bounce setups it returned only one stock. What I do like about this scan is that it keeps the returns to a low number so the trader is not overwhelmed with having to go through many charts. Tonight it returned one stock and that was Duke Energy Corp (DUK). Looking at the chart I really like it going forward. What I also like is that the current trade could be attractive to swing and position traders. Swing traders could benefit from a quick bounce and percentage gain while position traders can benefit from its low volatility and healthy dividend. Below is a picture of the chart with notes on it:
On a non-technical level I like the following stats (courtesy FINVIZ):
Trading 14.63x Fwd Earnings and 1.29 P/B
Stable and consistent quarterly dividend paying out the last 86 years
Liquid with Average 3-Month Volume of 5.22 million
Beta of 0.33 (not a volatile stock)
I also went to the iBankCoin PPT to get further stats on the stock (specifically overbought/oversold algorithm) and found that the stock is at and near Oversold levels with a history of bouncing. The timeframe for the bounce is short by going out a max of 10 days but nonetheless the stock does bounce from technical standpoint and hybrid (technical & fundamental combined) standpoint. this information would be better suited for the swing trader in my opinion. Also in the options market there remains a high level of open interest in the Sept/Oct 70 calls and the Jan 70/75 calls. This is in comparison to the put side.
Going forward I think there is a high probability for a bounce, personally I would like to see today’s high (65.23) taken out before getting long to ensure that selling has succumbed. Either way I like the stock from a chart structure standpoint as well as oversold triggers and has non-technical events supporting a reason to go long. As always trade at your own risk.
Today while scouring some sites for option trades of sizeable blocks I came across the Rydex CurrencyShares Euro Trust (FXE), the ETF tracking the Euro. I thought this was interesting given yesterday’s news of Draghi pulling out the Federal Reserve’s annual economic symposium in Jackson Hole, WY. Then again this is just news and may have no relation to the trade in the Euro that was seen in the options market today. Today while looking at the TIme & Sales of the Euro a trade came across where a trader looks to have sold the Sept 122 put 4000x and bought the 124 put 2000x for a 0.16 debit, essentially making this a Put Front Spread. Below is a picture of the T&S of the trade:
You can see that the Sept 122 put was traded at the mid-price making the sale speculative, but when I see a block like that trade where the two opening transactions can be matched I assume that they were sold. To further verify my thoughts I plug it into a Risk Profile to see if the trade makes sense and lines up technically. Below is a picture of plugging this trade into the thinkorswim Risk Profile with the following notes:
The trader would be assigned (long) 200,000 shares of FXE if it closes below 122 at September expiration
The trader would lose a max of $32,000 if FXE closes above 124 at Sept expiration
Furthest left red line = lower b/e at expiration (120.16)
2nd from left red line = max profit of nearly $367,000 if pins at 122 at Sept expiration
3rd from left red line = upper b/e at Sept expiration (123.84)
4th from left, furthest right red line = current price of FXE (124.52)
From this trade I believe the trader is betting on a pull back in the Euro and a decrease in implied volatility (notice the negative Vega in the Risk Profile).
I then look to my volatility chart to see if this trade makes sense. Note the following on the chart:
Dotted and solid lines represent the Upper/Lower b/e and the max profit pin
IV is higher than HV (making this trade a strategy a great candidate is it benefits from a drop and price and decrease in implied volatility
The profit region of the trade (120.16 – 123.84) is reasonable as it would bring the Euro back into that range
So what can a retail trader do with this information. I really like two options:
Follow the same trade willing to be long the Euro under 122, which doesn’t seem too bad considering it hit a 2 year low-end of July at 119.73. Also its a nice profit if the Euro pulls back into the range and follows with consolidation. This trade would benefit from the positive theta and negative vega components if it went in to consolidation and became mundane.
Put on a Butterfly spread. I really like this strategy as it limits your risk (unlike #1 as you have naked puts) and the greeks benefit the same, just on a different scale. One trade that I like is the Iron Butterfly.
This trade can be seen below in the Risk Profile and has the following characteristics:
Selling the 122/119 Put spread and selling the 122/125 call spread for a credit of 2.26, risk 0.74
Captures the same profit zone and widens your b/e’s from the Put Front Spread with downside b/e 119.74 and upside b/e at 124.26 (about a .40c advantage to each side from the Put Front Spread)
Maintains the positive theta and negative vega characteristics
Below is a picture with the price slices in the same position as in the Put Front Spread shown above (lower b/e, max profit, upper b/e, last price)
This post is meant to be used as a way to use the option order flow and implement it into your own plan. By looking at what the big money is doing and how they are positioning themselves you as the smaller trader can follow their strategy or as in this case implement a different one utilizing a spread that would benefit in the same way. Keep in mind that this is speculative and it is how I interpreted the trade that took place. I am by no means an expert and only have learned through reading and observation, but I have followed similar action and have benefited. I actually like this Iron Butterfly trade and I will be looking to put it on. One thing I do like is that it does not require a lot of attention and especially with Sept expiration has a “less monitoring” aspect as the gamma effect has not really kicked in quite yet. Also if you are interested in the Euro trade alone, Raul3 of the iBankCoin Blogger Network provides some excellent insight to the Euro along with market profile (example post). As always, trade at your own risk.
Sorry, he’s probably not but I could not think of a snappy title with putting ConAgra in there. On a more serious note, today while searching free sites for option order flow I came across bullish put flow in $CAG. I thought this was interesting given my post last night about hurricanes and industries/stocks that could benefit. While this would be highly speculative it raised a point at the end of my post in how traders can look at option order flow for institutional positioning to further quantify a trade. Today I came across this information, free courtesy of WhatsTrading:
CAG
– Bullish flow detected in ConAgra Foods Inc with 7207 calls trading, or 13x the recent avg daily call volume in the name. Shares near $25.185 (0.155) with ATMIV lifting by 1.36 point and 99% of todays call premium trading offer side. (Auto Content (Trade-Alert))
So with this information I then went to my thinkorswim desktop application and opened up the CAG options chain with Time and Sales (newer feature free to clients). Below are the screen shots:
First shows the September and December option chains as this is where most of the activity took place. Note the volume comparing to open interest in the September 26 calls (2085 / 1734) and the December 25 calls (5082/1378). I consider this as unusual option activity (click on picture to enlarge).
Next I went to the Time and Sales focusing on the December options chain (the larger transaction) to see if these options were bought or sold and if done in sizeable blocks (characteristic of institutions).
We can see that a sizeable block of 4745 Dec 25 calls trading at 0.85c on the ask (buying to open). Also going to the 1min chart of CAG I did not see any share volume that could have signaled this transaction as tied to stock.
Also note the rise in implied volatility (IV) throughout the day as it was at 12.28% before the 4745 block traded and then raised to 13.11% and as high as 14.36% during the day, showing demand for the option (click on picture to enlarge).
To save space I am not going to show the September chain but it was mostly bought on the ask at 0.10c. These transactions occurred approximately 30 minutes for the 4745 Dec 25 block trade.
Next is a daily chart of CAG and we can see that this stock has picked up momentum in the last 3 days and broke out of consolidation around its 50 day SMA. I do not have current access to my charting platform but note the following from top to bottom:
RSI above 50 and making higher highs and higher lows
Broke out from consolidation around the 50sma and highest volume since the beginning of August
Williams %R (30-setting) in uptrend and above -20 (bullish)
Rising +DI > declining -DI and ADX turning up
Am I saying that this option activity is due to Hurricane Isaac? Absolutely not, I just thought it was interesting as it belongs to the consumer goods industry (making Chef Boyardee, Healthy Choice, Slim Jim, etc.). I wanted to raise awareness as this is the type of activity you could look for in those insurers or airlines as noted in my previous blog post. Also this applies to other stocks where there is news pending or there is an unknown event and an insider is positioning.
In the case of CAG this activity could have been related several factors such as those listed but do know as of today that the big money is betting on further upside. Today the December 25 call transaction was at 0.85c so the big money is betting that CAG is higher than 25.85 by expiration Friday in December. In my opinion, I would rather wait for a pullback and then jump on board and then going forward watch to see if those calls are scaled out of or if there is another option trade of size changing the directional bias of the trade.
All of this information was obtained free of charge and there are other sites out there than monitor option volume vs. average option volume. The only item not obtained for free was the data from thinkorswim which is provided for free to its customers. Also while I was typing this out tonight a recommended Twitter follow @OptionsHawk came out with a blog piece titled “Methods To My Madness – Trading Options Flow” highlighting how he watches/interprets order flow in the options market. This is probably the best free information I have come across for analyzing/interpreting options order flow with other informative content.
***Disclaimer: I do not receive discounts, gratuities, or compensation for mention of sites listed within this blog post. I list them as I use their information as a resource and consider them educational and beneficial to the trader.
Running through some screens tonight 3 charts showed up that have my interest. The screens ran consist of stocks that have seen recent selling followed by an up day and stocks that have a trend in Relative Strength. I measure RS by comparing it to the Russell 3000 and measure the trend by having the RS line above the 21 day simple moving average (approx measuring last month) and the RS moving average moving up. The 3 charts can be found below with their sector/industry as referenced by FINVIZ and notes can be found on the chart. I would look to by these on a break of their Wednesday highs in which all 3 closed near.
**BWA – Consumer Goods / Auto Parts
**CXO – Basic Materials / Oil & Gas Drilling & Exploration (higher risk as coming into a long-term down trend line so this would be front-running, but a break could lead to further upside)
**PXD – Basic Materials / Independent Oil & Gas
Again I would look to buy these stocks only if their Wednesday high is taken out. Also keep in mind time frame as these are meant to be day to swing trading positions.
Also here is FINVIZ link (sorted by volume) to the results of one of the screens that I ran. I chose the 3 stocks above as they showed up on both screens. But there are also some (not all) nice setups in the linked page.
Average person with a full time job and interest of the market. Prefer reading trading blogs over trading books. Grew up near Rochester, MN & now live near Gettysburg, PA.
For more information visit http://redman59.com/
Yesterday I was away from the desk for most of the day and had to rely on my phone for quotes and how my positions were doing, have to love technology. Anyway, I made it back for about the last hour of the trading day. Checking the social stream intermittently and seeing the index quotes the day wasn’t looking good. I always like when we have days like that as all the stats come out and the stream is definitely more active. Coming back and sitting at the desk I looked at the chart of the SPX and posted on that I thought today was a better day to take off shorts if you were in some and hold your longs if they are working. Below is a chart of the SPX and what I was looking at:
Notice the pattern of blue highlighted boxes. Since this uptrend we have had around 4 days of selling followed by buyers stepping in. Watch for the lows of that 4th down day to hold.
The yellow dashed line is the trendline since the 6/4 bottom, still holding well
The 50sma (blue line) still sloping up and price holding above
We saw a significant low close in the McClellan Oscillator (purple ovals) and you can see on the chart the price action when we had other significant lower closes on the McClellan Oscillator
This so far is a 40 point range after we saw the breakout on 9/6
Something else I found interesting is what happened with the VIX with the SPX selling. Below is a 15min intraday chart (my intraday preference for VIX) of the last two days. The VIX is on top and the SPX is on the bottom. Notice what happened (blue highlighted box) to the VIX when the SPX made a bottom and based around that bottom. The VIX in turn dropped over-4% from high to low while the SPX only gained 0.30% from low to high. On a ratio basis volatility took a hit. This is characteristic of traders not rushing to buy protection, in turn not expecting increased volatility to the downside.
I can’t ignore that we have seen an increase in distribution days and we may see more downside. But when looking at other underlying factors shown above there is no reason to panic or get caught up in the news or the increased flow of traffic on the stream. Sometimes you have to step back and analyze other factors and stick with what has been working…until it doesn’t.
Last night I ran a screen with the goal of finding some small/micro-cap stocks that do not receive a lot of attention. In addition to a low market cap I was also looking for low-priced stocks that were displaying fundamental and technical strength. I charted six stocks and they can be found below in alphabetical order with the message I included with them on the stream and below the chart is fundamental data provided free courtesy of FINVIZ:
1) CAP (CAI International Co.) – small-cap rental-leasing name, good fundies, saw b/o after multi-attempts on 74% >avg volume
2) COBZ (CoBiz Financial Inc.) – regional bank, like it >7.20, long-term shows in large bottoming base
3) FVE (Five Star Quality Care Inc.) – weekly chart, coming into resistance, like pullback to 5, some in industry recently upgraded
4) KONA (Kona Grill Inc.) – micro-cap restaurant, momentum picking up, like a b/o >9.25 w/volume
5) MASC (Material Sciences Corp.) – weekly chart, haven’t heard of this micro-cap, like the fundies & chart pattern w/long base
6) ZIXI (Zix Corporation) – weekly chart, micro-cap, like it >2.50 & above 3.00 looks good for 10% run, 21.5 short ratio
To see their continued performance click on this link to the FINVIZ site to where you can see their chart and also sort by other technical and fundamental data.
There is no doubt that AAPL still remains a talked about stock especially with those cheering for the outperformance of GOOG and the inability for AAPL to gain ground recently. Looking at the last time that AAPL corrected, I am seeing some similarities to which I find intriguing. Here are some notes about the last time that AAPL saw a significant correction:
High on 4/16/2012 to low on 5/18/2012 compromising of 29 trading days
High of 644.00 to low of 522.18 (-121.82 pts, -18.9%)
Below are side-by-side comparisons of the last time we saw this correction (on left) and to what we are seeing now (on right). Click the chart to enlarge for better view and notes.
The following can be noted from top to bottom on the charts, the highlighted boxes for price and Relative Strength are of the same days:
Once we undercut the 10 EMA, we had a big up day that tested/came close to testing the downtrending 10 EMA, closing below both instances
Relative Strength (using the Russell 3000) undercut its RS Average and the big up day created a near test of the RS average but did not close above
Both charts are seeing an increase of volume near the top with days having above average volume (using 50 SMA), indicative of indecision and topping patterns
So with these notes and just overall observation of the chart it looks like we are seeing some similar price, volume, and indicator action. I do want to say that I am not calling the top in AAPL. I just noticed some similarities and things like this should be taken into consideration if you are looking to jump in AAPL. Even though AAPL is one of the most manipulated stocks we also have to keep in mind that human behavior does not change and this pattern could definitely repeat itself.
Below is a chart with two buy targets:
625, near the current 100 EMA (which I consider a long-term buy the dip area in momentum stocks)
571, marking the same percentage correction as last time, comes in near current 200 SMA, for me it’s a no questions asked buy no matter what area
Overall it’s almost hard to think that AAPL would see the 200 SMA but nobody can predict the future, but it would be hard to believe that buyers would not show up some where around there. Again, not calling the top in AAPL but I’m hoping to see some further selling at least to the 100 EMA so I can get in this for some longer term trades or at least put on a covered call strategy using LEAPS. Also keep in mind that AAPL has earnings October 25, 2012 after hours. This could create a scenario to where we could easily see the test of the 100 EMA play out if AAPL has a negative reaction.
Over the weekend I was going through some charts and then decided to pull up a long-term chart of the $SPX. The time frame is a monthly chart going back to our last signficant top in 2007. What I like about these longer term charts is that they can be simple and reduce a lot of noise as far as looking at the candle body and buying/selling tails. What I found interesting about where our price was on Friday’s close is the reference to where it is at to the prior price action. I drew a line at the level of interest as I saw this as a good support and resistance line (currently showing 1437.92)
Some notes about support and resistance and why I chose this level:
this is an area and not to-the-penny
“Ifa support or resistance level is broken, it signals that the relationship between supply and demand has changed” -StockCharts
serves as an awareness and I use it as a risk allocation
Specific to chart:
SPX broke out in April 2007 and the highlighted level was tested multiple times in 2007 and held, closing above each time
Closed below the highlighted level January 2008
May 2008 high tested the highlighted area and failed, candle pattern was confirmed to down side the next month
Nearly 4 1/2 years later we are testing that highlighted area again
Looking at this chart we can see that some churning can be expected as we are at a past signficant area. Stated in a bullet above, support/resistance can be used as an awareness. I personally would look for lighter allocation here as I expect some volatility to pick up. We are at an area of indecisiveness and I find it hard to have a major bias on direction here. I am looking for around a 5% pull back (around 1370) before adding more exposure. I am also watching to see how the market reacts on a volatility basis with a pull back. Also keep in mind your time frame. This would hold more weight to longer-term holdings and in deciding to take profits or allocate more on a portfolio basis. This would not hold as much significance to day or swing traders looking for those quick-hit trades. This mostly serves as an awareness to expect some indecision.
If you are interested in easy to follow longer term timing methods, I have written two previous articles that show two methods that have beaten the SPX. This was at the time of their writing and have not been updated since (both written 5/21/2012).
Watching the stream today it seems there is a growing number of skeptics and traders betting on the downside. It is definitely easy to get caught up in the day-to-day news, trader sentiment, or statistics of past seasonality. Keep in mind these are all subjective reasons for market direction. One way I try to mitigate all the noise is to keep in mind the weekly chart of the indices and the fact that we are seeing individual long setups in stocks work with volume supporting the moves (ie. GS, MOS, LNKD, CAKE).
Looking at the weekly charts of the indices it is hard to be bearish. Most notable is the $RUT which was previously a laggard but has caught up and is now seeing consistent tests of resistance. Also we have seen money rotate out of the $DJIA and allocate into riskier assets. When looking at the weekly chart I chose the $SPX as it is probably the most widely followed. Looking at the chart it is really hard for me to be bearish here, remembering that being bearish and looking for a pull back are two different opinions.
Note the following on the weekly SPX chart:
see more pressure from the downside for a move to the upside (subjective)
breakout (2nd) out of an ascending triangle (dotted gray line measures the resistance)
breakout 2nd time was met with increasing volume (bullish)
remain above rising 10 and 40-week moving averages
previous undercut of rising 40-week moving average (yellow box) saw immediate buying
rising volume on move up met with declining volume on recent move down
the recent weeks move down is not volatile but very orderly, as in where tops are usually met with volatility
In my opinion if we see a pull back from these levels I am looking at the 1365 area. I like this area for reasons that it seems many factors from below come into play: the rising trendline, the 40-week moving average, and the support line (gray dotted line from ascending triangle top). Also this will be a good test as we would undercut the 10-week moving average probably shaking some out.
Also I remember in the past that when we saw these grinds higher there were complaints that the financials were not participating. Looking at the $XLF (Financials Select Sector SPDR), this chart is looking bullish to me as we are seeing tighter consolidation after a breakout from a more volatile range. I am concentrating on the 14.80-15.00 zone to hold and a break below that will change my perspective on the financials. Daily chart below:
Over the course of the day one thing that I have noticed is that many stocks are starting to see their 50 day simple moving average catch up to price. Going back to simple rules from Investors Business Daily, the 50 day simple moving average (used interchangeably with the 10 week moving average) can be a key turning point to further price action.
Buy Signals
“…during a big price run a stock will periodically pull back to its 10-week moving average line to take a short rest. Then after it finds support at that line, it will resume its climb.”
“That support comes from big institutional investors who will often step in to buy shares during a pullback to a 10-week moving average line. And their buying will then push the stock’s price back upward.”
“If you missed out on a stock’s initial breakout, its first and second rebounds from its 10-week or 50-day moving average lines give you a chance to buy shares.”
Sell Signals
“If you see a stock fall below its 50-day moving average line on its heaviest volume in months, it’s a sign big investors are selling, rather than buying.”
So with this information I decided to run a scan that looked at stocks with the following criteria:
Market Cap greater than $300 million
Low was less than 50 day simple moving average
Close was greater than 50 day simple moving average (telling me some buyers stepped in)
Relative Strength line (comparison to Russell 3000) was great than its 21 day simple moving average (weeds out the stocks that have been previously weak).
The overall results of the screen can be found here (sorted by volume) courtesy of FINVIZ.
Overall I wasn’t too impressed with the stocks that it returned as there were no real big names. Also this was a quick scan just to see what stocks were displaying the criteria and also it can be used as a watch list as to how they perform in the future. If there is continued selling after today’s bounce in these names then obviously institutions are not quite interested here. Keep in mind this is not a buy list but more of a wait-and-see list. Also with these stocks I would prefer to see heavy volume as a further sign of institutions supporting price action. I just wanted to show a way of taking market observation (50 day simple moving average catching up to price), coupled with prior education (IBD rules), and plugging it into some scanning software to see what the results were.
Below I listed some of the stocks that I liked more than the other returned stocks. Each stock can be enlarged by double clicking in order to get a better view of the notes on the chart. The stocks are listed alphabetically.
While running a scan that looks for high probability bounce setups it returned only one stock. What I do like about this scan is that it keeps the returns to a low number so the trader is not overwhelmed with having to go through many charts. Tonight it returned one stock and that was Duke Energy Corp (DUK). Looking at the chart I really like it going forward. What I also like is that the current trade could be attractive to swing and position traders. Swing traders could benefit from a quick bounce and percentage gain while position traders can benefit from its low volatility and healthy dividend. Below is a picture of the chart with notes on it:
On a non-technical level I like the following stats (courtesy FINVIZ):
Trading 14.63x Fwd Earnings and 1.29 P/B
Stable and consistent quarterly dividend paying out the last 86 years
Liquid with Average 3-Month Volume of 5.22 million
Beta of 0.33 (not a volatile stock)
I also went to the iBankCoin PPT to get further stats on the stock (specifically overbought/oversold algorithm) and found that the stock is at and near Oversold levels with a history of bouncing. The timeframe for the bounce is short by going out a max of 10 days but nonetheless the stock does bounce from technical standpoint and hybrid (technical & fundamental combined) standpoint. this information would be better suited for the swing trader in my opinion. Also in the options market there remains a high level of open interest in the Sept/Oct 70 calls and the Jan 70/75 calls. This is in comparison to the put side.
Going forward I think there is a high probability for a bounce, personally I would like to see today’s high (65.23) taken out before getting long to ensure that selling has succumbed. Either way I like the stock from a chart structure standpoint as well as oversold triggers and has non-technical events supporting a reason to go long. As always trade at your own risk.
Today while scouring some sites for option trades of sizeable blocks I came across the Rydex CurrencyShares Euro Trust (FXE), the ETF tracking the Euro. I thought this was interesting given yesterday’s news of Draghi pulling out the Federal Reserve’s annual economic symposium in Jackson Hole, WY. Then again this is just news and may have no relation to the trade in the Euro that was seen in the options market today. Today while looking at the TIme & Sales of the Euro a trade came across where a trader looks to have sold the Sept 122 put 4000x and bought the 124 put 2000x for a 0.16 debit, essentially making this a Put Front Spread. Below is a picture of the T&S of the trade:
You can see that the Sept 122 put was traded at the mid-price making the sale speculative, but when I see a block like that trade where the two opening transactions can be matched I assume that they were sold. To further verify my thoughts I plug it into a Risk Profile to see if the trade makes sense and lines up technically. Below is a picture of plugging this trade into the thinkorswim Risk Profile with the following notes:
The trader would be assigned (long) 200,000 shares of FXE if it closes below 122 at September expiration
The trader would lose a max of $32,000 if FXE closes above 124 at Sept expiration
Furthest left red line = lower b/e at expiration (120.16)
2nd from left red line = max profit of nearly $367,000 if pins at 122 at Sept expiration
3rd from left red line = upper b/e at Sept expiration (123.84)
4th from left, furthest right red line = current price of FXE (124.52)
From this trade I believe the trader is betting on a pull back in the Euro and a decrease in implied volatility (notice the negative Vega in the Risk Profile).
I then look to my volatility chart to see if this trade makes sense. Note the following on the chart:
Dotted and solid lines represent the Upper/Lower b/e and the max profit pin
IV is higher than HV (making this trade a strategy a great candidate is it benefits from a drop and price and decrease in implied volatility
The profit region of the trade (120.16 – 123.84) is reasonable as it would bring the Euro back into that range
So what can a retail trader do with this information. I really like two options:
Follow the same trade willing to be long the Euro under 122, which doesn’t seem too bad considering it hit a 2 year low-end of July at 119.73. Also its a nice profit if the Euro pulls back into the range and follows with consolidation. This trade would benefit from the positive theta and negative vega components if it went in to consolidation and became mundane.
Put on a Butterfly spread. I really like this strategy as it limits your risk (unlike #1 as you have naked puts) and the greeks benefit the same, just on a different scale. One trade that I like is the Iron Butterfly.
This trade can be seen below in the Risk Profile and has the following characteristics:
Selling the 122/119 Put spread and selling the 122/125 call spread for a credit of 2.26, risk 0.74
Captures the same profit zone and widens your b/e’s from the Put Front Spread with downside b/e 119.74 and upside b/e at 124.26 (about a .40c advantage to each side from the Put Front Spread)
Maintains the positive theta and negative vega characteristics
Below is a picture with the price slices in the same position as in the Put Front Spread shown above (lower b/e, max profit, upper b/e, last price)
This post is meant to be used as a way to use the option order flow and implement it into your own plan. By looking at what the big money is doing and how they are positioning themselves you as the smaller trader can follow their strategy or as in this case implement a different one utilizing a spread that would benefit in the same way. Keep in mind that this is speculative and it is how I interpreted the trade that took place. I am by no means an expert and only have learned through reading and observation, but I have followed similar action and have benefited. I actually like this Iron Butterfly trade and I will be looking to put it on. One thing I do like is that it does not require a lot of attention and especially with Sept expiration has a “less monitoring” aspect as the gamma effect has not really kicked in quite yet. Also if you are interested in the Euro trade alone, Raul3 of the iBankCoin Blogger Network provides some excellent insight to the Euro along with market profile (example post). As always, trade at your own risk.
Sorry, he’s probably not but I could not think of a snappy title with putting ConAgra in there. On a more serious note, today while searching free sites for option order flow I came across bullish put flow in $CAG. I thought this was interesting given my post last night about hurricanes and industries/stocks that could benefit. While this would be highly speculative it raised a point at the end of my post in how traders can look at option order flow for institutional positioning to further quantify a trade. Today I came across this information, free courtesy of WhatsTrading:
CAG
– Bullish flow detected in ConAgra Foods Inc with 7207 calls trading, or 13x the recent avg daily call volume in the name. Shares near $25.185 (0.155) with ATMIV lifting by 1.36 point and 99% of todays call premium trading offer side. (Auto Content (Trade-Alert))
So with this information I then went to my thinkorswim desktop application and opened up the CAG options chain with Time and Sales (newer feature free to clients). Below are the screen shots:
First shows the September and December option chains as this is where most of the activity took place. Note the volume comparing to open interest in the September 26 calls (2085 / 1734) and the December 25 calls (5082/1378). I consider this as unusual option activity (click on picture to enlarge).
Next I went to the Time and Sales focusing on the December options chain (the larger transaction) to see if these options were bought or sold and if done in sizeable blocks (characteristic of institutions).
We can see that a sizeable block of 4745 Dec 25 calls trading at 0.85c on the ask (buying to open). Also going to the 1min chart of CAG I did not see any share volume that could have signaled this transaction as tied to stock.
Also note the rise in implied volatility (IV) throughout the day as it was at 12.28% before the 4745 block traded and then raised to 13.11% and as high as 14.36% during the day, showing demand for the option (click on picture to enlarge).
To save space I am not going to show the September chain but it was mostly bought on the ask at 0.10c. These transactions occurred approximately 30 minutes for the 4745 Dec 25 block trade.
Next is a daily chart of CAG and we can see that this stock has picked up momentum in the last 3 days and broke out of consolidation around its 50 day SMA. I do not have current access to my charting platform but note the following from top to bottom:
RSI above 50 and making higher highs and higher lows
Broke out from consolidation around the 50sma and highest volume since the beginning of August
Williams %R (30-setting) in uptrend and above -20 (bullish)
Rising +DI > declining -DI and ADX turning up
Am I saying that this option activity is due to Hurricane Isaac? Absolutely not, I just thought it was interesting as it belongs to the consumer goods industry (making Chef Boyardee, Healthy Choice, Slim Jim, etc.). I wanted to raise awareness as this is the type of activity you could look for in those insurers or airlines as noted in my previous blog post. Also this applies to other stocks where there is news pending or there is an unknown event and an insider is positioning.
In the case of CAG this activity could have been related several factors such as those listed but do know as of today that the big money is betting on further upside. Today the December 25 call transaction was at 0.85c so the big money is betting that CAG is higher than 25.85 by expiration Friday in December. In my opinion, I would rather wait for a pullback and then jump on board and then going forward watch to see if those calls are scaled out of or if there is another option trade of size changing the directional bias of the trade.
All of this information was obtained free of charge and there are other sites out there than monitor option volume vs. average option volume. The only item not obtained for free was the data from thinkorswim which is provided for free to its customers. Also while I was typing this out tonight a recommended Twitter follow @OptionsHawk came out with a blog piece titled “Methods To My Madness – Trading Options Flow” highlighting how he watches/interprets order flow in the options market. This is probably the best free information I have come across for analyzing/interpreting options order flow with other informative content.
***Disclaimer: I do not receive discounts, gratuities, or compensation for mention of sites listed within this blog post. I list them as I use their information as a resource and consider them educational and beneficial to the trader.
Running through some screens tonight 3 charts showed up that have my interest. The screens ran consist of stocks that have seen recent selling followed by an up day and stocks that have a trend in Relative Strength. I measure RS by comparing it to the Russell 3000 and measure the trend by having the RS line above the 21 day simple moving average (approx measuring last month) and the RS moving average moving up. The 3 charts can be found below with their sector/industry as referenced by FINVIZ and notes can be found on the chart. I would look to by these on a break of their Wednesday highs in which all 3 closed near.
**BWA – Consumer Goods / Auto Parts
**CXO – Basic Materials / Oil & Gas Drilling & Exploration (higher risk as coming into a long-term down trend line so this would be front-running, but a break could lead to further upside)
**PXD – Basic Materials / Independent Oil & Gas
Again I would look to buy these stocks only if their Wednesday high is taken out. Also keep in mind time frame as these are meant to be day to swing trading positions.
Also here is FINVIZ link (sorted by volume) to the results of one of the screens that I ran. I chose the 3 stocks above as they showed up on both screens. But there are also some (not all) nice setups in the linked page.
