Thursday, November 20, 2014

Thursday uncertain

The Hoot 
Actionable ideas for the busy trader delivered daily right up front
  • Thursday uncertain
  • ES pivot 2045.17.  Holding below is bearish.
  • Friday bias uncertain technically.
  • Monthly outlook: bias higher.
  • ES Fantasy Trader standing aside.
Recap

In retrospect, "uncertain" was just about the perfect call for Wednesday, considering that the Dow ended the day down all of two points and the SPX down three.  There's no way anyone can call that sort of change the day before.  So now with seven completely indeterminate sessions in a row, where does that all leave us?  Perhaps there's an answer in the charts.  I sort of tend to doubt it at this point but what the heck, we'll look anyway.

The technicals

The Dow:  Huh - the Dow was flat, then it was up when the Fed minutes came out, then it was down again, and in the end it was right back where it started.  Is it any wonder I call all Fed days as "uncertain"?  Ans so where does this little star doji leave us?  Well right where we started.  Nothing has changed.  We're still sitting on the longest daily overbought streak since December 2010.  Interestingly though, we've had much longer overbought streak on the monthly chart, most recently just last year, from January through August - and the market just kept going up then.  So I will stop worrying about this indicator and instead note that the stochastic is just about to curve back over for a bullish crossover even as the other indicators remain stubbornly overbought.  Overall though, there isnt' enough direction here to make a call.

The VIX:  As further indication of the confused nature of this market, we note that on Tuesday the VIX put in a big hammer just below its 200 day MA while on Wednesday is put in a complete mirror image inverted hammer just above the same MA.  How weird is that?  The overall trend continues to drift vaguely higher but sitting on the very right hand edge of the rising RTC right now, this one it too tough to call.

Market index futures: Tonight, all three futures are lower at 12: 26 AM EST with ES down 0.17%. After another unexpected (by me anyway) leg higher Tuesday ES stalled out again on Wednesday with a tall skinny hanging man.  But none of these technical signs seems to mean much lately and I'm tired of calling tops that don't come.  Still this new overnight action is really looking like there's lower ro come.

ES daily pivot: Tonight the ES daily pivot ticks up from 2046.08 to 2045.17.   We're back under the new pivot so this indicator is now bearish.

Dollar index:  On Wednesday the dollar put in its second star in a row, signifying confusion but no clear direction.  We've now touched the 59.49 level for 10 straight sessions, just oscillating about it.  And I still see no end to that.

Euro:  For its part the euro continues to drift vaguely higher with no more than two in the same direction all month so far.  Like the other charts, we got a doji here on Wednesday and the overnight seems to be covering it with a bearish engulfing candle so there's no call at all here.

Transportation:  On Wednesday the trans broke support at 9016 with a 0.32% loss on a classic hammer.  But indicators continue falling and are not yet oversold so that leaves us nowhere.  No all here.

Accuracy: 

Month    right  wrong  no call  conditional  batting   Dow
                                             average  points

January    5      10      6           0       0.333
    64
February   5       2      2           1       0.750    107
March     12       3      6           0       0.800    431
April      9       3      5           0       0.750    482
May        6       7      6           0       0.462    -67
June       8      10      3           2       0.500    132

July       6       4      4           3       0.692    639 
August     8       7      2           2       0.588     81
September  6       6      5           2       0.571    376 
October    6       6      3           1       0.538    271 
November   4       4      3           0       0.444     38


     And the winner is...

Tonight we're getting not so much mixed messages as garbled messages.  With most charts drifting vaguely sideways lately, I've been burned several times in a row trying to make calls in what is essentially noise.  So I guess I'm just going to let this one go by too and officially call Thursday uncertain, though if I absolutely had to take a wild guess, I'd say it's looking lower.

ES Fantasy Trader

Portfolio stats:  the account now stands at $110,500 after ten trades in 2014, starting with $100,000.  We are now 7 for 10 total, 5 for 5 long, 2 for 4 short, and one push.  Tonight we stand aside.

4 comments:

  1. Michele, I love your blog. I just wanted to suggest that what happened on Tuesday could be because of options expiration week. The big banks usually buy stocks in early-to-mid week in the monthly expiration weeks, in order to drive up options prices, so they can sell their options for big profits. This is a great source of revenue for them. This monthly phenomenon skews the indicators. In fact, the more negative the indicators are for Friday before expiration week (and sometimes for Monday of expiration week), the better the upward / positive lift may be on Tuesday (and sometimes Wed or Thurs). I've seen this happen month after month, year after year. One guy in Florida has been trading options (buying calls) on this phenomenon for 10 years and has an average profit of about 70% per month.

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    Replies
    1. Yes, that's a really great observation. I've observed that funny things can happen in op-ex weeks but never really tried to quantify or generalize the phenomenon. I'll definitely consider this more carefully in the future. Thanks very much for mentioning it.

      This is very cool - I just got up and I've already learned something today :-)

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    2. You're welcome Michele. Another industry guru, Sy Harding, has commented on this phenomenon, too: the big banks and institutional traders drive down the market in the week before expiration, in order to be able to purchase call options for pennies on the dollar. Then they buy stocks to drive up the prices during expiration week, to sell the call options during expiration week for handsome gains. It's a major source of revenue for them. It's listed on their balance sheets as "proprietary trading."

      This is how it works for the guy in Florida who's been following that plan for 10 years: right before the close of the daytime market on the Friday before expiration week, he buys near-the-money Call Options. During expiration week (usually at least by Thursday), he sells them. He recommends certain stock options each month, but I have found that the very best, most reliable gains (on average) are on SPY (also DIA and QQQ). He has 10 years of actual trading history on his site, with an average monthly win rate of 84%. Here is the monthly average gain for the index options (SPY + DIA + QQQ) options (all three of those index options averaged together for each month) under this expiration-week plan:

      January: 43%
      February: 56%
      March: 63%
      April: 70%
      May: 121%
      June: 88%
      July: 108%
      August: 121%
      September: 107%
      October: 92%
      November: 100%
      December: 72%

      Overall average monthly gain: 89%.

      Personally, I trade only SPY options and have followed the above plan numerous times, earning an average of close to 90% per month. For example, this week I bought SPY 204 call options on Monday (I usually wait until Monday, because sometimes the Monday of expiration week is down). I got into SPY 204 Call options at 0.85 this Monday. I sold them on Tuesday (a good up day this week) for $1.80. That's better than 100% gain.

      I find that the hardest part of trading is to exercise the discipline to NOT trade any other time of the month. I have been burned repeatedly--and lost a lot of money--by trying to be smart and trade in other weeks (besides expiration week). Finally I made a resolution this year: I will not trade at all, unless it's during monthly expiration week as outlined above.

      The historical monthly average gains listed above are helpful guides to realistic expectations. For example, I can't expect more than 40% in January, but in July I can reasonably expect 100%. (Of course, these are trends that can be overridden by unforeseen geopolitical strife or economic developments in China, etc., but 10 years of actual trading history have proven the trend to be so clear that I would consider it reliable -- and have personally enjoyed great success relying on it.)

      And of course, it would be much safer to shoot only for 25% monthly gains (as the Florida guy recommends). After all, 25% is nothing to sneeze at. Monthly gains of 25% can compound from $1,000 to a million dollars in 31 months. Or $5,000 can compound to a million in 24 months. (And that gain will be tax-free if done in a Roth IRA or Coverdell Education IRA.)

      For those who are not interested in options, the same trend applies to index ETFs and futures (SPY, DIA, QQQ, and ES). Thanks again for your blog. Your writing style and humor are great. I check your blog every morning for an overview of the technicals and the trend, even though I now trade only in expiration weeks.

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