7/19/2009 7:59:32 AM
Summary of Position For July
On June 23 we suggested a full position in a July 980/990 SPX Call Spread for a net credit of $0.50 and a half position in a July 770/760 SPX Put Spread for a net credit of $0.40. If you entered this, the premium you received was $70 per $1,000 of capital utilized, i.e. 7.0% before commissions for 4 weeks in the position.
The official CBOE settlement price for the July SPX options was 940.03.
Current Performance for 2009:
The system remains on a Neutral signal.
If someone had said this time last week that the market would rise 7% next week, you'd have thought they were crazy. We had various signs giving the impression that the market was about to break down, the head and shoulders top, the break (and close below) of support and a lower low.
So what happened?
The market simply loves to do the unexpected, unexpected in terms of what seems obvious on surface appearances. For the S&P, the head and shoulders pattern was being widely broadcast on CNBC and it seems the crowd was positioned for the worst. When the worst didn't happen and prices continued higher, short covering began (certainly spurred on by the positive earnings and guidance reports).
The thing is though, if you look a little below the surface of appearances you can usually find the truth. While it seemed logical to be positioned short before this move higher began, there were signs developing that the key support would hold (discussed last week). I don't think many would have suspected the speed and degree of the rise, although this is not out of the ordinary in short covering instances.
For the week ahead, the crowd is getting a little too bullish and I suspect that we're due for a consolidation, which could come in the form of a short sharp move lower (in the order of around a 4% drop on the S&P). If that happens, evidence is building that this will be a good point to go long. From this services' perspective, the current sideways market has been ideal, but the sideways pattern is probably close to ending soon so stay tuned on how we'll be positioning for the month ahead.
On to the analysis...
SPX Chart - Bigger Picture
The bigger picture is maintaining its range bound trading, even in the face of a 7% rise last week. Having said that, it's now at a point where a decision will be made on the next mid term move.
If we close above 950, the downtrend and horizontal resistance will be broken and the linear MACD will continue above zero, all clearly bullish. On the other hand, if we start to drift lower and the MACD crosses over, we're likely to see a significant mover lower. It'll probably still take a couple weeks before we know the definitive answer though.
SPX Chart - Shorter Picture
The shorter term has done a U turn to where we were last week and while the MACD has had a bullish cross over, prices seem to be extended and in need of a breather.
It's possible that we get to 950 early in the week ahead but I wouldn't be surprised if we begin a sharp turn lower. Ideally a drop to 905 to close the gap from Wednesday (50% retracement of the current move) and if prices can find support around the 900 - 910 region, it may be a great point to go long.
For the week ahead, support on the SPX is 900 - 925 and resistance is 950.
The VIX Picture
Given the strength in the markets last week, the VIX has not actually broken down by as much as one would have thought, in fact Wednesday gap up in the markets had the VIX finish higher on the day.
The MACD is still showing the potential of large divergence, which could be negative for the markets in the week ahead. Having said that, while the VIX remains below the 50 DMA, the bulls remain in control for the markets.
The VIX measures the premiums investors are willing to pay for option contracts and is essentially a measure of fear i.e. the higher the VIX, the higher the fear in the market place. It tends to move inversely with the markets.
Quote of the Week:
The quote this week is from Mahatma Gandhi, "Freedom is not worth having if it does not include the freedom to make mistakes."
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