Thursday is a big day for Tech as Google, Intel, IBM and Microsoft report earnings after the bell. Sentiment is extremely optimistic but historically, the days following Intel’s earnings report have not been all that impressive for the broader market and specifically for the technology sector. So far earnings season has failed to provide many upside surprises and although still early, this could add resistance to much further upside..

The technical picture for the big cap technology stocks represented in the QQQs suggest that some give back is in store in the days and weeks ahead. The QQQs are trading nearly 3 full standard deviations from the 40 period moving averages on the daily charts and as we have pointed out previously, these are indications of extremes which strongly correlate to pullbacks. Again, these sentiment and historical observations alone should not constitute a trading system because often the timing is imprecise but nonetheless it allows us to be a bit more patient with our thesis.

We closed our SLV straddle today as the silver ETF seems to be stuck within a narrow trading range and not trending in one direction as we had anticipated. The overall market action today is feeling “tired” and so far at least, it seems that we are clearly running out of “steam”. We are moving the market confidence indicator to Cautiously Bearish here as we approach what we perceive as a point of major resistance at around 1325 on the SPX.

Another troubling sign here is the lack of short interest in the market which coupled with excessive bullishness can make markets vulnerable to pullbacks.

In general I am turning a bit more bearish here as I don’t see sufficient momentum building to push stocks beyond this longer term trading pattern.

January 18th, 2012

Yesterday we evaluated the longer/intermediate term trends and today I wanted to drill down and look at the short term outlook for what we could expect over the near term. The longer term studies point to us getting progressively closer to a breakout on the current long term trend pattern and we have pegged our resistance and support points at SPX 1325 and 1190 respectively on the narrowing wedge which means these general levels of support and resistance should continue to narrow over time until, of course, we resolve one way or another.

So with the top and bottom of the trading range identified, we can now begin to look at the shorter term studies for potential short term trading candidates. Recently we traded a bullish Gold (GLD) spread for a nice profit and exited right at the 40 day moving average which was our identified resistance point. The GLD has struggled at this level over the recent days and is trading at around the same general level at 161.50. I want to see how this general level is negotiated and although I am bullish on Gold, I think we will trade lower before pushing through this resistance which is right overhead at 163.50 or so. We would look to get long again GLD positions at around 154.50 on a pullback or on a sustained move above the 163.50 level on momentum. A short term counter trend pullback trade where we go short Gold is a possibility depending on the trading action at resistance if indeed we trade that high before a pullback.

The IWM (Russell 2000) ETF along with the SPY and DIA are all trading above their 200 hundred day moving averages and in the case of the IWM, it is bouncing off of this now support level. Drilling down to the hourly timeframe, we see that the IWM is just peaking above its 2nd standard deviation on the 40 period MA so a pullback to around 75.00 or so from here would equate to a move back down to the 200 day moving average (daily) and possibly make a nice entry point. As in the case with the SPY and most other equity broad based indices, there is room for the IWM to run higher to around $81.50 or so before stiff resistance kicks in. This is based on the same weekly charts I used yesterday for the SPY.

The QQQ’s on the other hand are further stretched to the upside than the other major indices. Based on the same studies, the QQQs have broken above the long term weekly downtrend resistance channel but volume has not accompanied the price action. What happens here is that we are now into overbought territory on the weekly studies without accompanying volume and a break in momentum. Similar set ups in the past have resulted in a move lower. I am looking at around $57.00 on the QQQs or the 1st lower standard deviation off of the 40 period ma on the hourly charts as a target. The last two weeks of January have been rough for the Tech sector for several years now.

On the FXE and the Euro/USD trade. The FXE hit our first exit point today as we traded at the top of the recent trading channel at the 1st standard deviation off of the 40 day ma at roughly 127.85 which covers on of two large trading gaps. This short term pattern has held since late November and we wiggled our way out selling the short 132 strike earlier for a gain and today getting out of the long call and closing the full position for a gain. The FXE (Euro) is in an obvious downtrend and this was a counter trend move but at this level, it becomes less interesting to me. The weekly charts still point to very oversold levels (more oversold than any period in the past 5 years) and even though this is a crowded trade (short Euro) and perhaps a bit more upside may be ahead from short covering and the like, I am only willing to consider a counter trend move when we waddle into the 3rd standard deviation from the 40 period MA on the daily charts. We will consider it again if and when we pullback. The longer term prospects for the Euro are obviously not very good…

Silver (SLV) is stalling out at $30.00 exactly one standard deviation away from the 40 period moving average on the longer timeframe weekly chart. As with Gold (GLD), the SLV has formed a similar wedge from the lows set in late 2009 and the highs of last summer. The ETF has made a series of lower highs and there is room for the SLV to trade higher until around $34.50 which is where resistance would exert pressure from the downtrend line. What I don’t quite like is that during the last upswing in the SLV, marking the last lower high, the momentum failed to push it to resistance. It turned lower well below the 40 period ma and drifted lower. Our SLV straddle is suffering from this “indecision” as we have been zig zaging within a narrow range and failing to break out one way or the other while time continue to erode the value of these February options. We are very close to cutting this one loose…

January 17th, 2012

Wanted to pull back on the wide angle lens a bit today and take longer term view of the broad market. The longer term studies give us a good base before we drill down and look from shorter term trading opportunities. Below is a weekly chart of the SPY going back to mid-2006 and bear with me as I realize that the chart here looks a bit like a pizza pie with everything on it!

I want to call your attention to the $156.70 level reached back in October of 2007. The downward green trend line starts to delineate the first downtrend resistance channel created following the first “lower high” in December of 2007. The upward sloping green line begins at the low established in late 2008 marking the crisis bottom and connecting to the next “higher low”. The lines intersect and the market resolved to the upside initially breaking the uptrend resistance barrier before briefly pushing back before resuming the uptrend. The extended green downtrend line marks the support level on the ensuing pullback.

Now the red regression channel simply delineates the next trading pattern and note here how neatly the green extended line meets with the red channel support at around SPY 105 in mid june 2010. This trading channel was important for us traders over the past couple of years and notice how it neatly fails at the midpoint of the channel at around 134.45 in February of 2011 and again at around 136.85 in May of 2011. The channel pattern is finally broken lower at SPY 127 in early August of last year. Here is where it gets interesting…

If we go back to the bull market highs of late 2007 and draw a trend resistance line to the highs of this past year (blue line) and subsequently draw an uptrend line from the closing lows set in March of 2009 to the closing lows created in October just passed, we see another long term triangle wedge pattern develop. If we use these channels as support and resistance for our trading, we should run into strong resistance at 132.50 (1325 on SPX) and perhaps lower as time goes by on the downtrend resistance channel and support at 119 and perhaps slightly higher as time goes by on the upward sloping support channel. Note that these conveniently correspond to the first standard deviations above and below our 40 week moving averages.

This is the next pattern which will be resolved over the coming weeks. Which way we break will be dependent (as always) on what is happening in the day to day of the markets. The take away here is that we should see some narrowing of the ranges (as we have already seen) and a drop in vol (also as we have already seen) for the next few months as we negotiate this very dominant long term pattern.

To make a call on which way this will break at this time is really a bet I am not willing to make a the moment. Who knows what will be the tune of the day 2 to 3 months from now? What we do know is that a major trend pattern is set to resolve in the next few months and we will be ready to trade it whichever way the winds blow.

CJ Mendes

January 13th, 2012

The resistance on that wedge pattern we spoke about yesterday made markets vulnerable to any negative catalysts. Below is a copy of the same S&P500 chart and note that the pullback today hit the brakes at the first standard deviation from the 40 day moving average.

This pullback has so far been orderly and not out of the ordinary. The fact is that this downgrade by S&P has been priced into the equity and currency markets and the issues in Greece, which perhaps are more serious than the downgrade, have only had a measured impact on the market. A few months ago, news of such would have sent the market for a trip to much lower levels. This is evidence that the market is not surprised by the current state of affairs in Europe and although I am not of the opinion that we have priced in Armageddon, ie: a collapse of the EURO, I am reasonably confident that the market has discounted quite a bit of the near term volatility coming from these headlines.

Again, the behavior of the stock market today is very encouraging. Quite frankly I did expect more of a washout today on these headlines. If we are able to hold the 1275 level today (1st standard deviation) then it would make the likelihood that we are embarking on a new trading channel at between the 1st and 2nd deviations that much greater. These channels (between 1st and 2nd deviations) are excellent trading channels and I highlighted the last uptrend channel from early 2010 on the chart below. If we can actually break the overhead wedge resistance here, it bodes well for a solid move higher.

Also encouraging has been the trading action in the currency markets particularly the Euro/dollar pairs. Here is how I am handicapping the current events:

Perhaps the most important supportive action for the Euro today is the fact that the Fed is about to embark on another easing program (QE3). They (the Fed) have been hinting at this for some time because of the stubbornly weak job market and we could very well see something as soon as later this month. This would be supportive of the Euro and very bullish for Gold. I am of the opinion that this fact has been the only reason the Euro has been able to maintain its strong value in the face of this crisis.

Again, to drill down to on current trade, it does not mean that I am bullish the Euro in the intermediate term but I believe that because it is not in the best interest of anyone ( Europe, U.S. China) for a disorderly break down in the currency, I do believe a bounce higher is in the works. The likely scenario is for an orderly devaluation of the Euro and that entails gradually lower trading bands not a complete fallout.

Below is an hourly chart on the FXE. I am looking at a bullish divergence in the price oscillators. The FXE bounced off the 3rd standard deviation when we took off the short calls this morning and is now stabilizing at around 1 standard deviation below the 40. I look for a move to around $128.00 in the near term to cover the recent open gap.

January 10th, 2012

Bullish momentum has steadily improved since early December. The percentage of stocks trading at least 2 standard deviations above their 40 day moving averages has climbed to around 19% from the low single digits in early December. I tend to use this as a true measure of market overbought/oversold conditions and the current 19% reading is right about midpoint between what are generally true overbought levels at points above 35% or so and oversold at levels below 5%.

While this is generally a good thing for the bulls, for it to be sustainable we would need to see more participation. So far in the new year, participation has been anemic during a time of the year when we would expect to see it ramp up. This lack of participation along with the advancing levels of stocks pulling away 2 standard deviations from their 40 day moving averages puts the market at risk for sharper corrections.

We took off the IWM position today due to how it traded at the highs of the day which put it squarely 3 standard deviations away from the 40 period moving averages in the hourly chart. Usually when there is a gap higher into the 3rd standard deviation on the hourly charts and there is a break in the volume and momentum indicators, what we usually see is a reversion to the mean. The gap opened at 75.17 and the 40 period MA comes into play again as support at 75.00 and that is where we should gravitate to next.

The set up for Gold is solidly bullish here. We did make a break on the widely followed 200 day moving averages today and it is important we hold this level into the close today. The upside open gap we are looking at closing on this leg higher sits at around 166.00 or so on the GLD. Money flow into the GLD ETF confirms participant interest and I think we may trade near this resistance level quite soon.

The Euro remains stuck at these general levels although there is some indication that it may be ready to make that move higher to test 130 on the FXE. Our trade is for a counter trend move from very real oversold levels within the downtrend channel. At the moment we are trading 2 (nearly 3) standard deviations away from the 40 day ma.

C.J. Mendes

cjm

Madeira Trading Newsletters

DBA Trading Options For Income
8770 Sunset Drive 201
Miami Florida 33143

http://www.tradingoptionsforincome.com

No statement in this web site is to be construed as a recommendation by Madeira Investments LLC. , Madeira Trading Newsletter and/or Trading Options For Income to purchase or sell a security, or to provide investment advice. Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options . Copies of this document may be obtained from your broker, from any exchange on which options are traded or by contacting The Options Clearing Corporation, One North Wacker Dr., Suite 500 Chicago, IL 60606 (1-800-678-4667).

Earning season gets underway today and expectations are for a lousy fourth quarter of 2011. Particularly hard hit are the large financial institutions and in recent days, analysts have lowered their estimates for many of these institutions. The first of these to report will be J.P. Morgan which kicks off the financials on Friday of this week. The market seems to be hitting a wall at these general levels and many participants may be opting to take a wait and see attitude on earnings.

The rhetoric from Europe is also impacting the trading action this morning as the euro zone’s two leading powers, Chancellor Angela Merkel and President Nicolas Sarkozy, insisted after talks in Berlin that private sector bondholders must share in reducing Greece’s debt burden, along with new European and IMF lending. They rejected both a call by a European Central Bank policymaker to abandon plans to make private investors take losses, and a leaked International Monetary Fund memo that cast doubt on Athens’ ability to reform its public finances. Angela Merkel even went as far as casting doubt on the payment of the next tranche of Greek aid.

The German “negative yield” bond auction also did not help matters and these events all contributed to the VIX opening higher by nearly 6%. The market has really handled these headlines with composure lately as these headlines would have had a much bigger impact on the market just a few weeks, months ago. This crisis is far from over…

The technical picture based on our studies remains conducive for some more upside although there has been recent change in momentum. This change of direction in momentum is not pronounced enough just yet to prompt us out of the current bullish trades but something we need to keep an eye on. The short term studies show us trading right off of the 40 period moving average on the hourly charts and we have also noted a narrowing of price volatility which means we are close to a break out one way or the other.

We need to see some cash be put to work soon or the current rally may falter once again at these levels shy of 1300.

January 6th, 2012

Today’s employment report came much better than expected although many believe the data was somewhat priced in to the market. The fact that a stronger economy, which the better jobs data suggests, will keep the Fed on the sidelines in regards to any further easing measures.

The already weak Euro took another leg lower as the dollar jumped on the jobs data and the move triggered a bullish signal on our models. I am looking for a move to around 128.50 on the FXE to close the first of several open gaps before another move slightly lower. The fact remains that the Euro will continue to be pressured lower, in an orderly manner, over the course of this year and I envision opportunities to arise for both bullish and bearish trades.

Gold continues to perform solidly even with the extended move higher in the dollar which, as we have come to experience, goes against the recent coupling between the weak dollar and the rise in Gold and commodity prices.

The Nasdaq continues to be the leading gainer of the major indices along with the Russell 2000 small cap index. Whereas as all the major indices have lingering multiple gaps open, the QQQ quickly filled the gap open on the 20th of December and perhaps this has some bearing on the recent short term outperformance.

Next week we kickoff earnings season with Alcoa reporting. We are heading into the earnings season slightly overbought but I am of the opinion that we still have a few weeks of upside bias until trouble knocks on the door once again.

January 5th, 2012

I am looking at the open gaps on the SPY in relation where they line up versus the standard deviations on the 40 period moving averages to determine where we could expect support . The first open gap comes in at 126 SPY. Looking at the hourly chart below on the SPY we can see that the 40 period also comes into play so I believe that the 125.50 level, which corresponds to the first standard deviation below the 40 period moving average(red line), is our near term target for any downside move. It would close the most immediate open gap and perhaps set us up for a move higher to around 130.

Obviously along those same lines are the open gaps at 121.00 and 116.00…these will be closed at some point in the future but unless there is an immediate black swan type event in the near horizon, it may be an event for later 2012. What we do know is that these will close at some point.

I use standard deviations from the 40 period to gauge the potential downside move based on normal trading patterns. So for example we are trading right at the 40 period on the hourly charts, three standard deviations, and we know that stocks do not trade 3 standard deviations away from the forty for too long, (take a look at the chart below and notice that it is infrequent that we expand between the second and third standard deviations) so that a move lower here to close the second open gap would have to come on the back of an abnormal trading scenario. These are triggered by Black Swans or “mini” Black Swans as I call them which are headline type of events that trigger not of a major magnitude such as standard Black Swans but incite enough of a reaction from traders that in thin (low volume/participation) markets create deeper fluctuations in the price action than is normally expected.

Eventually the market will trade lower and the 40 period moving averages will slope downward. As we trade lower on “normal trading patterns” these open gaps will become more vulnerable

Just fyi on what I am looking at here. I would very much welcome a flush out to close at this open gap today. As always, any questions please let me know.

January 4th, 2012

Stocks started the New Year with a bang and today seems to be content in consolidating the gains. Traders are watching to see if the first five trading days of the month will be positive, indicating a possibly positive January as investors allocate funds to the market. The S&P materials sector, down nearly 12 percent in 2011, was the top performing sector Tuesday, gaining nearly 3 percent. The financials were up 2.8 percent, after an 18 percent 2011 loss. On the other end of the spectrum, utilities, up nearly 15 percent in 2011, fell 1.7 percent Tuesday as the worst performing of the major sectors.

Today, traders are already anticipating the December jobs report, which could make or break the current rally. Economists forecast that 150,000 jobs were created in December, but already there is talk that the number could be higher. The factory orders data was solid this morning and traders will begin to look toward the upcoming earnings cycle. Thursday we will also get a glimpse into the December retail sales data as many companies expect to show gains over the previous year.

The wild card continues to be Europe. The threat still looms of a possible downgrade of the Euro zone members across the board including Germany and France. How much of this is priced into the market may be debatable but it could nonetheless cause a short term ripple which we could exploit for trading purposes. I think this downgrade may very well come around the middle of this month.

Gold continues to trade solidly today even as the US dollar index trades nearly 2/3 of a percent higher. Following a much publicized change of heart regarding Gold, Dennis Gartmann, who is widely followed by many commodity traders, has admitted to being wrong on the recent call to sell Gold and is now looking to pick up Gold on any pullbacks. If we believe that the Fed will continue to embark on easing programs, which I do, then it stands to reason that Gold will perform well. If the ECB joins the printing party and decides to embark on a more aggressive easing program, then we could see an even more robust pick up in the metal.

The long term Gold support channel from back in 2009 was only briefly breached and should, for the moment, be considered intact from a technical perspective (+-2% from support/resistance). The 200 day moving average looms close at around 158 or so on the GLD and the recent strength should continue to attract speculative capital.

January 3rd, 2012

Hope you all had a great New Years holiday. Its time to turn the page on 2011 and the question traders should be asking is where to now? The holiday trading pattern should wind down this week (many don’t know this but the so called “santa” rally historically covers the first 3 sessions of the year. January is historically a good trading month as capital tends to be reallocated from the higher performing sectors of last year into the laggards and new money tends to flow into funds from bonuses etc. As we all know, the past few years have taught us that we are living through a period of unchartered waters in regards to market behaviors so we have to take all of these historical norms with a degree of skepticism.

Obviously all of the issues we have dealt with for the past several months and years have not magically gone away and we have to continue to put a huge premium on these potential headlines swaying the market one way or another.

The technical backdrop to the start of this year favors the bulls although this favorability could be very well short lived. In looking at the IWM of which we currently hold a position, we can clearly see that we are nearing an area that could move the market. The IWM is approaching the highs set on October 31st 2011 after that moon shot higher started early in the month. This level also corresponds to several lows set back in December of 2010 and several times since. Now these “straight line” points of resistance and support tend to be some of the toughest to negotiate. The reason for this is that these levels are set points of accumulation and distribution. In this case we say that there is plenty of “overhead supply” as many traders set stops to generally correspond to these levels. As the market trades at or slightly above the supply is exhausted and the instrument generally is set to trade briskly one way or the other. So if there are lots of sellers at the point and not enough buyers, the stock will bounce around and eventually shorts will step in and push the price action lower.

For the IWM, I am looking for a move to test $77.15 or there abouts and I think there may be a bit more upside from here as we are trading around $75.00 at the moment. Once we trade at this level, the dynamics I have described above will dictate were we trade next. The IWM $77.00 area also corresponds to the second standard deviation from the 40 day ma which will also offer some resistance although to a much lesser degree. The 40 day moving average is our support and in this case it is an upwardly sloping line. We will make our decision on what to do with the position based on how we trade between these levels. If we don’t make a push above this level by the middle of the month then it is possible that we will trade lower first before making another push.

My point here is that these straight line support and resistance points act as catapults one way or another so we should move with gusto one way or another.

Also from a technical perspective, the GLD still has some room to push higher although I think we will hit stiff resistance at between 165 and 168 as we negotiate that downtrend lower lows lower highs pattern. At around 156.00 on the GLD we should have some room and I am using the 40 day moving average as our potential exit point. The 40 day in the case of the GLD is downward sloping so we could very well trade up to meet it quickly over the next few sessions.

C.J. Mendes

cjm

Madeira Trading Newsletters

DBA Trading Options For Income
8770 Sunset Drive 201
Miami Florida 33143

http://www.tradingoptionsforincome.com

No statement in this web site is to be construed as a recommendation by Madeira Investments LLC. , Madeira Trading Newsletter and/or Trading Options For Income to purchase or sell a security, or to provide investment advice. Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options . Copies of this document may be obtained from your broker, from any exchange on which options are traded or by contacting The Options Clearing Corporation, One North Wacker Dr., Suite 500 Chicago, IL 60606 (1-800-678-4667).

The last day of trading for calendar year 2011 is upon us. The market is set to close around the flat line for the year and if someone had gone to sleep late December of 2010 and woke up today, he or she would perhaps think that it was a snoozer of a year! As we know, that could not be further from the truth. The market has traded within a relatively wide range and the overseas headlines have dominated the market action almost from day one. There were natural disasters such as the earthquake in Japan and consequent tsunami as well as the Arab Spring which combined with the European debt debacle and our own domestic economic and political woes made for a very difficult trading year.

Nonetheless, we did have some success particularly early in the year and during this the 4th quarter of the year. Late spring and summer was difficult for most traders and we took some serious lumps as well.

Heading into 2012 we are making no major changes to the TOFI – Options strategy in general. I believe that we have found the sweet spot in regards to the metrics used for autotrading the strategy such as maximum number of live positions etc as well as our own internal trading parameters and systems. I feel very good about the strategy going forward!

We are going to formally suspend the Leveraged ETF strategy for the time being and just concentrate on our diversified options trading strategy. The leveraged ETF space is the current “redheaded step child” of the market and I believe the regulators are going to eventually step in and change how these instruments are designed and used by traders. The intraday volatility that these instruments have created continues to be scrutinized and perhaps rightfully so.

From the pure perspective of the trading strategy, the decaying aspect of the leveraged ETFs make them little more than day trading instruments  in the current market where day to day strong ups and downs in the price action can exacerbate the decaying effect of these instruments. Since our strategies do not revolve around day trading, I feel best to shut down the ETF strategy for the time being and perhaps revisit later in the year.

When I started this newsletter back in 2007, my goal was to provide my subscribers an alternative trading philosophy to what has been the norm for many years. The main principle behind the philosophy is that risk management can only be accomplished on an absolute basis by limiting exposure to it in the first place. There are many brokers, newsletters, pundits and other assorted investment related professionals who profess that the way to success in the market is to diversify between asset classes and invest for the long run. There are also many in the marketplace who make claims that there are ways to structure positions in options, futures etc which offer “high probability” of success (90%+) and that by trading only these high probability trades, one can generate outsized returns.

This fallacy has cost many traders a bunch of money over the years…These high probability strategies do work well most of the time if applied properly. The issue is that because they are high probability trades, when they do go wrong, they generate very outsized losses. Many traders get into a false sense of security and sometimes have months (years) of positive but meager returns only to give it all back in one single bad month. Because these strategies are large risk versus small reward propositions, when a Black Swan event, which by definition are not “knowable” events, the losses can be devastating.

Over the past several years, the stock market has undergone tremendous changes to its core structure. The abolition of the Glass Steagall Act which prevented financial firms from operating as banks and brokerage/insurance companies at the same time has added a great deal of leverage to the system and has exposed many participants willingly or not, to a tremendous amount of risk. The advent of advanced technology which today is used by some firms to “game” the current market system is also something that has forever changed the landscape for traders and investors alike.

Because of these factors, I wanted to offer subscribers an options trading strategy that was high risk high reward using my directional trading models and signals which could be applied to a small portion of an individual’s portfolio yet generate sufficient alpha to outperform portfolios composed of much higher dollar amounts invested in diversified broad market sectors while offering a lower overall risk profile. The first year we were in business, our trading strategy generated returns of over 285% and we were the highest yielding, verified options trading newsletter in the country. This generated much interest and our subscriber base grew extremely fast as many traders jumped on board . The issue we run into is that very often, individuals become mesmerized by the return potential of options but disregard the risks associated by allocating very large amounts (in relation to their overall portfolio) to the strategy in hopes of “hitting it big”….

As many of you know, I do not believe in owning equity in the form of stocks. This hasn’t always been the case but for the past 10 years, I have not owned a single stock. The reason for this is not that I do not believe in the earnings power of good solid companies but because I don’t believe in the structure of the marketplace where these instruments trade. Like I mentioned above the market has changed and the risk versus reward of owning equity in the form of common stocks of even the best companies is not a compelling proposition in my opinion. As I have often mentioned, I keep a large majority of my investable assets in “riskless” assets comprised of different duration/maturities of United States Treasury bonds bills and notes. The remainder is dedicated to our options strategies and that amount never surpasses 25% of the overall portfolio. Gains in the trading is capitalized monthly and a portion is used to supplement my income and a portion is reinvested proportionally between the “riskless” account as I call it, and the trading account. This is by no means a recommendation, it is what works for me and I present it so that you as a subscriber to my newsletter are aware of what is at stake in regards to my overall level of assets. Undoubtedly someone managing a position that represents 2.5% of their investable assets is going to perhaps take a bit more risk than someone who is managing a position that represents 25% of their assets….

I often get many questions regarding investing in Treasuries and why I would park money in such low yielding instruments. The truth is that most do not understand the mechanics of the bond market and the dynamics that govern it. The bond market is not the equity market…The bond market is not nearly as affected by what ails the equity markets today. In fact, long term (80 plus years) returns between the bond market and the equity market are almost identical at around 5% per year with a much lower risk profile.

The idea is that the treasury portfolio is there to provide a backstop for my trading when the trading account is diminished by positional losses. I want to have the greatest portion of my assets in instruments that have a stated maturity and that are guaranteed as far as return of principal and interest are concerned. I know that the term “riskless” is viewed as nonsense by many today due to the current state of affairs but the debt of the United States is still the safest bet in financial markets.

This again is not a recommendation but just me sharing what has worked for me, personally, over the years. In short, please make sure to keep your allocations to manageable levels for your particular financial situation. Over the years I have had thousands of subscribers who have learned and applied this philosophy/strategy to their own situation and today are successfully trading options on their own and beating the market year in and year out.

I want to thank you all for your support and for your business. I look forward to a profitable 2012!

Wishing you and yours a safe, happy and prosperous New Year!

December 29th, 2011

The light volume and concerns over Europe combined for a lower session. The weakness occurred early on and the majority of the session was spent trading sideways, digesting the losses. The weak Euro was to blame for the day’s weakness but perhaps more importantly, the US dollars strength was what brought the knockout blow for commodities and stocks in general. Financials also suffered some weakness after a week or so of recovery strength.

The session’s internal readings were negative with breadth decisively to the downside with declining issues outpacing advancing issues by a 6-to-1 margin. The index losses were all in the neighborhood of 1%. Volume was a bit heavier than Tuesday’s level, but still well below average. Again, there isn’t much insight to be garnered from those numbers. It is basically just a low volume down day to follow up what has been a series of low volume up days.

As we pointed out earlier, the odds of getting a big move up or down before year end seem unlikely. With the S&P 500 at resistance, the internal momentum measures closing in on overbought levels and the lack of participation typical of this time of the year, a push through the resistance area seems difficult if not improbable. After a few days of strength and resistance looming, it is not unusual to see some profit taking. The S&P levels of importance remain the 1265-1275 range on the upside with 1200-1225 the near term support range. The S&P 500 and the other major indexes are in a bit of no man’s land for the time being.

The GLD is trading sideways today after the lower opening gap and actually has managed to pare the loses quite a bit as the session progresses. The open was ugly in the Gold pits and there was a major rush to the doors to take advantage to profit taking in what is one of the few assets up for 2011. The options market activity was also interesting. The at the money volume in the Jan Call strikes was nearly three times the ATM put volume and even now as I write this note, it is 2 x 1 over put volume.

The IWM in turn is rebounding today after yesterday’s move lower. The broad market SPX is fighting for a close at the flat line for the year and I think that is exactly what we are going to get. We are going to hold steady here and take the 2 current positions into the New Year.

December 27th, 2011

The end of year, seasonal grind higher seems to be in full force although the pace of this push may get even slower as we negotiate the 200 day moving average. From a technical perspective, we have to watch out for several factors that may come into play at the 1265 to 1275 SPX level. Besides the 200 day, this general level bumps up against the lower highs made on the downtrend channel formed back in May of this year. This are also coresponds to the first standard deviation from the 40 day short term moving average studies. All three of these could act as a some form of resistance particularly as we trade on such light volume.

Some in the market may interpret this low volume/resistance combination as a great setup to go short the market but after 4 trips to this resistance level on a narrowing range, the market is set to move one way or another and early Jan money flows may push us above this resistance point which could be the catalyst needed to get some participation after the new year.

The opposite scenario, say we fail at this level, could bring us to support at the 40 day moving average which at the moment is at the same general level as the widely followed 50 day MA at around 124 SPY.

It is very difficult to get a short term directional picture at this late stage of the year. Many participants will not be back until early January and those who needed to cover shorts have already done so making any technical study handicapped at best.

I still favor a move higher into the first couple of weeks of January before pairing back a bit. This move higher should take us to test 1300 or the upper band of the second standard deviation from the 40 day MA. We could see a push to 1320 or so but that should be about all before a move lower to retest some lower levels around 1220 or slightly lower but not pushing below 1200. Following the corrective move lower, we could set up for a stronger push into mid February where we could perhaps even push as high as SPX 137 to challenge the highs of 2011. From there I believe we will again enter a period of lower lows and lower highs and the market may begin to falter again.

Headlines from Europe will continue to roil markets and the potential announcement of a QE3 program from our own Fed will obviously have a bearing on how markets trade. Many participants are anticipating the Fed to step up again to make a stronger effort in helping to push unemployment lower.

We closed out the XLE position today. The sector is still favorable in my opinion but decay on the January options will require sharper and sharper moves higher in the price of XLE in the next few days to offset and I think we may begin to slowdown into the New Year holiday. We will certainly revisit this sector again early in the year.

Gold has traded a bit lower still and the bounce I anticipated has really faded quickly. This may be due to just miserable trading volumes or there may be more downside in the metal. At any rate I am not going to wait around too long for this one to perform and more than likely close it out before year end. IWM will more than likely be taken into 2012 and If we are to rally, this may be the sector to ride.

December 22nd, 2011

Stocks have managed to hold their ground after some awful earnings from tech bell weather Oracle. The firm rarely misses earnings projections and the fact that the market managed to hold its positive bias yesterday and today despite the poor showing from the broad technology sector is encouraging.

Overall the session was benign and a flat day after a 3% gain the previous day isn’t all that concerning particularly this time of year. The session managed to keep the momentum of Tuesday’s rally intact and as I mentioned, a day or two of consolidation after the “monster” rally is perfectly normal.

The S&P 500 should make a solid push higher to at least the flat on year level of 1257, but more than likely make a push to test the 1265-1275 resistance levels. Should the S&P manage a few days of calm into next week and into year end, it is possible that the broad market index will knock on the door of 1300.

Energy continues to show some bullish divergences particularly against the broad commodities sector. The energy sector has broken from the general broad commodities sector as Oil looks poised to make a push to the upside. This divergence is being viewed as supporting the outperformance of the domestic economy as well as other developed economies versus economies of emerging nations. Since developed economies consume the majority of crude oil supplies, it stands to reason that outperformance of stocks from developed economies may last at least into the first half of next year.

Gold seems to have stabilized after a corrective move lower to test long term resistance which has so far held. The move lower has brought GLD back to an interesting point to consider long plays. If we consider the chart below, we see that the exhaustive move higher of late July into October has been worked off and we are again testing the lower band of the uptrend channel formed in early 2009. I expect this channel trading pattern to continue into next year which should give us plenty of trading opportunities. This next leg higher should take us to at least 162/165 on the GLD and eventually into the low 170’s before pulling back again.

The domestic economy continues to improve. The jobless claims number continue to improve and there are signs that consumers are spending a bit more. Housing starts have also improved and are at recovery highs. Overall consumer sentiment is surging higher and although still very pessimistic by historical means, it nonetheless has improved substantially over the past month. The improving conditions should begin to take some of the luster away from U.S. Treasury prices as we tread into 2012.

Wishing all of you a very happy and joyous holiday season and a very merry Christmas!

CJ Mendes

Tuesday, December 20th, 2011

The market continued its drift lower yesterday after the third test of the recently established downtrend line. Today, we have managed to build some momentum off of a benign overnight trading session in Asia and Europe and with one of the two major gaps closed, traders are feel a bit better putting some cash to work.

There have been some signs in the intra-day studies that traders were buying into the very recent weakness and this was particularly the case with the XLE and the SPY. This divergence is what gave us an indication that perhaps there was some “stealth” accumulation going on in the S&P futures market that would be expressed in the cash markets once this gap closed. Below is an hourly chart of the XLE and a 15-3-3 stochastic oscillator along with a superimposed buy/sell volume oscillator that makes this a bit clearer. The arrows point to the divergence so that we see prices dropping but that there is accumulation building as the red volume oscillator line pushes higher above the mid point. This basically shows that traders were “buying the dips”.

I have gotten a lot of emails on this today and I wanted to share the reason or better said, what I was looking at yesterday and why I picked up some more XLE calls at the point I did yesterday. There is method to my madness!

On the same chart, we can see that today’s opening created a short term gap against the prevailing short term trend which may very well be closed tomorrow. The push today has taken us exactly where this downtrend pattern has indicated it would making a new lower high. A day of strength tomorrow following today’s rally would be a solid indication that some more accumulation is going on which is what we want to see develop in the next few weeks until at least the first days of the new year. If we manage to make a closing high and break the downtrend altogether, the rally may pick up even more steam.

As I mentioned above, this is the first of two prominent open gaps for most equity ETFS that remain open. The other is the initial opening gap off of the short term oversold levels of late November. This gap will be closed as well at some point… On the SPY, this happens at the 116.77 level for example and on the XLE, it is at the 64.10 level. My feeling on this is that we will not push lower here and the reason for this is the divergence I mentioned above. It seems that, barring some unknown event hitting the market, accumulation has begun and we should begin making a series of higher highs and lower lows off of the trading action today.

C.J. Mendes

cjm

Madeira Trading Newsletters

DBA Trading Options For Income
8770 Sunset Drive 201
Miami Florida 33143

http://www.tradingoptionsforincome.com

No statement in this web site is to be construed as a recommendation by Madeira Investments LLC. , Madeira Trading Newsletter and/or Trading Options For Income to purchase or sell a security, or to provide investment advice. Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options . Copies of this document may be obtained from your broker, from any exchange on which options are traded or by contacting The Options Clearing Corporation, One North Wacker Dr., Suite 500 Chicago, IL 60606 (1-800-678-4667).

Monday, December 12th, 2011

We are pulling back today although admittedly on low volume as the market digests the outcome of the European talks of last week. The outcome of the meeting failed to address some of the meat and potato issues of this crisis but it has done enough to buy some time into March. Those bearish the market based on this outocme are expressing their sentiment today. I think it will be short lived and I would not be surprised if we see a narrowing of the loss into the close today.

Even if we do hold the lower levels today, I am still confident that there is limited downside to the market at this juncture of the year. In my opinion the selloff today is not indicative of a another eminent leg lower and may give some participants the opportunity to cover shorts. As we near year end, many participants that are short the market will opt to cover positions and go out the year squared up.

Another unwelcome bit of news today is the lowering of profit expectations by Intel which is having perhaps more of an impact on the selloff than anything else. The profit warnings could be an issue to the year end rally and should this become a major issue with many other companies issuing similar warnings going forward, the market may have difficulty making much progress no matter the season…

Gold is selling off sharply today. We took profits on our bearish GLD spread today as we had already taken in 50% of the maximum possible gain on the spread. The pullback in Gold is also a limited move in my opinion as we are getting close to the 200 day moving average at around GLD 158 which should offer some support. The reason Gold is selling off here is twofold. The first reason is that the US dollar is trading extremely strong and there seems to be no signs of worrisome inflation in the economy. Secondly, many European Gold investors have been selling Gold to raise funds (Euros) to repatriate. This is true particularly of the European banks which hold quite a bit of the metal. I think there may be a bit more to this weaker Gold trade but we will need to restructure a trade to reflect the timeframe of our play.

A lot of chatter today about the weakness of the BRIC nations and their corresponding stock markets this year. All of the BRIC players (Brazil, Russia, India and China) have had double digit down years so far and many are speculating more trouble ahead into next year. This is certainly an issue to watch for into 2012.

The VIX today is behaving extremely well considering the price action. This could be indicative of some optimism that the worst of this crisis is behind us for 2011 or it may indicate a market that is exhibiting complacency. Again I am going to fall on the side of the latter and say that this is a good indication that this selloff will not succeed and will be very short lived.

Daily Update

Tuesday, December 13th, 2011

Markets gave up the ghost over the last 2 to 3 hours of trading as traders took their cues from the dollar which traded higher, above 80.00 on the DXY. The European issues along with concerns over Iran and their threats of closing important crude oil navigation pathways.

The Fed’s policy announcement did not present anything new to traders and nothing much was really expected to come out of today’s meeting. The Fed would be hard pressed to make any policy adjustments at this time of the year and most feel any more accommodations would probably come during the 1st Quarter of 2012.

The price action was choppy and the market traded both up 100+ points and down 100+ points on the Dow Jones industrials. The financials added to the change of direction midday as there was a rumor circulating that a major downgrade of European sovereign debt was eminent possibly coming after market hours today. The turn in financials was a major contributor to the slide as were the large cap techs such as Intel.

Early in the session we saw a major implosion of implied volatility and the cash VIX plunged to a session low of 23.24. The cash VIX managed to print below the 200 day moving average for the first time since the Late July of this year. After the move lower, the volatility index pushed back higher but only by a few percentage points before closing the session below the 200 day moving average. The move lower in the VIX is important and particularly so because it has traded lower several days consecutively which is what we like to see when vol pulls back. The “rate of change” is important and I think we will probably make another move lower tomorrow making another lower low and lower high. The reason this is so important for traders is that it implies that traders are taking off some hedges or pushing hedges further down the expiration cycle.

The next couple of days should be choppy but generally I believe we will trade higher from these levels. The market seems to want to go higher as interpreted by the action of the VIX and I think if we see another couple of days of this type of action, we will push higher.

There is a gap in the SPY at 121.00 which may get filled if we trade lower. This may be the low point from here and year end and I would see it as an important trading entry point particularly if we don’t see any expansion of volatility (VIX).

Daily Update

Friday, December 16th, 2011

A busy day of trading due to quadruple expirations comes to an end and markets closed pretty much at the flat line. After trading substantially higher early on, the rally lost momentum and we gradually sold off into the afternoon only to push a bit higher into a flat close. The volatile trading gave us opportunity to manage our way out of the short expiring leg on the SPY 127/124 diagonal ratio and half of the long puts.

The seasonal studies, as we know, set up well for a bullish end to the year particularly when the year sets up as it has this year and although that has yet to materialize, it does not mean that it is out of the question that we get some sort of push into the last 2 weeks of the month. The first two weeks of December are historically most often mixed and most of the strength due the this “seasonal” effect coming in the latter half of the month. Like I said yesterday, do I think this scenario is likely? Yes I do, perhaps not as emphatically as I did earlier but I still think there is quite a bit of short covering ahead which could spark a decent rally into year end.

Now that the expiration related trade is behind us, we could be in for a “dull” period which favors the bulls and as the old saying goes,” never short a dull market”.

I have to believe that the downgrade of the Euro nations by S&P has to be priced into this market. I think they have done a decent job telegraphing this to participants so I am not sure how much of an impact this would have on the market. It may actually be a bullish catalyst once it is out there and done with.

The currency markets are also stabilizing a bit and it may very well be that we see some near term bounce in the Euro versus the USD which would bode well for any potential rally. In the short term, I would not be surprised if we see a push to around 133.00 on the Euro and for the dollar index (.DXY) to push lower. Gold seems to also have stabilized at these levels and I believe the heavy selling may be behind us for the time being. The GLD has been pummeled by the move lower and interestingly enough the physical holdings of Gold in the GLD are actually worth more than the actual trading price of the ETF!. These skews don’t happen very often and are usually short lived. In fact, my trading systems alerted on both a bullish GLD and FXE play today but I opted to hold off for the immediate moment to reevaluate early next week..

The trading pattern in December has been one of lower intra-day highs and lower intra-day lows as we can see on the study below. For any bullish momentum to develop we will have to break this pattern which very nearly corresponds to the 50 period moving average on the 60 minute charts. Below we see that early in the month we began a pattern of lower intra-day highs after three failed attempts to make an intraday higher high. Although we failed to make an intra-day higher high today, we came very close. Monday, I would look for an intraday high above 122.94 to possibly be a catalyst for bullish momentum. On the other hand, the opposite is true for continued failure to break this pattern. The bears will continue to trade this staircase pattern down until there is sufficient momentum building the opposite way.

Also from a technical perspective, we have to consider the trading gaps that are left open in these same studies. The late November gap from the recent lows is still open and as I mentioned before these gaps tend to close sooner rather than later. The timing of the close can vary widely but this 2 point gap in the SPY will eventually need to be filled. The filling of this gap would take us down to 1170 on the S&P…

Again the question here should be not “if” but “when”. We certainly seem to be well on the way after making an about turn on the 8th of December and starting that “staircase lower pattern” I spoke about earlier. What I have been evaluating today though is how the S&P 500 has behaved at the 50% Fibonacci retracement from the recent trading low of Nov 25th of SPY 116.30 and the highs set in early December of SPY 127.13. We have managed to hold this intraday level over the past few days which may be a good sign for a turnaround next week.

Hopefully I haven’t confused anyone too much! As almost always is the case there are two opposing but equally plausible technical arguments to consider. Either we move lower and attempt to close that short term open gap at 1170 or we push higher in the next few weeks to perhaps only stumble early in the New Year. My view is that we will not erase the full move higher from the late November lows and that the second half of the month will be solid for the bulls. That being said, we are at the point of max discomfort with this thesis and the market needs to hold this level. Reason why we are opting to hold the SPY puts into next week along with the bullish XLE calls and IWM call spreads. We should have ample opportunity to trade these positions as the market figures out what it wants to do next…

C.J. Mendes

cjm

Madeira Trading Newsletters

DBA Trading Options For Income
8770 Sunset Drive 201
Miami Florida 33143

http://www.tradingoptionsforincome.com

No statement in this web site is to be construed as a recommendation by Madeira Investments LLC. , Madeira Trading Newsletter and/or Trading Options For Income to purchase or sell a security, or to provide investment advice. Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options . Copies of this document may be obtained from your broker, from any exchange on which options are traded or by contacting The Options Clearing Corporation, One North Wacker Dr., Suite 500 Chicago, IL 60606 (1-800-678-4667).

Tuesday, December 6th, 2011

The market has traded within a very narrow range throughout the session and there is a definitive skew towards quality names as the gains in the large cap Dow Jones is outpacing the S&P500 and Russell 2000 by a 2 x1 and 3 x1 margin respectfully.

It has been a lackluster session as not many traders are willing to put money on the line ahead of the EU meetings coming up on the 9th of December which many view as crucial in setting the tone for the market going forward.

Implied volatility has pushed lower but not quite low enough to get long only mutual fund players excited about the prospects for the market and for short term players, implied volatility is perhaps a tad cheap considering the risks ahead over the next few days.

I have been running several trade scans and we have been close to alerting on several trades over the past couple of sessions as we negotiate the 200 day moving average. The market wants to push higher but until we prove that there is some degree of sustainable interest in the market at these levels (200 day ma) and at this junction in the year, we have to trade based on the fact that we are at the top of the recent trading range, no more no less.

So bottomline, we want to be bullish as that seems to be the most logical path here but the fact remains that there has not been any sustainable pick up in volume and general participation just yet which is something that makes us vulnerable to a sharp drop or sharp spike at any point on any slight headline.

A close above the 200 day MA would be a first step as would a pick up in volume into any strength. So far we have not had either.

Wednesday, December 7th, 2011

Markets are playing the wait and see game and traders are taking sides on the outcome of Friday’s European summit. I seems to me that U.S. equity traders may be overly optimistic on what the potential outcome of this summit could be. The German DAX has traded lower over the past few sessions and the European markets and market participants seem to be a bit more “grounded” in their expectations.

Back in the early summer of 2009, I told subscribers that the Fed had shown its cards and that the policy of easy money was one that could not be traded against. The Fed took the position of lender of last resort which has been the catalyst for the market rally from the lows of March 2009.

The ECB has yet to take the same position. This is due to many factors whose merits could be debated until the cows come home but the fact is that they (ECB) have been staunchly opposed to lowering rates under the leadership of Trichet and it remains to be seen if Mario Draggi, the new head of the European central Bank, is willing to take a more dovish approach and allow the Euro to depreciate which is what we would expect to happen should they lower rates (print Euros).

If and when this happens, we could very well expect the market to take another substantial leg higher. The issue is that they may not take the necessary steps to make this happen. Just as the decisions of the Fed here at home had its share of winners and losers, so would it in Europe. The Germans would certainly prefer to remedy the situation with austerity and keep the euro strong. The Greeks and Portuguese and so forth would certainly welcome a weaker currency.

Now the question we have to ask is which side has the most influence on what happens next and the answer here is that German do. The Germans by design made the ECB weak in their mandate to control the purse strings in Europe. They have been the biggest beneficiary of the Euro to this point and I am not sure they see value in taking the measures necessary to right the ship in Europe.

They have beeen at the “sweet spot” over the past 10 years and have been the biggest beneficiary of the European common currency. They, as producers of goods, have enjoyed the benefits of selling their products to the more consumer driven economies of southern Europe while maintaining a high standard of living for the more thrifty German citizendry. This “game” has come to an end because the southern nations are drowning in debt and the market has said “no more” much like when a person reaches their credit limit and lenders shut down their credit lines. Germany is going to have to decide whether or not to save the European union and the longer it waits to decide, the longer we will be in this “limbo”.

If we get a major shift in this scenario and the ECB adopts easier monetary policies, we will see a very powerful rally in Global equity markets. If not we may be a step closer to the worst case scenario for the market which is the demise of the European financial union and the Euro.

We opened a position on the GLD. The position is a bearish call credit spread and the way I see it, if the market does rally, I do see a slight pull back in the GLD as many will look to pick up stocks instead. If the market pushes lower, money would very well flood the U.S. Treasury bond market as Gold has not really been a “safe haven” during this crisis. In this case I would also expect gold to hang around these general levels. The position breaks even at 171.46 and max profit at our short strike at 164.00.

The technical argument shows the development of a wedge which should resolve to the upside but this will more than likely come later in 2012 as there is still some work to be done at these levels. Again this position calls for a move in the GLD perhaps down to 160 or slightly lower to the 200 day moving average.

Daily Update

Thursday, December 8th, 2011

We have structured a couple of trades over the past 2 days. Today we sold to close the final portion of the 124 Dec puts on our original butterfly position. The stand alone, December expiration, out of the money put option was on my radar to close today no matter what as it was vulnerable to both steep time decay as we near the weekend and also to a possible move against it after tomorrow. We also structured a new bearish leaning ratio on the SPY which I think will allow us to capture both volatility skew and decay over the next 8 days. The new position is a ratio (2 x 3) Dec 11 127 short call to a Jan 12 124 long call. The position offers us the opportunity to profit should we trade lower over the next 8 days to expiration as well as to profit if we trade higher over that same period up to the break even which is at 130.67 on the SPY at expiration 8 days from today. The best case scenario for this trade is for us to trade between 125 and 128 as we near expiration or if we trade much lower below 115.

The IWM trade is a January expiration bullish position which will do well if the outcome of the the current round of meetings in Europe has an immediate positive impact on global markets. If this is the outcome then we could possible push much higher into year end. This is, in my opinion, not a very probable outcome tomorrow. I believe we will rally into year end but that this will be a later December event to come after expiration next Friday. I think the probability that the European leaders disappoint the market is the most likely scenario tomorrow and choppy trading into next week. Nonetheless I do expect some money to be put to work as we wrap up the month.

The GLD position as I mentioned yesterday is a play that should allow us to profit on a move slightly lower in Gold over the next couple of weeks. The play has a directional and a decay component currently working in our favor. I think we may trade into the low 160’s over the next few days and weeks no matter how we trade in the equity market. On a bad tape, I expect funds to move into US Treasury and on a very good tape, I expect Gold to lag substantially as money flows to equities.

Daily Update

Friday, December 9th, 2011

The Euro summit, which has had markets in knots over the past several weeks, has supplied the market with some respite from the immediate implosion of the Euro but little in regards to answers to the real dillemas facing Europe .ie too much debt. The proposed oversite of budgets and more stringent rules regarding spending are a positive for the future stability of the Eurozone but what is to be done with the problem at hand which is a tremendous amount of current debt which needs to be rolled and refinanced. Somewhat like someone in great financial stress who has overspent on credit who now pledges to cut up the credit cards and live within their means. The fact that you are going to adopt a more austere lifestyle is good for your future solvency but it does not pay the current bills…

In the end, what is needed to recapitalize banks and fund stability funds etc is the printing of Euros (devaluing the currency) which as I mentioned yesterday isn’t what is in the best interest of Germany so this is unlikely to happen anytime very soon. In the meantime what we get is more band aids and a unwillingness to tackle the issues at the core. Too many diverging political and national interests which makes resolving this a monumentous task at best.

So with a wobbly punt don the field, the politicians may have just managed to provide some cover until we start talking about this gain in early 2012. This is not done and something that we will have to deal with for some time with periods of ebbs and flows much like an ailment which goes away for a while and then flares up all of a sudden.

So what is the market telling us today? The VIX is down substantially and implied volatility is imploding. As the immediate risk is taken off the table, the skews between front month and back month implied volatility is narrowing quite strongly. This drop in implied volatility may be the first signs that a rally may be on the way. Seasonality is important here and as I have mentioned, money managers are underinvested and need to put capital to work. This is an important point to consider. Many of you may not know that Mutual Funds and other regulated investment companies can only hold a certain amount of uninvested cash in the portfolio. The amount or percentage of the fund which can be held in riskless assets is specified in the funds prospectus and obviously this differs from fund to fund, but bottomline, they have to put cash to work in whatever segment of the market that the fund invests in. The most underinvested funds today are the small cap funds and I do expect the small caps to outperform over the next few weeks if indeed we rally. The large caps in turn have outperformed and I think will underperform the small caps in this same period. Many large cap managers have been able to buy quality names on dips and aren’t as underinvested as their small cap peers.

Hedge Funds on the other hand don’t have the same restrictions as they are not regulated as Mutual Funds are. The idea is that many hedge funds have underperformed the indices or benchmarks and because of such, need to generate alpha. However we slice it, it seems that a rally may be in the works.

What are our pitfalls and road blocks? The ratings agencies may take a look at the outcome of this summit and decide to downgrade the sovereign debt of Europe. Here is my take on this. The market today is telling us that this risk may be already priced in. The drop in the VIX today along with market breadth etc is a real indication that there is substantial “dehedging” going on and that if we get a move down on a downgrade, it will be a short term buying opportunity and we will trade right up again.

I would caution everyone not to be too short the market going into year end after today. Although there is always the possibility for a swoon lower on any headline, there may be substantial short covering ahead pushing markets higher. Implied vol should continue to plunge into next week which will add fuel to the fire.

Do I believe that anything has been resolved with what has come out of Europe today? Absolutely not. We will still have to deal with this mess for some time to come but for the next few weeks we may have a chance to actually look at other factors besides Europe.

C.J. Mendes

cjm

Madeira Trading Newsletters

DBA Trading Options For Income
8770 Sunset Drive 201
Miami Florida 33143

http://www.tradingoptionsforincome.com

No statement in this web site is to be construed as a recommendation by Madeira Investments LLC. , Madeira Trading Newsletter and/or Trading Options For Income to purchase or sell a security, or to provide investment advice. Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options . Copies of this document may be obtained from your broker, from any exchange on which options are traded or by contacting The Options Clearing Corporation, One North Wacker Dr., Suite 500 Chicago, IL 60606 (1-800-678-4667).

Thursday, December 1st , 2011

November went out with a 490 point rally in the Dow Jones and a 4.3% move in the S&P 500. The liquidity injection provided traders with some assurances that the financial powers are committed to stepping in if and when needed. Those short the market outright yesterday are licking their wounds today as the market gapped higher and never really looked back. Because the macro issues we are dealing with are centered in Europe, the risk of these overnight announcements hitting while markets in the US are closed become much greater. In short (no pun intended) to make money from yesterday’s rally you would have had to be long at the close Tuesday or long futures in the aftermarket prior to the announcement. The move certainly surprised many participants and as I mentioned yesterday, it seems to have come in response to substantial stress from the European banking system.

Volume was decent during the first half of the day but trailed off considerably towards the end of the session and the VIX did manage a pullback below 30 which is managing to hold today. At the moment, it seems traders are willing to hold these general levels into the employment number tomorrow. I would not be surprised by a slight move lower this afternoon into the jobs number tomorrow but we may just as well end flat. The jobs report, based on the ADP report Wednesday, should be solid. The market is pricing in a good number and we could say that a disappointing number could spur some profit taking into the weekend. Important to note that a great deal to the move yesterday has to be credited to short covering in the futures markets as opposed to strong buying interest at the NYSE. At the end of the day, somebody has to want to hold stocks for more than a day for this market to build traction and for that to happen we need real investors to engage.

So if we agree that short covering was a big part of the move yesterday, then the market today is now, after yesterday’s rally, less exposed to another immediate short covering rally (at least to the same magnitude). A bit of this is reflected in todays action. A second day of follow through accumulation following yesterday’s monster move would be very bullish. So far it does not seem to be the case but many times markets take a day or two to digest the move before we see some follow through. We are carefully monitoring the SPY butterfly which was blindsided by yesterday’s announcements… The move higher yesterday created a second consecutive open gap higher on the SPY which very often results in a retracement. These consecutive gaps create an “island” and these are much more often than not filled and filled in short order before resuming an uptrend. The reason for this is that because these gaps happen in the off hours, many participants do not participate in the gains and are unwilling to chase the higher prices. Short term traders realize this and if there is no follow through, will push markets lower to cover the gaps which usually gets investors/money managers out of the sidelines. When we see strong follow through on the day after a rally it is said to be a true bullish indicators because participants are “pilling on” and willing to chase prices higher. This may still be the case as we could just be in a day or two of consolidation and then gap higher once again but this is not what we usually see after two big gaps higher.

So we are going to hold on to this position “as is” here and hedge our overall exposure to a move higher in the broad market with the IWM bullish leaning strangle we initiated yesterday and possibly another similar play in the next day or so. The idea is that it may be the case we fill this gap first and from there make another push higher. At any rate if we continue to trade much higher, we will have to close out the SPY butterfly at a loss which should be partially offset by gains in the bullish strangles. Should we trade lower, the butters will again show decent gains particularly if we trade back to below 122.

Daily Update

Wednesday, November 30th, 2011

An avalanche of good news greeted traders this morning starting with China lowering reserve requirement for their banks, which basically is their equivalent of an easing move by our Fed, followed up by a coordinated move by the ECB, U.S. Federal Reserve and several other global central banks to basically inject a measure of liquidity in the markets to avoid frozen credit markets and a run on European Banks. This was not a proactive move as I understand it, but a real “put the fire out now” move as overnight there was considerable stress in the system. Some are speculating that there may have been a bank in dire trouble overnight and although this has not been confirmed just yet, it does make sense.

Seems like the immediate liquidity concerns have been abated with this move. What remains and what is truly the major point of contention is the solvency issue which as we all know will not be solved “overnight”.

Below is a chart on the SPX. It is a daily chart and it highlights our 40 day standard deviation bollinger bands. The period or “trading trend” we are tracking is the trend which began off of the August 2011 lows. We have traded within this regression channel since and have briefly breached it twice, once on the downside and once on the upside.

A quick glance highlights a couple of points. First is that we are trading at the mid point of the regression channel. Secondly, that within this broader trend, we are also negotiating a near term pattern of “lower highs” for the month of November. We are currently trading right around this channel resistance level. This really is the last line of defense and I don’t believe it will be much of a road block due to the Fed announcement.

So based on this study, we seem to be at a good entry point for bullish plays on the broad market. We made a low in early October quickly followed by a move into the third standard deviation above the 40 in early November and a successful test of the lower channel just a few days ago. We throw into the mix seasonality which is on the side of the bulls and the fact that apparently some of the darker clouds have been lifted in Europe and what I come up with is a very bullish scenario from here to around 1300/1320.

Considering the move today, I would not rule out some profit taking but in general, I have no problem being a bull here into year end. Obviously headlines are still an issue particularly with the Jobs report due out Friday.

Daily Update 11/29/11

I am (have been) working on modifying the parameters we use for the leverage ETF trading module.

Because of decay on these 3X and 2X leveraged ETFs, holding them for through even short counter trend periods makes it difficult to recoup even when we return to the intended direction. The size of moves while on the brief countertrend also make a tremendous difference. Decay when referring to leveraged ETFs is not option like decay. It is simply a function of the leveraged nature of the instruments. The chart below clearly demonstrates what is meant by this decay which in my opinion is a misnomer for what really happens. From quantumfading.com

If the 1x ETF were to drop 10% on a particular day, the 3x would drop 30%. That puts the 1x ETF at $90 and the 3x at $70. Then on the next day the 1x ETF increases $10 back to its original value of $100, which is an 11.11% gain (10/90 is 11.11%). The 3x ETF will gain 33.33% of its $70 which is an increase of roughly $23. This puts the 3x ETF at a value of $93, for a loss of $7! Repeat this process again and again and over time the 3x ETF will continue to lose value while the underlying index always returns to $100. Here is a chart that shows this process happening 15 times (30 days).

Leveraged coumpounding can work to our advantage when on a strong uptrend and by strong uptrend I mean unbroken uptrends, or day after day of increases in the index but on an uptrend that is punctuated by even a day of counter moves can be disastrous.

In short, I am running some models considering these factors with the purpose of eventually incorporating these into our system for generating buy sell signals. So for example, we may use an overide to exit a position even if still within the directional thesis of the trade if, say the index trades countertrend for more than a day. So for example say we alert on a bullish play on the TNA and trade higher 3 consecutive days on the underlying IWM followed by a down day. Theoretically we would exit if the IWM opened down the following day (second down day) even if the technical backdrop for the trade indicated continued upside potential for the IWM.

Bottomline with leveraged ETFs is that there is considerable deviation from returns on the 1X to the 2X and 3X and it is magnified as time passes making these not appropriate for long term buy and hold investors. These are trading vehicles and optimallly designed for day traders.

I will have some more on this over the next couple of weeks.

Final Stretch

Nov 28th, 2011

Not sure exactly what the catalyst is today for the 30+ point move in the S&P 500. There where some hopeful comments out of European officials but in general, I am leaning towards an oversold bounce and some speculative short covering.

The timeframe for that rally we (and everyone else) has anticipated is quickly fading as we enter December and the VIX seems to be indicating a continued level of “concern” on the part of participants which I think will not be shed so quickly. Remember in the past few weeks we have had two major whipsaw moves in the market when the VIX has ventured below 30…The fact that the headlines are so volatile and can carry so much of a punch, I don’t believe we will get too much of a break in implied vol for at least the remainder of the year.

Higher levels of implied volatility do not necessarily mean that markets have to be volatile but that markets have the potential for outsized moves either way. Options continue to be expensive and my take is that they may get slightly more expensive even if we trade a bit higher into year end.

There is no major participation from “bread and butter” long only money managers in recent months. This has been a theme we have spoken about for some time now. As long as those who buy stocks for fundamental reasons stay out of the market, we will continue to trade in very choppy and range bound fashion. For the market to make “sense” again, these players need to come back, particularly to the small cap names.

Even with the recent upside surprise earning announcements and improving economics here at home, the overwhelming theme has been Europe debt crisis. Money managers know the risks associated with a fallout in the Eurozone and the major damage that a disorderly Eurozone default could have on Global markets. Equity markets tend to climb a mountain of worry but this mountailn may just be too much for some to tackle at these levels.

The bottomline is that if we continue to be hamstrung by this debt crisis into year end, the potential for a strong move lower into early 2012 will be substantially more probable. If participants feel that the risk reward of putting money to work at this juncture is too great, then they may just as well “write off” the year and look to buy at much cheaper levels next year.

This is the reason that it is so important to keep an eye on the VIX at this junction. We need to see some institutions take a bullish position into year end by releasing some of their hedges. Another asset we also need to keep an eye on are U.S. Treasuries. We need to see outflows from bonds into equities. Today for example we are seeing very low volume and a VIX down only 4% while markets trade 300 points + on the Dow…as well as U.S. Treasuries trading just about flat. Not a very bullish backdrop.

A hold of 1185 would be constructive today. 1200 remains an important psychological point and the 50 day MA at around 1210 or so is near term resistance. First standard deviation on the 40 day remains a point of support although on a break we could well trade lower to the second standard deviation at around 1130…

So today by no means should be taken as an all clear. Markets are forecasting continued volatility and moves up and/or down of 2% a day may be in the cards.

C.J. Mendes

cjm

Madeira Trading Newsletters

DBA Trading Options For Income
8770 Sunset Drive 201
Miami Florida 33143

http://www.tradingoptionsforincome.com

No statement in this web site is to be construed as a recommendation by Madeira Investments LLC. , Madeira Trading Newsletter and/or Trading Options For Income to purchase or sell a security, or to provide investment advice. Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options . Copies of this document may be obtained from your broker, from any exchange on which options are traded or by contacting The Options Clearing Corporation, One North Wacker Dr., Suite 500 Chicago, IL 60606 (1-800-678-4667).

Tuesday, November 23nd, 2011

Nothing like a failed bond auction in a major Global player to whack markets….

The timing of this is what has really hurt the market today as many traders will not step up here before the holiday and take advantage of the move to scale into long positions particularly when the European markets will be open tomorrow as we celebrate the Thanksgiving Holiday.

Another issue irking markets are poor economic figures coming out of China. Nonetheless, the market seems to have found some support at the 1165 level or the first standard deviation off of the 40 day MA which I mentioned yesterday as the probable next “speed bump” should a catalyst emerge to shake traders confidence.

Failed bond auctions are obviously a concern particularly when the paper being auctioned is quality AAA debt of a major economic power such as Germany. I certainly did not expect this detail today and I am still not quite sure what to make of it. There are rumors that this failed auction could have been staged somehow for the purposes of sending a message to the ECB but either way, it is a concerning development. The Euro took a hit overnight on this news before paring back the loss a bit as we began our trading day here in the U.S.. Consequently the U.S. dollar is trading strong today against a basket of major currencies as the DXY (Dollar Index) is trading 1.1% higher.

VIX is higher today again but still very subdued considering the headlines and still within yesterday’s ranges… Either the market is totally mispricing risk or this is going to be classic head fake as we trade into December. Ask me yesterday and I would have said “classic head fake” but today I am a bit more skeptical…Because of this and due to the holiday tomorrow, we decided to chop down some bullish exposure on the IWM and QQQ positions even though these are longer term options. On the ETF portfolio, our TNA and EDC positions stopped out this morning on the move lower as I had purposely set rather tight stops on these because of the uncertainty ahead of the holidays.

We’ll have to see what the next few session bring. I am still leaning bullish but the headlines out of Europe are very concerning. The lack of coherent action from the EU leaders to stem the fallout of the crisis is really beginning to damage their credibility which is potentially why bond buyers are only willing to consider Euro bonds at much higher rates.

Wanted to wish everyone a terrific Thanksgiving Holiday!

Good News Bad News….

Nov 21th, 2011

The market action today brings some bad news and some good news. The bad news first…The politicians again failed to come to a compromise on the deficit cutting debate in Washington. Although this has not been formally announced just yet, the market today is pricing in the fact that no agreement has been reached by both political parties to find some middle ground. Along with the highlights from the congressional super committee, the market continues to weigh the debt situation in Europe and if that was not enough, overnight the Chinese vice Premier warned about a slow down in China that could threaten a Global recession…Talk about a triple wammy!

Along with the fundamental onslaught of bad news, the market today is dealing with some serious violations of important technical levels. First to go was the 40 day MA and then the simple 50 day MA which is widely followed as well as the psychological 1200 SPX level. The action has also been one of extreme breadth as we will probably see a 90% down day (90% of the S&P 500 trading lower). The breakdown of volume has also been decidedly skewed towards those declining stocks making the TRIN reach some very extended levels.

Now for the good news. I mention this not because I want to see the trading action through rose colored glasses, or because of any bullish bias on my part but because it is what it is and needs to be considered.

Considering the major price selloff today, we have not seen a major expansion of implied volatility. The VIX on a 30 point move lower in the SPX, is only up by around 5% as I write this and at its worse point around 9% higher. This is certainly not what we would expect to see following a weekend of bad news and on a Monday after expiration. Another point to consider is overall volume. The moves today have not yet elicited the type of rush to the exits volume one would have expected. This is crucial to consider here not because I believe the market action today is particularly “good”…but because considering the backdrop, it is not as bad as it potentially could be…

Because of the above I am of the opinion that the downside here may be limited and the market may rebound very quickly to test the old support levels broken (which now become resistance) over the next few days.

It is tough to get markets to sell off very aggressively in late November and December. Those bearish the market are leary to short stocks at this time because trading volume is low making markets vulnerable to whipsaw. I think this should be viewed more as a short term buying opportunity than a true bearish catalyst.

A close above 1185 would be viewed positively for those who want a decent, year end trading entry point into the market. At least this is how I am reading the action today!

Daily Update

Nov 18th, 2011

The market followed through on Wednesday’s weakness and sold-off with a bit of conviction on Thursday. Thursday’s bearish pressure has pushed the S&P 500 out of the recent consolidation range and moved the index back for a retest of support at the September highs. The breakdown has moved my short-term indicators into oversold territory and these indicators are at levels at which I would start to look for a mean reversion trade back to the upside.

The support level we highlighted yesterday at the 40 day MA has held again today and there is some evidence that seling pressure is evaporating at these levels.

The VIX is testing the upper end of a two standard deviation band and the 7-day ROC (Rate of change) for the VIX has moved into extreme territory. These short-term extremes in the indicator suggest that the VIX has moved a bit too far, too fast and short-term selling pressure may have become one sided. We’ve also seen the % of stocks > 2 standard deviations over the 40-day moving average (a measure of bullish pressure) move back towards the zero line. This tells us that the excesses created during the October rally have been completely worked off.

The market has created the short-term conditions for a rally. If the indexes have actually made the bullish change, which has been suggested by the price action in October, then the short-term oversold condition is a bullish entry point into the market.

Headline risk continues to be the wet blanket on the market and there “should” be little appetite to go long into the weekend but if the market does manage to push higher on volume late this afternoon, it could bode very well for next week.

The risks are obvious and they remain the same. Fallout from both a poor showing from the so called super committee in Washington and the continued weakness in Europe. Another risk which is also beginning to catch trader’s radars is the simmering issue in Iran and their nuclear aspirations. No doubt some of this rise in the price of crude is due to elevated geo political risks.

These risks, if alleviated, could trigger an explosive rally at any moment. I do favor an upside resolution here but we are going to play it cautiously into the weekend.

C.J. Mendes

cjm

Madeira Trading Newsletters

DBA Trading Options For Income
8770 Sunset Drive 201
Miami Florida 33143

http://www.tradingoptionsforincome.com

No statement in this web site is to be construed as a recommendation by Madeira Investments LLC. , Madeira Trading Newsletter and/or Trading Options For Income to purchase or sell a security, or to provide investment advice. Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options . Copies of this document may be obtained from your broker, from any exchange on which options are traded or by contacting The Options Clearing Corporation, One North Wacker Dr., Suite 500 Chicago, IL 60606 (1-800-678-4667).

The market gave up the gains of the session very late yesterday and the broad S&P 500 index managed a close right at the 1257 level which corresponds to that flat on year “magnet” I have mentioned before which seems to be where the daily battle between buyers and sellers is being waged. The trading action yesterday was not much different than what we have seen of late. I hate to sound like a broken record in these updates but there there really hasn’t been anything different in the character of this market over the past 2 weeks.

We are reaching the third week of this consolidation and it is beginning to get “old”. By that I mean that sufficient time has passed to unwind the previously very overbought oscilators and that very soon we will need to see some resolution to this tug of war. The range we have been observing has narrowed over the past few sessions with the market making a series of higher lows and lower highs forming a symmetrical wedge pattern which by nature supports the probability of a more decided move either up or down.

The overwhelming and overriding event continues to be the worries over Europe. While many a bull market has been built on the back of investor “worries”, the potential magnitude of the Euro headlines has placed a “lid” on this market and rightly so in my opinion. While for us traders (particular those trading options) this environment presents many opportunities and potential for great returns, for the traditional investor, the risk versus rewarded presented by this debt crisis is not attractive at all.

Looking for a close this cycle at around 1250 on the S&P 500. This corresponds well with the current open interest around that strike and I do not expect a move either way until next week. Obviously the Europe headlines can cause markets to erupt at any point here but baring any major event, this is what sounds most probable with a slight bias to the upside of 1250.

Daily Update Nov 15th, 2011

Lingering concerns from Europe were somewhat mitigated this morning with some better than expected economic figures here at home. Particularly intersting was a drop in inflation which could, if sustained for a few more months, open the gates for another round of Fed easing (QE3).

This afternoon markets also seemed encouraged by the fact that apparently the new Italian prime Minister, Mario Monti, was moving quickly to build support for these austerity measures. How long this lasts is anybody’s guess…

There really wasn’t much else driving stocks on Monday. The market is maintaining the strength off of the surge higher in October but buyers are still hesitant to step up in a big way. The VIX is hanging onto the 30 level after traders twice over the past few weeks ventured to pullback on hedges only to get immediately burned.

From a purely technical standpoint, markets are well within a consolidation phase after a huge move higher and working off an overbought condition. A quick point on technical analysis and at least how I apply technical analysis to my day to day trading. Technical analysis means very little if not handicapped by other pertinent factors. By that I mean things such as sentiment, volume, momentum, seasonality, macro global headlines short term economic headlines and many others. If you don’t handicap a technical thesis with these factors, you are setting yourself up to fail. Stocks and indices do not have to stop at a support or resistance level on cue and change course or necessarily move lower when “overbought”.

Technical analysis, again in my view and I am aware that those who trade purely on the charts may find this heresy, should only used as a guideline to what most probably will happen when a stock or index trades within a certain technical pattern or reaches a particular support and resistance level. That view has to be tempered with a consideration to other factors such as I mention above.

Since HFT (high frequency trading) is such a huge part of the marketplace these days (60 to 70% of total transaction volume), we have to be very careful not to get whipsawed by blindly following any tried and true technical pattern. That is when these guys and gals are most active and in a thin market, it becomes very easy for these traders to manipulate the short term direction of the market and influence direction.

The same consideration has to be given to sentiment and sentiment based studies. These buy themselves do not make for good trading indicators by themselves but do help fortify or discredit a technical argument.

We bought to close the short Nov. QQQ 58 calls which were sold against our long QQQ June 56 calls. This is the 2nd strike we have sold against these long 56 calls and have bought both back for nice profits. Along with the buy back we also sold another round of Dec 58 strikes against the same existing long 56 calls.

A close above 1257 today would be a win for the bulls…

Expiration Week

Nov 14th, 2011

Last week was a real wild ride in global equity markets. We saw some steep declines in the S&P to the tune of 4% on Wednesday only to put in a 3.5% rally in the following two sessions…

Today we are giving back some of the gains of Friday and the VIX has spiked nearly 10% before pairing back some. More rumblings out of Europe and today we are seeing “Spain” in the headlines which I mentioned just last week as being exactly what would happen next in this drama… Folks this is not going away anytime soon.

We are holding right at the middle of the recent range and while volatility has increased of late, volume has been really non existent. The fact that volume has increased into selloffs versus a noticeable pullback on rallies leads me to believe a continued move lower to test the recent support levels at the 50 day moving averages is likely before a push higher.

As I have been saying, there is no reason for mutual fund managers and other “big money” players to put cash to work in this environment. The seasonal skew to show better than market results are being outweighted by the headline risks out of Europe. Better to show tepid returns than risk being caught in a rush to the exits…

An inter range level that has proven to be a magnet on both up days and down days has been the flat on year level of 1257 on the S&P 500. This could come into play this expiration cycle as we may very well close in this general vacinity at expiration due to “pinning” action at around this level. “Pinning” has to do with the level of open interest at different strike prices and the fact that markets will be influenced by market maker activity during the last days of an expiration cycle and tend to gravitate to the strike with the highest level of open interest. Again, baring any unforeseen headlines, this is where we may trade to close this week.

Contagion

Nov 10th, 2011

Contagion of the credit woes of Greece and the other weak members of the union to the healthier European economies has been the biggest concern of markets since this crisis began to surface some time ago.

In reality, this has been a concern to markets ever since the Euro came into being. The drastic differences between the more austere nations and the profligate southern European nations have always been something of a vulnerability within the framework of the European union and many feared that these vulnerabilities could be exploited in the right environment.

The lack of a clear framework to tackle these issues, whether good or bad, is just not part of the structure of the union and markets know this. Just as in nature where a predator hunting for a meal will focus on the weakest member in the group, the marketplace is focusing on the most vulnerable members of the European Union. In nature, once a weak member is attacked, the stronger members of the group may try and mount a challenge to save the weak member (s) from the predator if it is deemed that the weak member can still contribute to the group or If a member is ill, weak or perhaps too old, the group may not feel the challenge worth the risk and allow the weak member to be sacrificed. Such is the case at the moment in Europe. The weak nations are vulnerable to speculative atacks and the stronger member’s of the group seem to be undecided whether to mount an effort to try and save the weak members or allow them to fend on their own. The problem is that by hanging around, they are exposed to being attacked themselves… Such is the risk of contagion. The weakness in Europe stems from too much debt and is exarcerbated by a structural inability to shield its weaker members from speculative attacks.

These issues will not go away. The market senses the weakness and as free markets will do, will continue to pound away at this weakenss until the risk of doing so is greater than the reward. It is that simple. If the stronger members of the group do not do enough to change this dynamic they risk themselves being prayed upon by the market.

Here at home we have a Fed that, for better or worse, has the ability to overwhelm the market in these cases with easing programs like QE 1, 2 etc…Whether these programs are sustainable in the long run can be debated but what can’t be debated is the fact that the Fed does have this “arsenal” ready and available to use if necessary.

Yesterday we worried about Greece today we worry about Italy and tomorrow it will be Spain, Portugal and others…The cat is out of the bag and this deficiency in the European union will continue to be exploited until it is no longer a weakness. For that to happen, the stronger members will have to decide if they are staying put and mount a real challenge against speculation or opt to go off to find greener pastures…

There is no way to avoid a devaluation of the Euro and achieve this. You cannot have a strong currency while the world shuns your debt…Eventually, the ECB will have to intervene with aggressive rate cuts and similar quantitative easing programs to our own which will lead to a weaker currency but show the world that they mean business in regards to keeping the European Union intact.

Not impressed with today’s rally after a 400 point drop in the Dow Jones Industrials yesterday. Volume was unimpressive and there was nothing about today’s session that changed any of the current dynamics. Might as well be a continuation of yesterday’s trading session whereas instead of a 400 point drop we managed only a 300 point drop at the close…

Most probable move here is a continued push down to test the 50 day around the 1220 level. With the VIX trading at this level above 30 without much participation in the market (low volume) we can expect to continue bouncing around like a ping pong ball trading off of each headline out of Europe.

E.C.B. Needs To Step Up NOW!

Nov 9th, 2011

The trading action over the past 24 hours represents exactly what is holding back the markets from a push higher…

I have mentioned that for markets to start making a push higher into year end, we would first have to shed some of the worries about an immediate breakdown in Europe. Yesterday we saw the market once again push a bit higher on declining volatility. The VIX managed to pullback below 30, a level that is crucial for long term institutional money managers and mutual funds to begin considering putting money to work. Today those who waded too far in the pool have been reminded once again that headlines from Europe could still have a tremendous impact in the day to day trading action.

Today the VIX is once again trading above 30 as investors rush back in to hedge up portfolios. It is important to note though that we are not seeing outright selling of the market and volume has been tepid considering the price action. Markets make substantial moves (up or down) when institutions are involved in the market but that just hasn’t been the case. How can money managers put large amounts of cash to work in this environment? We have to keep in mind that institutions, because of the size of their trades and positions, do not have the ability to be as nimble as smaller players.

I think the market may be headed once again to the lower end of the trading range. That means a test of the 50 day MA with a potential dip as low as the 40 day. That puts us at around 1215 or so on the SPX where we should find some buying interest once again from short term traders and depending on the global macro headlines, institutional money managers.

I have to repeat that even with the near 30 point slide in the SPX today, markets are very composed. The selling that I would have expected in the Global equity markets on a blow out of Italian debt yields such as we saw today and the corresponding move lower in the Euro has not materialized, at least not yet. Either the market is totally underpricing this risk, or completely overreacting to it…

Again, in my view the uptrend channel recently formed is still intact from a technical perspective. The fundamental backdrop tells me that we may be headed to test support. In my opinion, the action today indicates a market that is still “waiting for the rain to stop but is eager to come out and play” ! So in short, look for a move lower to perhaps 1220 or so before another try at a push higher.

The wildcard in this thesis is if the ECB comes out with the proverbial “bazooka”. This means a ramp up of bond buying (particularly debt of Italy) to push out speculators along with more easing. I understand that the ECB does not have the legal mandate to act in that capacity but I think if the situation gets dire enough they may throw that to the winds and intervene. In this case scenario, we could see another massive drop in implied volatility and a barn burner of a rally. Today at least, I favor the move a bit lower as most probable case scenario.

C.J. Mendes

cjm

Madeira Trading Newsletters

DBA Trading Options For Income
8770 Sunset Drive 201
Miami Florida 33143

http://www.tradingoptionsforincome.com

No statement in this web site is to be construed as a recommendation by Madeira Investments LLC. , Madeira Trading Newsletter and/or Trading Options For Income to purchase or sell a security, or to provide investment advice. Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options . Copies of this document may be obtained from your broker, from any exchange on which options are traded or by contacting The Options Clearing Corporation, One North Wacker Dr., Suite 500 Chicago, IL 60606 (1-800-678-4667).

The market has shifted its focus from the Greek situation to the big elephant in the room which is the Italian debt situation. Yield on Italian 10 year debt is at historic levels this morning as investors target the next weak link in the European chain link…The market smells trouble and will not ease up until measures are taken to scare away those betting on the demise of the European Union. For that to happen, real, decisive and coordinated efforts need to be undertaken which so far have fallen way short of the mark. The Europeans will have to bite the bullet and devalue the Euro at some point and while the Germans and the French won’t like it, I don’t think they will have many choices if indeed the European Union is to remain intact. It is a serious situation with serious implication for the Global economy which will not go away until bold action is taken by the European leaders. Political considerations will make this a monumental task to achieve.

Running several scans this morning with the hope of finding a couple good quality trade and have so far come up empty. The fact that we are at the mid-point of our identified trading range is certainly to blame along with the fact that we are at the mid point of the implied volatility range of the past few weeks. What I want to sell is not as rich as I think it should be and what I want to buy is way too expensive! I want to be bullish the market but I don’t like the overhang of these incredibly volatile debt issue headlines… Seasonality is on the side of the bulls but money managers will not play until volatility comes down to a more manageable level.

Trader’s are also evaluating the EFSF auctions today which were dysmal… The lack of interest in the issue, of which the Europeans depend on for raising cash to meet the terms of the recent deal, is not exactly what the market wanted to see.

In general, volume today has been anemic which also supports some of what I mention above. Traders are unsure of what the market has in store for them next and are opting to sit on the sidelines. Keep on eye on the VIX today. A close below 30 would be bullish but even while we push higher this afternoon, the VIX has not (yet) managed an incursion below that mark.

Greece, Greece and More Greece!

Nov 3rd, 2011

It is incredible that the world’s financial markets are hanging on every word from Greek politicians! Such is the world we live in today…

We surged higher this morning before pairing back some of the gains on several optimistic domestic economic reports and on the the rate cut by the ECB. The ECB under Trichet’s stewardship had been steadfast in its reluctance to cut rates but the incoming head of the ECB, Mario Dragghi, seems to think otherwise. This bolsters the argument for a weaker Euro even though the trading action has been supportive of the Euro today. If the ECB is about to embark on a rate cutting cycle and our Fed holds the line with no new easing measures, the Euro will depreciate against the U.S. Dollar. The rate cuts will take time to affect European growth and the lower rates will push even more assets in to USDs, precious metals and commodities.

If the “risk on” trade really takes hold, we can anticipate that small caps will lead the rally along with big cap Nasdaq. Gold and the precious metals complex should also do well particulalry after the Euro rate cut this morning and I believe there is a very good chance that we set new highs in Gold before the end of the year. China may also ease (or take measures which equate to an easing move) into year end which would also be supportive of the Global growth picture.

From a technical standpoint, the push higher did what we expected and we opened the session almost dead on to close the lower opening gap of a few sessions ago. We took the opportunity to exit the recently opened SPY spread with a nice gain on the pop as rumors circulated regarding the situation in Greece and the fall out from a downgrade of another major financial firm with exposure to Europe. There has also been a noticeable pullback in momentum as the S&P trades at the 1257 level which is almost exactly where we opened for the year.

Deal or No Deal? Nov 1st, 2011

Markets are reeling today on the fallout from the now bankrupt MF Global, amidst allegations that client funds and firm capital was commingled…That along with rumblings out of Europe, poor PMI numbers from China and some weak data from our own economy have all served to pushed markets lower, shedding some of the tremendous gains of the past few weeks.I mentioned a few days ago that it was very rare to trade 3 standard deviations either above or below the 40 day moving averages and much more so for a prolonged period.

We have unwound quite a bit of the froth today. The 50 day MA has held support and it has been an encouraging session for the bulls (believe it or not!) . If we look at the chart below, we can see that this rally began off of a very oversold move while the S&P 500 traded at the 3rd standard deviation below the 40 day MA. The move took us up to near the 3rd standard deviation and now we seem to be finding some support in the middle, between the 40 and the 50 day upward sloping moving averages.

The question we have to ask is how long will this support hold? The answer here depends on what happens in Europe which is the overiding wild card. I believe we will hold support at around these levels and bounce higher from here. I will keep it short today due to the rapid fire trading action. More a bit later!

C.J. Mendes

cjm

Madeira Trading Newsletters

DBA Trading Options For Income
8770 Sunset Drive 201
Miami Florida 33143

http://www.tradingoptionsforincome.com

No statement in this web site is to be construed as a recommendation by Madeira Investments LLC. , Madeira Trading Newsletter and/or Trading Options For Income to purchase or sell a security, or to provide investment advice. Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options . Copies of this document may be obtained from your broker, from any exchange on which options are traded or by contacting The Options Clearing Corporation, One North Wacker Dr., Suite 500 Chicago, IL 60606 (1-800-678-4667).

We knew this firm was in trouble for some time and following the European debt agreement, the huge losses from being long and overexposed to European sovereign debt was too much for this firm to survive. The fact that haircuts to those holding Greek debt is going to be part of the solution (as it should be) is something MF Global was betting against and had substantial exposure to. A stark reminder that any trade or thesis, no matter how tempting, needs to be measured and follow the same guidelines set forth for managing exposure to loss.

The market is consolidating some of the gains today helped by the weakness mentioned above but perhaps more importantly, on the back of overnight intervention by the bank of Japan which was out selling Yen causing the dollar to appreciate quite a bit today.

The action is subdued and volume is quite weak today which bodes well for a late day narrowing of the losses. The issues in Europe have not gone away and the focus now shifts to the debt of Italy and Spain. The spike in yields of Italian debt in particular is concerning. We will have to deal with this for some time and until we see actual growth in European economies, these problems are not going away. With the tremendous austerity measures being adopted by these economies, I am not sure how much growth we could reasonably expect to see from Europe any time soon.

On the other side of the coin, we have strong seasonal factors that should will act as a counter weight to some of these bearish arguments. How much exposure firms are willing to take will be key to answering that question. Money managers have woefully underperformed this year, but will the risk of further losses outweight the need to show portfolio returns… To that extent, we have to keep an eye on the VIX and the variations between the front and back months for clues as to how the big players may be positioning. As I mentioned before, the best way to gauge the impact of the VIX on the market is not by looking at the spot print at any moment but instead at the rate of chance over a period. We are starting the week with a 10 to 12% increase (at the moment) in the cash VIX levels. Let’s how much of this increase can be absorbed tomorrow if we get an up session.

From a technical perspective we are unwinding a bit today but are still very much overbought. I am leaning for a move to around 1257 on this pullback/consolidation.



October, 28th 2011

The European “debt solution” has obviously been good for stocks and the strength of the rally post announcement has been stronger than I and many others had anticipated. After a run up of historical proportions in October, I anticipated that a good portion of the positive news had already been built into the market. Yesterday’s massive rally took markets into extreme overbought levels which we have not seen in some time fueled by a rush to cover short positions.

Markets today are relatively subdued and trading within a narrow range. The short covering we saw as an outcome of the Euro deal has run its course as well as most of the supply that had to change hands at the 1257 resistance level.

Markets rarely negotiate a major resistance point in a “V” pattern. Most often one of two scenarios occur, one being what we typically see which is a period of “bouncing” back and forth within a narrow range before a final resolution and the other is what we saw yesterday where a catalyst fuels short covering by traders and prices, because of the increased liquidity are able to absorb whatever supply comes to market and push higher.

So what next? Technically, markets are ridiculously overbought but are they ready to consolidate just yet? I do believe that the next move for this market is a consolidation of the recent gains. A consolidation in my opinion could be a relatively sedate move to around the 1257 level which would correspond to flat on the year or the first standard deviation on the 40 day ma at around 1230. A move as far as the 50 day MA at around 1217/1220 is a longer shot at this juncture and time of year. These move would still keep the uptrend intact and would usher in some more longer term capital into the market. This is the best scenario for the bulls.

The risk to this thesis is that markets will not give traders who are anticipating this pullback a chance to get in and keep any consolidation very shallow, perhaps only to the 1275 level (200 day MA) as support. In this case, we may not trade much higher but within a narrow sideways range between 1275 and 1300. A fair amount of short interest has covered which also supports the sideways thesis.

Again, I favor the scenario that calls for a consolidation to at least the 1257 level perhaps even as low as 1230 before resuming the uptrend, but I do allow for the possibility that from here at these levels we will see strong support at 1275 and not much more than a range bound sideways trading scenario till year end. We will structure our trades accordingly keeping both of these two possible scenarios in mind.

The downside move to test much lower levels is in my opinion, a 2012 proposition at this juncture in the year. The seasonal forces that come into play during November and December should help support markets in the near term. The budget issues in Washington, which will begin to come to light once again in the coming weeks, will continue to highlight partisan politics in Washington and not much in terms of solutions. Any potential fallout from these negotiations may very well not be discounted by markets until after the New Year.

October, 27th 2011

Global markets are rallying on the Euro debt deal reached overnight. The deal is typically short on details and leaves a lot of “I”s undotted and “T”s uncrossed but it is perhaps enough of a punt to give markets that “cover” we spoke about to push higher into year end. Lots of chatter about the efficacy of the plan but as I often mention, price is truth for traders and we are trading substantially higher today.

We are trading near 3 standard deviations above the 40 day moving average on the S&P 500… This is not something we see very often and have not seen it sustained for more than a few sessions for at least 2 years. These are extreme levels and although I do believe we are on a general uptrend now heading into year end, it is more likely that we pull back a bit from the current exuberant levels. That doesn’t mean we can’t begin to structure bullish options positions. It just means we have to have positions that consider a short term pullback before a resumption of the uptrend.

The gap created today on the open should close over the next couple of days because of the extreme overbought conditions. On the SPY, that represents a level of 124.60 and we have traded as high as 127.84 this morning. We may even push abit lower and still remain within the uptrend.

October, 25th 2011

Markets have traded quickly to the level we (and everyone else) has identified as an important or better said, “significant” level of resistance at 1257. I talked about the reason why this level is important to watch and it suffices to say that today we are seeing the typical trading pattern seen at these junctures which is a narrow but active trading range with a decent amount of volume. Those that are selling into the strength (those unhappy shares) are getting a chance to get out of positions and reallocate portfolios and those that believe a the bullish scenario is predominant here are glad to pick them up. In short, that is what makes a market!

The selling has yet to overwhelm buying interest and the reason why this is the case is that there are many traders speculating on a bullish outcome to the Euro related crisis and many longer term fundamental traders/investors who are trading the earnings reports which have been somewhat better than expected by consensus.

By and large, the bullish thesis from a pure pricing standpoint, is an expensive one at the moment as volatility still weighs heavily on options pricing. Many still are unwilling to pull back on their bearish hedges as evident by a stubborn VIX above 30. This is the typical scenario where options traders can easily get crushed due to quickly collapsing implied volatility levels even while on the right side of the market.

To say that there seems to be quite a bit of good news priced into this market is an understatement. After a 1000 point rally in the DOW since early in the month, it seems logical to expect a pullback from that fact alone but when was the last time the stock market acted in a logical manner?…

This type of action can be the beginnings of a “grind” higher type of pattern where the market just stubbornly defies logic and pushes higher. We have “been there and done that” so it will not be a surprise to us if this pattern emerges until year end.

I would prefer to be bullish at the 50 day exponential moving average on the S&P and fade rallies when we move above 2 standard deviations on the 40 day MA. Right now this trading range is relatively wide but if indeed we trade in this pattern till year end, it will narrow substantially as volatility pulls back ever slowly.

Not to sound like a broken record but we are at the mercy of policy makers in Europe at the moment and later in the year, we will be again at the mercy of our own policy makers when debt ceiling negotiations once again take up the headlines. Any major deviation from the expected outcome of these issues could cause markets to change course quickly to say the least… Our outlook for the next 5 to 7 days is still “Cautiously Bearish” as look for a pullback within this nascent trading uptrend.

October, 24th 2011

Ok so we put 1230 to rest last week and circumstances, many of which we considered over the past few weeks, have pushed markets right to the door of the 1257 resistance level.

So to review this thesis a bit, let’s look at why this level is a “major” resistance point. We talked about what creates these resistance and support points before and why some are more important than others. The 1257 level is important because it is first and foremost, where we opened 2012 on the S&P 500. Another reason is that the 1257 level represents support level that was broken in early August when markets plunged. The level had held support several times over the course of this year.

The reason this level is a major level of support is that, as technician Carter Worth of Oppenheimer calls it, there are many “unhappy shares” purchased at this general level. As we traded several times at this support, many traders bought on the dips (why support held). When we plunged below support in early August, many participants set their exit points at these levels between 1250 and 1260 to get out whole. This by no means indicates that we are not going to push higher. It just means that we will very likely trade higher but within a range as these “unhappy shares” change hands.

We are trading 2 full standard deviations off of the 40 day MA on the S&P 500. As I mentioned last week we are forming a clear uptrend channel above the 50 day MA and I believe we will trade lower from this point at least back to around the 1217 level (1st standard deviation)and possibly down to the 50 day MA itself at around 1200. This more than likely on a sell the news on the announcements from the European leaders due out Wednesday (last I checked).

So this is not an intermediate term bearish call but a very short term reversion to the mean play. I believe as we trade towards the end of the year, should conditions in Europe remain stable, we may be in for a nice rally once we absorb some of the supply of stock at this resistance point (unhappy shares). Should things not go as planned in Europe, then back to the drawing board…

There is some talk, rumors, swirling around about a QE3 plan by our Fed as well as potential IMF involvement in a Euro bailout which basically means our taxpayer money at play as we are the major contributor of funds to the IMF. How a new round of easing would be received by the market is still cloudy to me. We should get some more clarity on this as we near November’s Fed policy meeting. I believe the initial reaction would be positive but could mean a sharp pullback early 2012 on the weaker economic outlook.

C.J. Mendes

cjm

Madeira Trading Newsletters

DBA Trading Options For Income
8770 Sunset Drive 201
Miami Florida 33143

http://www.tradingoptionsforincome.com

No statement in this web site is to be construed as a recommendation by Madeira Investments LLC. , Madeira Trading Newsletter and/or Trading Options For Income to purchase or sell a security, or to provide investment advice. Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options . Copies of this document may be obtained from your broker, from any exchange on which options are traded or by contacting The Options Clearing Corporation, One North Wacker Dr., Suite 500 Chicago, IL 60606 (1-800-678-4667).

There are two opposing but equally important dynamics affecting the stock market. On one hand we have the bullish fundamental and technical underpinning to the near term trading action but the overhang of the Euro debt crisis is not allowing the markets to breakout and push forward. Money managers know this, institutional traders know this and the only ones placing bullish bets on the outcome of this crisis at the moment are very short term spec traders and those who have a naïve view of reality. 

How do we know this? Well volume for one. If this is what a true breakout session looks like from a participation point of view, markets are in trouble…I remain convinced the real move higher, if we are to see one in the near term, will not come in anticipation of the resolution of these issues but when it really does come to fruition. In other words, sell the rumors, buy the news. 

Another “tell” is the VIX remaining stubbornly above 30. This shows a tightly hedged market and until some of this comes off the table, a sustained move higher will not develop.

I mentioned that from a technical analysis point of view, markets are much better positioned today than just a week ago. Some near term support levels seem to be attracting buyers and a trading pattern seems to be developing above the 40 day MA and the first and second standard deviation. Fundamentally markets are relatively cheap at current multiples and earnings, although not “stellar”,  should support higher prices based on historic multiples. 

Seasonality favors the bulls here as well. The fourth quarter of the year is traditionally strong particularly when we come into it flat or down for the year (which is the current situation). Managers need to generate returns and are much more willing to put cash to work.

All of these bullish factors can be wiped out in an instance with a major deterioration of the Euro crisis. It is that powerful and the reason why markets have been stuck in the mud for many months now. Some on the street are using the common sense argument in approaching this crisis. The argument is simply that in the end, should all else fail, as happened in the U.S. back in 2008 with the Fed stepping in with the many interventions to stabilize the market and the congress acting to pass TARP etc, the european will do the same to salvage their union. It is a resonable argument to make but it is not sufficient to support a very bullish stance on markets. The reason why is that the European Union is very different from our own and their ability to take decisive action is, by design, limited. To trade upon the thesis that in the end, what needs to get done will get done by the Europeans is not a risk reward proposition that I feel compelling enough to get “big” money back in the market. 

A resolution to this issue is far off in the future. Any positive measures arrived at next week will simply serve to punt the crisis down the road far enough to take the near term risks off the table. I believe we will not see the worse case scenarios come to fruition but at the same time I am not willing to anticipate it with overly bullish positions.

C.J. Mendes

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The earnings miss by Apple did not help the case for a push higher today. The miss was unexpected although many analysts had mentioned the possibility of the new Iphone 4S taking away some Iphone 4 sales as customers opted to wait for the new model. Nonetheless, it is an extremely rare event when Apple misses by any margin.  

Technically the market is showing surprising resiliency. The market has managed a push above the 50 day MA and a clear uptrend seems to be forming. “Run ups” or “run downs” off of the second standard deviation on the 40 day MA can be powerful. I highlighted a couple of the recent “run ups” since early 2010.  

If we remove the threat from Europe as a consideration, the current pattern would be a screaming bullish signal for us. These patterns form those extended periods of “overbought” conditions that we hear so much about with markets following a tight “melt up” type of pattern finding support at the first standard deviation (buy point) and selling after any incursion of the second standard deviation.  

As always, real world events cause traders to question the continuity of such patterns (as they should). If we pull up each one of these run up events and dig deeper to what was happening at the time we would find that in each case there was a competing thesis based on either a potential macro event or upcoming earnings or any of many arguments made by traders with an opposing view. My point is that we have to evaluate both the technical and fundamental factors in our trading decisions. The technical pattern developing could be the beginning of a “run up” pattern. Recently we were trading in a bearish downtrend pattern with poor fundamental. At least for now, that has changed. The 50 day is now support and we may be at the early stages of an uptrend. Have fundamentals changed? Not really. We still have the Euro issues hanging over us as well as the weak domestic economy to factor in but instead of having both technical and fundamental factors against us, we now have a favorable bullish trading pattern developing.  

The headline risk we currently face is very high. The high VIX is clear proof of that as we have traded at a high level in the VIX for an abnormally long period. That has to temper any exuberant bullishness. We have to keep a close eye on the VIX, a sustained drop into the mid 20’s could be an indication that we may be ready to make another “run up”.

C.J. Mendes

cjm@tradingoptionsforincome.com

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Miami Florida 33143

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 The week ahead holds promise to be very choppy. A lot of important earnings reports will compete with the headlines out of Europe for investor’s attention. So far we have seen a mixed bag from earnings. Financials look lousy as expected while energy and big technology seem to look OK. The trend has been to sell any positive earnings surprises and a buy the rumor, sell the news pattern seems to be emerging. 

Markets seem to be reacting to headlines out of Europe over the weekend today as well as some rather tepid earnings from some of the big financials. The headlines seem to throw some cold water on the exuberance that we saw last week as the German Finance Minister is said to be calling for a bigger haircut from Greek bondholders. So the drama continues… 

The VIX is up sharply today as traders pay up for protection. It seems at least from the action this morning that the top of the range is proving to be strong resistance as I thought it would and the market may unwind at least some of the move of last week. There are acouple important levels in the near term we have to keep an eye on. The first is the 50 day moving average which has now been a level of support for the S&P 500 for 5 sessions. As it stands today that number is 1191.67. Secondarily and not nearly as important is the first standard deviation from the 40 day MA which corresponds to 1207. Finally, the 40 day MA which corresponds to around 1175, should provide some support for the bulls and where I believe we are headed to this week. I am not sure we are in for a move much beyond that level in the very near future.  

We have several positions expiring this week. The SPY 126/123 bearish credit spread is now in the money and with four days left to expiration, time value is quickly fading on our short 123 calls. The short QQQ 56 Oct calls are also deteriorating fast and our breakeven on the short leg is $57.18. The long leg of this position is a July expiration 56 call and we will sell another short QQQ leg against it next week. The TLT October 125/121 strike bearish call spread is well in the money and baring an unexpected event, all of these should expire worthless on Friday allowing us to keep the cash premium.  

So to sumarize our position regarding the markets. The S&P 500 managed a breach of the 50 day MA which is bullish and certainly not to be discounted wholesale particularly with the 50 day MA actually turning upwards over the past week. The upper range of the recent trading pattern of  1075/1230 has held so far and that is certainly a bearish development for the market. Oscillators are still registering overbought indications (although certainly not as pronounced after today’s session) which exposes the market to sharp downside moves when a catalyst emerges (in a trending market, an absence of a catalyst is what we attribute to markets continuing to push higher when technically overbought). The fundamental argument still has not been successfully made by the bulls. Earnings so far have not provided any basis for broad based lifting of estimates and price targets and with the exception of some of the traditional high flyers  ( ie, Goggle, Apple etc) so far earnings have been tepid. Finally, we have to evaluate the headlines. There is still substantial downside risk to the market which can’t be ignored. When I weigh all of these factors, I can only come up with a cautiously bearish outlook for the near term. Until we see otherwise the best probability at the moment is for a move lower within the trading established trading range. We have to keep an eye at how trading develops at support levels for hints of a turn around.

I know it is frustrating to have such an ill defined market but it is the market we are dealing with and we just have to have patience and trade around the obstacles until we get some more clarity as to the future course of the markets.

C.J. Mendes

cjm@tradingoptionsforincome.com

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10/13/2011

Stocks managed to push higher once again but, unlike the past couple of sessions, stalled late in the day. This could suggest that the very near term overbought levels may be coming into play or at least that some of the short covering may be subsiding. The session was nonetheless a broad based one with advancers outpacing decliners by a 4 to 1 margin. The bullish news out of the European Union provided a catalyst for the session and the Euro posted the best showing we have seen in some time.

The fact that the markets pulled back as aggressively as they did yesterday into the close and again into today’s open supports the thesis that at least in the near term, it may be a bit harder for the bulls to push prices much higher from these levels. One of the strongest signs that “real” buyers are participating in a rally is when markets manage to surge higher on overbought readings. We will see how the trading action develops during the last 15 minutes of the day which lately seems to be where any real price action takes place!

From a technical perspective, the market has managed to remain above the 50 day moving average for a third. It now becomes support on the daily charts and today we have traded right down to it and stopped declining right on cue.  The 50 day MA level, currently at 1190,  is one to watch today and into tomorrow as a close below it may embolden the bears to try for another push lower.

Earnings are rolling off the press and so far not so good. It is extremely early in the cycle but the numbers from Alcoa and JP Morgan have disappointed the market. If this is a preview of what is to come, the market may be in for a some angst. Google is up after the bell today.

The Issues in Europe seem to be stable from the standpoint of headlines at least and traders seem to be content giving Merkel and Sarkozy the benefit of the doubt that a concrete plan to deal with these issues will be completed by early November.  Markets have rallied on some of these favorable expectations out of Europe and are vulnerable to a pullback should things not pan out as expected.

C.J. Mendes

cjm@tradingoptionsforincome.com

Madeira Trading Newsletters

DBA Trading Options For Income
8770 Sunset Drive 201
Miami Florida 33143

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What can I say about yesterday’s close? The market became very one sided and extremely oversold and after an unsuccessful hold of the previous support level at 1101.54 where the bears successfully pressed their case to bring the market down to a new low of 1074.77, those short the market embarked on a furious short covering move at the close on a slight hint of optimism out of some official in the Eurozone…

So a new support point has been established at yesterday’s intraday low but this is in no way a strong level of support for the market. Nonetheless, I think now that the bears have made their case, we could see a quick trip higher as some excessive bearish speculation is relieved. This should lead to another failure at the 50 day MA, at least that is how I see it at the moment, and a subsequent trip back down to probe support which I think will take markets down to 1045 or so before we talk about more substantial support again and very possibly as far south as 1020. It is what it is and we will trade around this thesis until proven wrong.

Again, I can’t emphasize enough that this is a classic short covering rally by the most speculative bearish players and not yet a true buyers rally which is what the bulls really wanted to see off of this test of support. I have gotten many questions regarding how much a couple of points matter on tests of support and resistance and hopefully I answered some of these over the past few days.

So the bearish case is clearly defined here but since the natural tendency of markets is to go higher (many more participants who trade exclusively on the long side), what would it take to get markets to turn around and bust out of this “funk”? Well several possible catalysts could usher that scenario to the forefront. A stronger (much) stronger than expected earnings season could as well as a market favorable solution to the issues in Europe. Obviously an improvement in the domestic economic outlook could do it. Whether we will see any of these catalysts in the near future is debatable but each of these could be a game changer for the bulls.

C.J. Mendes

cjm

Madeira Trading Newsletters

DBA Trading Options For Income
8770 Sunset Drive 201
Miami Florida 33143

http://www.tradingoptionsforincome.com

No statement in this web site is to be construed as a recommendation by Madeira Investments LLC. , Madeira Trading Newsletter and/or Trading Options For Income to purchase or sell a security, or to provide investment advice. Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options . Copies of this document may be obtained from your broker, from any exchange on which options are traded or by contacting The Options Clearing Corporation, One North Wacker Dr., Suite 500 Chicago, IL 60606 (1-800-678-4667).

C.J. Mendes

cjm

Madeira Trading Newsletters

DBA Trading Options For Income
8770 Sunset Drive 201
Miami Florida 33143

http://www.tradingoptionsforincome.com

No statement in this web site is to be construed as a recommendation by Madeira Investments LLC. , Madeira Trading Newsletter and/or Trading Options For Income to purchase or sell a security, or to provide investment advice. Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options . Copies of this document may be obtained from your broker, from any exchange on which options are traded or by contacting The Options Clearing Corporation, One North Wacker Dr., Suite 500 Chicago, IL 60606 (1-800-678-4667).

Yesterday I sent a late note on the markets late (very late) push lower to close below, albeit just slightly below, the 1101.54 level. I tried to explain to the best of my ability the real world collective trading decisions that create these support and resistance levels and why they are so important to technical traders.

The action late yesterday certainly is not what the bulls wanted to see and the open this morning much more so. The 1090.57 level which is roughly 1% lower from the support level we have been watched has been breached pretty convincingly today in the cash markets and overnight in the futures. As far as I am concerned and by how I interpret the support/resistance technical thesis, this level has been breached and support has failed even if we do close higher today above 1101.54. So what does this breach really mean? Well like I said yesterday, it is an interpretation that those bearish the markets have been able to make their case for lower stock prices. The support levels to watch for now are 1045 and 1010 which is the lowest point reached in the summer of 2010. This does not preclude that we can trade a bit higher here on an oversold bounce as the bulls try to rally markets over the next few days but the trend lower is the overwhelming theme for the equity market.

The percentage of stocks greater than 1 and 2 standard deviations below the 40 day moving average have moved back across the range and they are once again approaching panic levels. 80% of stocks are at least one standard deviation below their 40 day MA which is quite substantial bearish pressure. This leads me to think that perhaps a countertrend rally may be near to flush out some of the extreme bearish speculation. Like I mention above, this should be viewed as a relief rally only and not a real trend reversal. Nonetheless these counter trend moves present decent trading opportunities.

So bottom line, look for a new low to be set perhaps as soon as today and a countertrend relief rally to eventually develop which should be met with resistance at the first standard deviation from the 40 day MA and then stiff resistance at the 40 day ma leading up to another attempt to breach the 50 day moving average.

C.J. Mendes

cjm

Madeira Trading Newsletters

DBA Trading Options For Income
8770 Sunset Drive 201
Miami Florida 33143

http://www.tradingoptionsforincome.com

No statement in this web site is to be construed as a recommendation by Madeira Investments LLC. , Madeira Trading Newsletter and/or Trading Options For Income to purchase or sell a security, or to provide investment advice. Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options . Copies of this document may be obtained from your broker, from any exchange on which options are traded or by contacting The Options Clearing Corporation, One North Wacker Dr., Suite 500 Chicago, IL 60606 (1-800-678-4667).

C.J. Mendes

cjm

Madeira Trading Newsletters

DBA Trading Options For Income
8770 Sunset Drive 201
Miami Florida 33143

http://www.tradingoptionsforincome.com

No statement in this web site is to be construed as a recommendation by Madeira Investments LLC. , Madeira Trading Newsletter and/or Trading Options For Income to purchase or sell a security, or to provide investment advice. Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options . Copies of this document may be obtained from your broker, from any exchange on which options are traded or by contacting The Options Clearing Corporation, One North Wacker Dr., Suite 500 Chicago, IL 60606 (1-800-678-4667).

10/3/2011

The worst quarter since 2008 is behind us but the issues that plagued the market then are not going away just because of a turn in the calendar. There are benefits to the change in quarter as many money managers are allocated fresh funds to put to work and this at can be a good catalyst for beginning a recovery. At any rate, the new quarter begins in exactly the same fashion as the old quarter ended.

Friday’s session was decidedly negative from a technical perspective. We typically see quarter end window dressing act to support prices but stocks seemed to be persistently pushed lower throughout the session. The weekend headline risk outweighed the potential benefits of any “window dressing” and this certainly addresses some of the “fear” out there.

Today, the U.S Equity markets are making an early October test of the 1100 support level on the broad S&P 500. Although this is a rough start to the new quarter for the bulls, it is not disastrous in my opinion because a successful test of this level early in the month could very well usher in a rally. Had the markets started with an immediate push higher, we would still have to more than likely retest support at some point sooner rather than later as this level not been reached since it was set on August 9th. The fact that we are doing this early on in the new month/quarter is a much better scenario than had we tested later in the month/quarter as it may nudge some money managers to put some money to work (IF we manage to hold support). Be sure that they are watching how this test plays out and so are we. Either way, even if we fail to hold support, it will be a good thing for us traders because it will set in motion a move lower to perhaps the 1050 level which we could take advantage of. Again, either way I like to get this in earlier rather than later.

The failure at the 50 day moving average on the broad market for a third time in 2 months is certainly concerning and should not be discounted but at some point we will push out above this important moving average once again and perhaps a successful retest of the 1100 level will be the catalyst to get money out of the sidelines. We will trade it as it plays out and be vigilant for telltale signs that momentum is building one way or another.

The weekend brought us a couple new facts to consider. One, and this one was not unexpected, was that Greece will not meet its austerity goals for 2012…and the other and perhaps not as expected, the manufacturing sector in China appears to be slowing quite a bit faster than many expected. After many months of rate hikes to quell inflationary pressure, the Chinese may have to do a 180 degree about face and begin to lower rates to try and avert a drastic economic slowdown.

We entered some positions today and the risk graphs and charts have been updated on the position pages.

C.J. Mendes

cjm

Madeira Trading Newsletters

DBA Trading Options For Income
8770 Sunset Drive 201
Miami Florida 33143

http://www.tradingoptionsforincome.com

No statement in this web site is to be construed as a recommendation by Madeira Investments LLC. , Madeira Trading Newsletter and/or Trading Options For Income to purchase or sell a security, or to provide investment advice. Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options . Copies of this document may be obtained from your broker, from any exchange on which options are traded or by contacting The Options Clearing Corporation, One North Wacker Dr., Suite 500 Chicago, IL 60606 (1-800-678-4667).

C.J. Mendes

cjm

Madeira Trading Newsletters

DBA Trading Options For Income
8770 Sunset Drive 201
Miami Florida 33143

http://www.tradingoptionsforincome.com

No statement in this web site is to be construed as a recommendation by Madeira Investments LLC. , Madeira Trading Newsletter and/or Trading Options For Income to purchase or sell a security, or to provide investment advice. Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options . Copies of this document may be obtained from your broker, from any exchange on which options are traded or by contacting The Options Clearing Corporation, One North Wacker Dr., Suite 500 Chicago, IL 60606 (1-800-678-4667).

Up down and all around is how stocks have traded recently. The lack of fundamental investors in the marketplace continues to create an environment of extreme volatility and traders have to be nimble to catch any waves of momentum.

Markets traded within a range yesterday and did a 180 turn around late in the session to close up triple digits on the Dow Jones Industrials. The VIX traded above 40 for most of yesterday’s session and only dropped slightly towards the end of the day. No doubt that there is an elevated level of concern in the marketplace with the general lack of leadership out of Europe.

The majority of the trading action seems to be increasingly coming from the first hour and last hour of the trading day as many prefer await the closing of the European markets around midday here in the U.S. and then decide to implement any buying or selling activities based on the general tone of the market in the last hour. Despite the positive finish to the majority of the major indexes yesterday, the internals were not all that impressive. Breadth was flat and volume while light was actually a bit higher than we would have expected for a holiday session. The high relative strength sectors have lagged considerably and the NASDAQ in particular was negative for the entire session.

The backdrop for the new quarter should continue to revolve around the sovereign debt issues out of Europe but we should also get substantial input from corporate earnings and from what appears to be a rapidly slowing economic outlook from China. Earnings should be better than expected from a general perspective and I believe the energy sector in particular will surprise many investors with much better than expected earnings.

The tug of war between the bulls and the bears continues as markets are tugged one way or the other with any change in the wind. The range bound markets we have seen since Late July seems ready to make a more decisive turn but the question is which way? The technical backdrop of the market is decidedly bearish at this juncture but there are cogent fundamental arguments for a break higher. The recent failure (s) at the resistance levels we have highlighted on the broad market cannot be ignored by traders. The inability of the bulls to muster a push above the 50 day moving average is indicative of selling pressure at the level as traders take profits and push markets the other way any time we get close. The recently established short term up trending channel was broken as the pattern of higher highs and higher lows gave way to a lower high and a lower low followed by a new lower high which leads me to believe the market may be ready for another leg lower.

Now here is the caveat and I apologize for having to temper the above bearish thesis but it is part of the market we trade in today. Because the bearish thesis is so clear with so many expecting the market to tank, we have to be very careful around points of potential whipsaw ie support/ resistance, standard deviations, gaps and the like. It has always been the case that the market punishes the largest contingency and right now there are an awful lot of bears growling out there! Because the market is so devoid of investors and being driven primarily by high frequency traders, the traditional technical studies many have relied on to trade the markets for many years no longer work as they perhaps did in the past. Also, the first few days of the quarter have historically tended to be positive.

Bottomline. I do not like the tone of the market here with a VIX above 40 and broad markets failing at major resistance points but I can’t fully discount the possibility that upcoming earnings could substantially surprise markets and get some “fundamental” (Institutions, Hedge Funds and Mutual Funds) money back to work and push markets higher.

C.J. Mendes

cjm

Madeira Trading Newsletters

DBA Trading Options For Income
8770 Sunset Drive 201
Miami Florida 33143

http://www.tradingoptionsforincome.com

No statement in this web site is to be construed as a recommendation by Madeira Investments LLC. , Madeira Trading Newsletter and/or Trading Options For Income to purchase or sell a security, or to provide investment advice. Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options . Copies of this document may be obtained from your broker, from any exchange on which options are traded or by contacting The Options Clearing Corporation, One North Wacker Dr., Suite 500 Chicago, IL 60606 (1-800-678-4667).

C.J. Mendes

cjm

Madeira Trading Newsletters

DBA Trading Options For Income
8770 Sunset Drive 201
Miami Florida 33143

http://www.tradingoptionsforincome.com

No statement in this web site is to be construed as a recommendation by Madeira Investments LLC. , Madeira Trading Newsletter and/or Trading Options For Income to purchase or sell a security, or to provide investment advice. Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options . Copies of this document may be obtained from your broker, from any exchange on which options are traded or by contacting The Options Clearing Corporation, One North Wacker Dr., Suite 500 Chicago, IL 60606 (1-800-678-4667).

Up down and all around is how stocks have traded recently. The lack of fundamental investors in the marketplace continues to create an environment of extreme volatility and traders have to be nimble to catch any waves of momentum.

Markets traded within a range yesterday and did a 180 turn around late in the session to close up triple digits on the Dow Jones Industrials. The VIX traded above 40 for most of yesterday’s session and only dropped slightly towards the end of the day. No doubt that there is an elevated level of concern in the marketplace with the general lack of leadership out of Europe.

The majority of the trading action seems to be increasingly coming from the first hour and last hour of the trading day as many prefer await the closing of the European markets around midday here in the U.S. and then decide to implement any buying or selling activities based on the general tone of the market in the last hour. Despite the positive finish to the majority of the major indexes yesterday, the internals were not all that impressive. Breadth was flat and volume while light was actually a bit higher than we would have expected for a holiday session. The high relative strength sectors have lagged considerably and the NASDAQ in particular was negative for the entire session.

The backdrop for the new quarter should continue to revolve around the sovereign debt issues out of Europe but we should also get substantial input from corporate earnings and from what appears to be a rapidly slowing economic outlook from China. Earnings should be better than expected from a general perspective and I believe the energy sector in particular will surprise many investors with much better than expected earnings.

The tug of war between the bulls and the bears continues as markets are tugged one way or the other with any change in the wind. The range bound markets we have seen since Late July seems ready to make a more decisive turn but the question is which way? The technical backdrop of the market is decidedly bearish at this juncture but there are cogent fundamental arguments for a break higher. The recent failure (s) at the resistance levels we have highlighted on the broad market cannot be ignored by traders. The inability of the bulls to muster a push above the 50 day moving average is indicative of selling pressure at the level as traders take profits and push markets the other way any time we get close. The recently established short term up trending channel was broken as the pattern of higher highs and higher lows gave way to a lower high and a lower low followed by a new lower high which leads me to believe the market may be ready for another leg lower.

Now here is the caveat and I apologize for having to temper the above bearish thesis but it is part of the market we trade in today. Because the bearish thesis is so clear with so many expecting the market to tank, we have to be very careful around points of potential whipsaw ie support/ resistance, standard deviations, gaps and the like. It has always been the case that the market punishes the largest contingency and right now there are an awful lot of bears growling out there! Because the market is so devoid of investors and being driven primarily by high frequency traders, the traditional technical studies many have relied on to trade the markets for many years no longer work as they perhaps did in the past. Also, the first few days of the quarter have historically tended to be positive.

Bottomline. I do not like the tone of the market here with a VIX above 40 and broad markets failing at major resistance points but I can’t fully discount the possibility that upcoming earnings could substantially surprise markets and get some “fundamental” (Institutions, Hedge Funds and Mutual Funds) money back to work and push markets higher.

C.J. Mendes

cjm

Madeira Trading Newsletters

DBA Trading Options For Income
8770 Sunset Drive 201
Miami Florida 33143

http://www.tradingoptionsforincome.com

No statement in this web site is to be construed as a recommendation by Madeira Investments LLC. , Madeira Trading Newsletter and/or Trading Options For Income to purchase or sell a security, or to provide investment advice. Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options . Copies of this document may be obtained from your broker, from any exchange on which options are traded or by contacting The Options Clearing Corporation, One North Wacker Dr., Suite 500 Chicago, IL 60606 (1-800-678-4667).

C.J. Mendes

cjm

Madeira Trading Newsletters

DBA Trading Options For Income
8770 Sunset Drive 201
Miami Florida 33143

http://www.tradingoptionsforincome.com

No statement in this web site is to be construed as a recommendation by Madeira Investments LLC. , Madeira Trading Newsletter and/or Trading Options For Income to purchase or sell a security, or to provide investment advice. Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options . Copies of this document may be obtained from your broker, from any exchange on which options are traded or by contacting The Options Clearing Corporation, One North Wacker Dr., Suite 500 Chicago, IL 60606 (1-800-678-4667).

9/28/2011

Markets are weak and volatility has spiked again today. The VIX is printing higher by around 7 % on low relatively low volume.

Yesterday’s turn around at the close of nearly 200 points on the DOW is telling in that the active participants in the market place are primarily the short term momentum traders and the Algos. I mentioned this in some of the recent updates as a way for us to discern what market environment we are dealing with

The technical picture we have been keeping an eye on is certainly concerning for the bulls. We talked about the need for strength and resistance levels to “push” through and for that to happen we need conviction from the “Big Boys and Girls” that it is safe to put money to work. Otherwise what is happening is to be expected, with market pushing higher on positive, rumors, headlines, etc and quickly backing away when resistance begins to take effect with sellers stepping in and overwhelming the buyers.

The 50 day S&P 500 simple moving average is an important “mark” as many intermediate term institutional investors (Hedge Funds) use it in forming their investing decisions. So in other words, on a succesfull close above this level, we could expect some longer term money to come back to the market. Other important levels are the 200 and 150 day moving averages. Again investment horizons usually dictate which to follow.

We have been trading below the 50 day MA in the S&P 500 since July 29^th when the market began the August swoon and we have been working on consolidating the decline since with the moving average steadily pushing lower. This type of action is what we would expect to see following a steep decline as “V” patterns of this magnitude are rare. We are now straddling the 40 day moving average and what has transpired over the past few weeks as we probed the 50 day is that we are beginning to shift from a higher highs/higher lows pattern to a lower/highs and perhaps lower lows.  When this happens at a major resistance level, we have to be wary of another potential leg lower. In other words, if the bulls fail to make a push through the 50 day MA, then the bears may be able to make another push lower.

While this sounds like a clear bearish argument, we have to handicap it with what we are know are volatile and potentially market moving headlines out of Europe which, as we saw over the past couple of days, could emerge and whipsaw markets. Also, earnings season could bring a dose of reality to markets with a bout of better than expected earnings. At the moment, we are at the mercy of these headlines and continuing saga out of Europe which have proven to be very powerful market movers. I am inclined to believe that we will push higher but I am not confortable making a big bullish bets here just yet.   

C.J. Mendes

cjm@tradingoptionsforincome.com

Madeira Trading Newsletters

D/B/A Trading Options For Income

8770 Sunset Drive 201 Miami Florida 33143

http://www.tradingoptionsforincome.com