VIX: Riding the Range

The VIX continues to trade near the bottom of our box and spent an hour or so in the sub-18 no-fear zone today.

We'll be watching these levels for the next few days to see if an inverted Head and Shoulders continues to form on the daily chart. This may take a week or two to develop so we'll be patient and just be aware that a pattern could emerge. (That would be bearish)

VIX Daily Chart:

SPX: Late Day Fizzle

The SPX traded up as expected today and attempted 1410 but could only make it up to 1406 intraday. The SPX traded lower in the afternoon session to close at 1398.26.

The SPX has formed a lower low on on the daily (similar to the DOW), and now it's just a waiting game to see if the SPX and DOW drag down the NDX and RUT or if it's the other way around and the SPX and DOW get some footing to follow the NDX and RUT to new highs.
Only time will tell.

The topping tails on the daily charts of the DOW, SPX and RUT look a little ominous going into tomorrow, but I'm still a bit bullish even though we're at some short term resistance. These are the spots in the recent past where the market continues to chart up despite resistance levels. I'll be prepared for both.

SPX Daily Chart:

NDX: Head and Shoulders Forming?

Keep an eye on the NDX chart as it's in the early stages of forming a head and shoulders top. Too early to know if it will fully form or follow through, but if it does then 1900 would be the likely target down below.

The short term trend is definitely up so this may just be a little pull back, but to be fair to the bears I just wanted to point out the downside evidence too.

NDX Daily Chart:

SPX Levels

The SPX is getting the bounce this week that was expected given the oversold condition that was created with last weeks sell off.

The rally in the last hour was a bit of a surprise given the lackluster buying the first 5 1/2 hours, but this shows us again how powerful that last hour of the trading day can be. (Reviewing the 15m chart today I see an inverted Head and Shoulders pattern that played out to the upside)

SPX 5m Chart (Inverted Head and Shoulders)



My bias is slightly bullish as it seems the market continues to be in a retracement mode to the upside so the next target above would be the 30MA on the daily at 1396 and then 1400 which is also the R2 resistance pivot area.

For support I'll be watching 1380 which is the area of today's lows.

SPX Daily Chart:

SPX: Text Book Technicals this Week

We've been talking about the rising wedge on the SPX for a few weeks now, and the SPX price action is currently trading the way the the daily chart has been predicting.

Rising wedge, then a massive topping tail at 200MA resistance...This one was almost too easy. We alerted everyone to watch for the wedge to break, and with that break came the exodus.

Notice how today's price action closed on the downward trendline on the daily. This makes the probabilities for a relief bounce on Tuesday fairly high, that's my current bias for Tuesday. If the SPX trading action goes lower on Tuesday I'd look for some support at the 100MA on the daily which is the 1365 area.

Have a great 3 day weekend.

SPX Daily Chart:

SPX: Trendline Break on Daily

The pattern was hinting to the potential of today's drop. I hope you were able to take advantage of it.

The SPX held on the 30MA, we'll see if it bounces tomorrow or continues to fall to complete the rising wedge pattern. It may take a week or two to show it's real direction.

SPX Daily Chart:

SPX: Keep One Eye Open

The SPX could close below the upward trendline on the daily chart soon, and that might create a better probability for some bearish action.

Keep your eyes on that trendline and just be aware of what a break of that support might mean.

SPX Daily Chart:

NDX: The 375 Point Wonder

I've been watching the NDX as it continues to power up unencumbered, but when I pulled out to some longer term charts I started to see some interesting patterns.

We hit some longer term horizontal resistance today, but what was more interesting to me was that the longest sustainable rally in the last 3 years has been 375 and there have actually been 3 of them.

We hit the 375 today --

We can certainly power up some more, but a more likely scenario would be a pull back or some consolidation sideways like it did for several months after the rally ended in Nov 06. There were severe pull backs in July 07 and Nov 07 after those large rallies and remember those were in some pretty good economic times.

Technically we are still in an intermediate downtrend so it should be a surprise if we decided to grind down for another month of so. The short term chart is certainly saying up, but the NDX is smacking into resistance so to bust through is going to take a lot of buyers stepping up to drink some potent cool-aid. It can happen and I'll be ready for it, but it will truely amaze me if we just keep heading up and the VIX keeps dropping.

NDX 3 Year Weekly Chart:

$VIX: Now What?

The $VIX (fear indicator) hit a 10 month intraday low today before the market coughed up most of it's earlier gains.

We've all heard the saying, "When the VIX is low, time to go."

That sure seemed to be the consensus with the 12:30EST sell off today.

Personally I am trading in a very tight time frame as I respect the up trend but I am also very aware that we are overextended and at key resistance levels.

The past couple of days have shown some great intraday battles with both sides putting in some strong moves both up and down.

It will be interesting to see if the VIX can actually go lower this week, but it seems the probabilities might favor a rise in the VIX and the market to pull back and rest a bit before deciding if it wants to keep moving up.

$VIX 1 Year / Daily Chart:

Transports: Reverse Head and Shoulders

We've been watching the Transport Index chart for the last few months and early on saw the reverse head and shoulders forming. Although it wasn't logical that the Transport Index could complete the bullish pattern to 5530 with $4.00/gal gas, the market proved again that it can do anything it wants.

Okay, so now we've hit the target, what next?

Answer: No one knows, but we do know this. The VIX has been at SUPER LOW numbers that are likely unsustainable and the general market is in an overbought condition.

The topping tail on the Transport Index is very prominent and after such a ballistic move up it seems likely that a moderate pull back is in order even if it decides later to resume it's uber-bullish trend.

We talked about this reverse H&S target on last Thursday's call so those of you that were on the call this comes as no surprise.

Summary, market is certainly bullish, but we are at some key resistance levels so we are prepared to take advantage of a mild to severe pull back should one occur.

DOW Transports Index:

SPX: Uptrend within Rising Wedge

We love trends and the SPX continues to trend higher. However, we must also be cognizant that this bullish action is happening inside a rising wedge pattern which if confirmed is quiet bearish and could lead to a substantial pull back. It's too early to predict anything like that, but we need to be aware of patterns like this forming so we're not surprised with the market tanks (if it does). When I looked at some of the longer term SPX time frames I saw that these rising wedges often fail on the SPX, so this could just be some wildly bullish action that just keeps on moving up. I'm ready for either scenario.

The SPX hit 1440 today (intraday) which has been a target of many for the last couple of months and by looking at the daily chart it appears everyone sold on mass once it hit 1440.

Another topping tail on the daily chart, we'll see tomorrow if it means anything. Note that last Wednesday's topping tail failed and the bulls blasted right over it.

SPX Daily Chart:

RUT JUN Paper Trade Idea

This trade idea is for Educational Purposes Only.

Last night on the call we discussed the idea of selling a tight June RUT Iron condor 730/740/720/710 for a credit of $8.57, leaving us a risk of $1.43 + commissions.

We took this paper trade because we have a bias that the RUT will possibly pass through the 720-730 area 10 to 4 days prior to June expiry.

Our goal is allow the Theta to burn off of this position. Our profit target is a return of 50% to 100% ROI, so in this case we are looking to buy back the position for $7.00 to $7.75. The only way we can collect that type of return is if we wait patiently for this trade to ripen and for the price action to cooperate.

Our current breakeven on this position is between 670 and 738 so we will be patient and evaluate this position again in 2 weeks to see if we need to make any type of adjustment.

Note the current Delta of -21.83 gives us a slightly bearish bias which we actually like in the current uber-bullish environment. We are well positioned for any type of pull back.

RUT JUN Tight Iron Condor 730/740/720/710

New Conference Call Format

Welcome everyone, Doug Allen here.

Tonight we're going to use WebEx so we can share more of what we have on our screens.

Joining me on the call and alternate Thursdays going forward will be Tyler Bellis who will continue to share his knowledge on index trading strategies. I'm sure many of you are familiar with Tyler from the 6 session intro have gave over the past few months on TOS style trading.

We'll have some fun talking about this uber-bullish market, the super low VIX and what this means moving forward.

To join the WebEx meeting:
1. Click on the following link: https://usergroups.webex.com/usergroups/
j.php?ED=102442992&UID=0
2. Enter your name and email address.
3. Click "Join Now".

To join the teleconference:
Dial-in-number: 712 451 6100 Enter Access Code: 691867#

RUT May Paper Trade Update

Our RUT 730/740/720/710 May Iron Condor (Paper trade) was ripe to be sold today and we exited at the end of the day for a $6.25 debit netting 1.95 before commissions.

We received a $8.20 credit to enter the trade and we had $1.80 risk.

Since we profited $195 on $180 risk we were able to secure 100% ROI after our $12 in commissions is factored in ($1.50 x 8).

If you recall, we entered this trade because we had a slightly bullish bias
when we entered the trade on April 18th as the RUT was in the 705 area. We saw resistance in the 730 and 740, so our target area was between 720 and 730. We targeted the 720-730 range as an area with a high probability of the RUT crossing through the last 2 weeks before expiry. During those last two weeks our job is to monitor the trade closely and exit the trade when we feel the trade has reached an acceptable profit vs. additional risk level.

We closed the trade today because the additional risk of price movement and the gamma risk created too much risk for the additional profit that we might have gained. Gamma risk is the acceleration of Delta movement we see the last few days before expiry. As we get closer to expiry our breakeven point tightens and it creates a greater risk of our profitable position evaporating to a loser if the price moves too far.

If you analyze this trade on the analyze tab you can see how the gamma affects the position.

All in all this was a great trade with a favorable risk / reward. We monitored the trade closely, didn't get greedy and walked away with 100% return. Not bad for a 3 1/2 week trade.

RUT May 730/740/720/710 Tight Iron Condor (Analyze Tab at Exit Point)

RUT Rising Wedge

The RUT is starting to form a rising wedge which is a bearish pattern.

In order for this pattern to set up correctly for a downward move, it will need to break below the green upward trend line.

The pattern suggests that the RUT is losing it's momentum on this move up.

RUT Daily Chart:

VIX continues lower

Despite $122 oil, fear in the market is at a 4 month low.

We are patiently waiting to see if this is sustainable or if we're just one news story away from a big fall. The VIX level is precarious when compared to lows on the yearly chart below.

It doesn't have a history of hanging out at the lows, quite the contrary.

CBOE $VIX Daily Chart:

VIX Levels: Heading Even Lower?

The VIX continues to surprise to the downside despite consumer confidence at 25 year lows, bad employment reports and $4.00 gas. (I filled up yesterday for $4.11 gal premium)

Another reason why to be cautious when trying to apply logic to the market.

Trade what you see, not what you think.


VIX Daily Chart:

DOW Transports - Reverse Head and Shoulders

DOW Transports Index Daily Chart:

SPX Levels

The SPX broke the downward trendline today and is resting it's head at some horizontal resistance at the 1409 area.

Very bullish and could easily see the 1433 200MA level as the next target. First though, it will need to crack over the 50% fib level at 1416.

Can dispute the higher highs and higher lows -- go with the trend. Like the DOW, the SPX still has plenty of room to pull back to the 30MA while still keeping the uptrend intact. Any break of that trend may summons the bears again at which point there may be some choppiness.

SPX Daily Chart:

NDX Feeling the Power

You can't turn your head for a second with the NDX, it's so good at sneaking in and coughing up or putting on 60 points a session. By the time you notice the move it's often too late because it rarely gives pause to a decent pull back to entry.

Two weeks ago on our call we were discussing the NDX chart with regard to 1825 and 1860 levels. We were mentioning that the NDX was having a hard time getting over 1860 -- we'll, that discussion is over.

The NDX closed up 62.74 at 1980.44, a mere 120 points from the 1860 we were discussing 2 weeks ago and more impressive was that 60 of those points came today.

I refer to the NDX as the "wild horse," I rarely trade this index despite the apparent riches because it is so good at reversing without notice, gapping, and generally moving in a more random fashion then most indices.

If you are trading NDX and making money then I applaud you - job well done!

As you can see from this chart, to try and trade a market neutral strategy on the NDX would be quite unprofitable, but it's a great chart to watch as a potential leader sometimes.


NDX Daily Chart:

DOW Levels

The DOW is just a few points away now from kissing the 200MA which lurks just overhead at 13,053. It saw 13,000 territory today for the first time since taking the elevator through it in early January.

The short term uptrend is very much intact and also has plenty of room for a healthy pull back if it decides it needs to take a breather before heading up a little further.

The chart is looking overbought, but as long as buyers keep stepping in at these pull back areas it could continue to do this for a while. It seems more likely to chop here for a while, but so often the obvious is ignored by the market -- that's what makes using any kind of logic in trading very difficult. Better to treat each day as random and keep nimble.

Up until today there has been a battle between the Intermediate downtrend and the shorter term uptrend. The bulls seem to be staking claim for the victory today with convincing volume.

DOW Daily Chart:

RUT Daily

The RUT made it up and over the downtrend line today to establish a break and try to extend the bullishness of the short term upward trend.

The 30MA is steaming up higher and chasing the price, any pull back now will likely find support on the 100MA, and if not the 30MA will be close behind.

The chart is looking very bullish indeed, 740 looks like the next likely target.

RUT Daily Chart:

Paper Trade - Last Trade Revisted

Two weeks ago we put on a papertrade for the RUT May 730/740/720/710 Iron Condor. We had mentioned that we liked this trade because of it's low risk and wide profit curve.

Looking at the position at the end of today with the RUT sitting at 729.75 we are within the profit area with a current profit of $55.39 (less commissions).

Our total risk on this trade was $180 so a profit in two weeks of $55.39 gives us a 30% return before commissions. Not bad for putting on a little bit of a bull bias to this Iron Condor.

If the bullishness continues it may blow right past this trade and it may experience a loss on this single trade. For the amount of risk we have on this trade, I am willing to watch it over the next few days to see how far the market is actually able to charge up. I will be patient to wait for the eventual pull back in hopes that it will settle at expiry somewhere under my profit range. This is too good of a risk reward take it off prematurely.

RUT 730/740/720/710 May Iron Condor (position as of 5/1/08)