August 5, 2014

Market Observations from August 5, 2014

hisfaultherfaultI received a few emails and calls on Tuesday asking me how I could stand behind Elliott Wave when it so clearly doesn’t work.  “Doesn’t work,” I asked “ how so?” Seems the question was of understanding that applying Elliott wave to a live ongoing market is just that – “live”.  The principle itself does not forecast what will cause a particular move in the markets, but merely alerts the analyst of the probabilities and also the likely path the market will take.   In our constant search for the holy grail and instant gratification it is much easier to find fault with someone or something else rather than take responsibility for our individual decisions.  So, to those who prefer to play the blame game and throw out the baby with the bath water – read on – the broader indexes appear to have completed their initial 5-waves down, which under the guidelines of R.N. Elliott suggests a trend change, but to satisfy all those naysayers the next move (in the broader indexes) will be a rally.  Yes, sparky you will get another chance to tell the world that technical analysis doesn’t work.

Trader riding Elliott WaveTuesday’s trade started off as expected with the markets heading lower.  Things picked up speed and intensity after it became known that Russia is again building up troops along the Ukrainian border.  Whether we like it or not the geopolitical situations brewing around the globe will continue to trigger a reaction from the markets.

The DJIA (YM), SPX (ES), and NDX (NQ) all appear to have completed 5 wave patterns down, which is best interpreted as wave A of an ongoing A-B-C correction where waves A and C will be declines and wave B an intervening rally.  It is prudent to allow for follow through selling dropping the indexes back into support zones, which would be 1900 to 1905 for the ES, 3815 to 3850 for the NQ and 16350 to 16330 for the YM.  Technically, the stochastic oscillators have all reached short-term oversold readings after Tuesday’s selling.

Based on the lows currently in place the expected B-wave rallies would be expected to reach resistance zones between 1938 to 1956 for the ES, 3917 to 3935 for the NQ, and 16593 to 16685 for the YM.  Ultimately the rallies will form their own A-B-C structures and resistance and support levels will be revised and updated as the moves unfold.

Initial projections for the larger corrections in progress would be 16172 to 15968 for the YM, 1894 to 1872 for the ES, and 3767 to 3698 for the NQ.  Again, these levels would be adjusted and revised as the moves progress.

Shorting Puts as an Asset Class

volatilitywordsVolatility again surged higher today, as yesterday’s sellers became today’s buyers.  The VIX surged 11.5% higher with the VX (future) jumping 8%, while the VXX added 7.12% and the UVXY jumping by 13.76%.  Again, these are large moves and the increase suggests fear is replacing complacency.  Also, interestingly a prominent research firm again laid claim to “espousing” the benefits of selling put options for years as being one of the safest and most consistent way to generate income in the market.  They laid claim to the fact that may have yet to sell a put option and that their quest was to share this knowledge.  If this were a strategy that you seriously would choose to employ I would implore you to understand the risk associated with it implicitly and to understand the strategy will not work as well if at all in a volatile and declining market.  There are many risk-defined strategies to take employ and play volatility. The strategy being sold by many is to either sell puts against a long stock position whereby the thought process is if the seller is assigned the stock it would be at a level the world would be willing to get long.  Don’t count on that always being the case.  Case in point would be Groupon.  The company reported today, and disappointed.  The stock closed at $7.07 and traded as low as $5.80 after hours.  Volatility spiked to 222% for the August weeklies that expire on Friday and 142% for the August monthly that expire in 10 days.  If you happen to believe GRPN was cheap at $7 and bought the stock and then to help finance the trade sold the August 7, 6.5, or 6 puts believing they would expire out-of-the money and therefore worthless with the premium collected being “money in the bank” – think again.  moneydownthetolietAll three put strikes are now in-the-money and the I suspect the potential for assignment notices may start to flow as early as tomorrow.  The research firm that espouses this strategy also continues to say the bull market isn’t over and that higher interest rates suggest higher stocks.  Both of those statements may be true and well within the realm of reality, but not all stocks are created equal and not all companies will participate at the same rate if and when the bull market resumes.


coaching2Steer the course and don’t compare yourself to everyone else.  You are not they and they are not you.  Remember to trust and believe what makes you unique at this moment in time and in this situation and allow others to choose for themselves.  Don’t be swallowed up by the chaos and false emotions swirling around.  Remember it’s just a number.

Trading the number remains key to being able to reduce and separate the “noise” from opportunity.  This takes knowing and executing a well-defined strategy and allows you to see opportunities amongst the “chaos” and by trusting the mechanics of your strategy, be able to take advantage of them.

Opportunity continues to knock on our doors.  While it doesn’t come without risk, risk can be defined and more manageable. Volatility and broad moves are exactly what a day trader desires and being able to respond without questioning is a luxury many are unaware of.