February 11, 2013

Logical Market Update | Markets Continue to Inch Higher on Low Volumes | LinkedIn Surpasses Expectations

Spurred on by LinkedIn’s Stellar Earnings Report the Markets Continue to Inch Higher on Low Volumes

Friday’s trading action again left many on the sidelines wondering what to do. Yours truly included. If it wasn’t for the Japanese Yen (plug this one into the DTS system for some great trading!) I would have been mumbling to myself.

LinkedIn surpassed expectations and blasted through all projections for an earnings move with Friday seeing some strong what I believe was ‘short’ covering. I know many traders that put on earnings plays using options gave themselves up to $20 wiggle room, but LNKD blasted through that like it didn’t exist. This pattern of “over reactions” to earnings this past month takes us back to the glory days of the late 20th Century when adding “.com” to your company name produced a $100 rally in the stock price – and I’m not kidding this really did happen. NFLX also continued to take out resistance and is now sitting above $180. Amazing – but the hype is just not catching up with reality yet. I believe it will but I’m not sure the shorts will be able to hold out that long before they receive a margin call. APPL picked up the pace on Friday and successfully turned 470 resistance into support. AAPL appears to still be on target for a push back above $500 soon. Again, the DTS trading system using any of the birds has produced some huge results when trading AAPL. Unfortunately, most traders don’t have accounts large enough to day trade this stock. But there is a solution for those DTS users who are looking to expand their markets to include equities. Options are a great tool to use along with DTS’s Trend trader. I’ll be speaking more about this in the next week or so.


LinkedIn – (LNKD) what a difference a day makes. Thursday the stock closed at 124 and Friday it nearly reached 152. Volume tripled which makes for superior trading conditions. Price volatility, and two-way volume a day traders pre-requisites. The options markets are a little wide but that should be expected after a nearly $30 move. LNKD is notable because the price volatility should remain for a while as the market determines LNKD’s next trading range. Volumes should remain as well as traders come in to participate. As long as the price volatility remains high DTS users should set up LNKD across the board in all three birds. The incredible improvements made to Trade Manager have made the DTS system reliable, resourceful, and profitable! Set up LNKD in and let the fun begin.

Here again is a brief list of the markets I have found DTS to very profitable: 

• US$/Euro
• GS (Goldman Sachs)
• AAPL (Apple Computer)
• E-mini S&P 500
• GLD (Gold ETF)
• SLV (Silver ETF)
• TLT (Treasury Bond Long ETF)
• TBT (Treasury Bond Short ETF)
• FB

Within the coming weeks I’ll be providing more details and suggestions on trading both equities and options using DTS trading signals.

Expectations for Monday (2/11/2013)

The overbought nature remains intact, and realistically could for some time to come. While using these technical oscillators to gauge what comes next, the market does not always pay attention to “overbought” readings. With volumes generally on the low side it would be fair to say that many investors and traders are not participating. So either they are long already and happy as can be – or short and hoping for a downturn soon. But it is not a positive sign when a market moves to new highs or recovery highs on declining volume and this is happening in many notable stocks and indexes. Such as the Russell 2000 (RUT) (TF – Russell 2000 mini- futures), and (IWM –Russell 2000 Index Fund) all moved to new highs on Friday on volumes that were substantially lower. Granted the Nor’easter was getting ready to slam into the area, so I’ll give up Friday’s volume to that, but in general volumes have been declining over the past year as markets march higher.

I am continuing to look for more of a pull back before the larger advances kick it into high gear again. Thus far the one day here and one day there of decline has done little to rebalance the markets. I’m also noticing HFT traders taking over during the low volume periods. While HFT traders do eventually add volatility to equity and option prices, the apparent price manipulation is getting out of hand. So be careful when trading larger issues. Sudden run ups or down without much actually trading are becoming more common and misleading.

Intraday Support and resistance zones (daily) to watch for:

DJIA: support at 13,800 and resistance at 13,965 to 14,150
SPX: support at 1500, 1495 and resistance at 1525


30yr – support at 142’16 to 141’16 and resistance at 143’29 to 144’12
10yr – support at 131’14 to 131’06 and resistance at 131’22 to 131’26

TLT – support at 116.50, 116.00, 115.50 and resistance at 117.15, 117.85, and 118.20
TBT – support at 67, 66. 55 and resistance at 68.10, 68.70, 69.15


AAPL: support at 469 to 452, 440 – 439 and resistance at 481 and then 500
GS: support at 147, 146 to 143 and resistance at 152 and then 164
Options Basics

As promised I am rolling out some basic information about options. If you are an experienced options trader you already know this. If you are new here are the basics to begin building an understanding of this market.

From Wikipedia:
In finance, an option is a contract which gives the owner the right, but not the obligation, to buy or sell an underlying asset or instrument at a specified strike price on or before a specified date. The seller incurs a corresponding obligation to fulfill the transaction, that is to sell or buy, if the long holder elects to “exercise” the option prior to expiration. The buyer pays a premium to the seller for this right.
An option which conveys the right to buy something at a specific price is called a call; an option which conveys the right to sell something at a specific price is called a put. Both are commonly traded, though in basic finance for clarity the call option is more frequently discussed, as it moves in the same direction as the underlying asset, rather than opposite, as does the put.
Options valuation is a topic of ongoing research. The value of an option is commonly decomposed into two parts: The first of these is the “intrinsic value,” which is defined as the difference between the market value of the underlying and the strike price of the given option. The second part depends on a set of other factors which, through a multi-variable, non-linear interrelationship, reflect the discounted expected value of that difference at expiration. Although options valuation has been studied at least since the nineteenth century, the contemporary approach to is based on the Black–Scholes model which was first published in 1973.[1][2]
Options contracts have been known for many centuries, however both trading activity and academic interest increased when, starting in 1973, options were issued with standardized terms and traded through a guaranteed clearinghouse at the Chicago Board Options Exchange. Today many options are created in a standardized form and traded through clearinghouses on regulated options exchanges, while other over-the-counter options are written as bilateral, customized contracts between a single buyer and seller, one or both of which may be a dealer or market-maker. Options are part of a larger class of financial instruments known as derivative products, or simply, derivatives.

Options Glossary:
Call: A call option, often simply labeled a “call”, is a financial contract between two parties, the buyer and the seller of this type of option.[1] The buyer of the call option has the right, but not the obligation to buy an agreed quantity of a particular commodity or financial instrument (the underlying) from the seller of the option at a certain time (the expiration date) for a certain price (the strike price). The seller (or “writer”) is obligated to sell the commodity or financial instrument should the buyer so decide. The buyer pays a fee (called a premium) for this right.

Put: A put or put option is a contract between two parties to exchange an asset (the underlying), at a specified price (the strike), by a predetermined date (the expiry or maturity). One party, the buyer of the put, has the right, but not an obligation, to sell the asset at the strike price by the future date, while the other party, the seller of the put, has the obligation to buy the asset at the strike price if the buyer exercises the option.

Strike Price: the strike price (or exercise price) is the fixed price at which the owner of an option can purchase (in the case of a call), or sell (in the case of a put), the underlying security or commodity.

In the Money, Out of the Money, At the Money: moneyness is the relative position of the current price (or future price) of an underlying asset (e.g., a stock) with respect to the strike price of a derivative, most commonly a call option or a put option. Moneyness is firstly a three-fold classification: if the derivative would make money if it were to expire today, it is said to be in the money, while if it would not make money it is said to be out of the money, and if the current price and strike price are equal, it is said to be at the money. There are two slightly different definitions, according to whether one uses the current price (spot) or future price (forward), specified as “at the money spot” or “at the money forward”, etc.

The Greeks:

In mathematical finance, the Greeks are the quantities representing the sensitivities of the price of derivatives such as options to a change in underlying parameters on which the value of an instrument or portfolio of financial instruments is dependent. The name is used because the most common of these sensitivities are often denoted by Greek letters. Collectively these have also been called the risk sensitivities, risk measures or hedge parameters.

deltaDelta measures the rate of change of option value with respect to changes in the underlying asset’s price. Delta is the first derivative of the value value of the option with respect to the underlying instrument’s price price.

gammaGamma: measures the rate of change in the delta with respect to changes in the underlying price. Gamma is the second derivative of the value function with respect to the underlying price. All long options have positive gamma and all short options have negative gamma. Gamma is greatest approximately at-the-money (ATM) and diminishes the further out you go either in-the-money (ITM) or out-of-the-money (OTM). Gamma is important because it corrects for the convexity of value.

thetaTheta measures the sensitivity of the value of the derivative to the passage of time the “time decay.”

Vega: Vega measures sensitivity to volatility. Vega is the derivative of the option value with respect to the volatility of the underlying asset.

roRho measures sensitivity to the interest rate: it is the derivative of the option value with respect to the risk free interest rate (for the relevant outstanding term).