Dr. Duke's Blog

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Written by Dr. Duke

Created: 14 July 2010

SPX closed just above its 50 dma at $1095 yesterday, so all eyes were watching to see if it could hold that key support level today. In the early going, it looked like it wasn't going to hold, but then SPX rallied as high as $1099 before pulling all the way back to $1088. But the bulls came to the rescue and drove SPX to close unchanged at $1095. RUT traded in similar fashion, but was unable to recover all of its losses, closing at $640, down $3. Trading volume dropped today by 7% on the NYSE and dropped 6% on NASDAQ. Trading in the S&P 500 stocks dropped from yesterday to about 3.7 billion shares, well below the 50 dma.

The price charts of RUT and SPX are displaying the harami candlestick pattern (or an "inside day" on a bar chart). Haramis suggest a possible reversal of direction - after a strong up day yesterday, we have a doji candlestick today, suggesting market indecision, and possibly a market turning point. But in these markets, I'm not sure any of my indicators have much value. It seems as though the market is just thrashing back and forth from one extreme to the other. Recent events have made me cautious.

When the market ran up this morning after testing support, I added to the hedges on my Aug iron condor. The P/L now stands at -$2,780 with position delta = -$23 and theta = +$76. Since RUT pulled back, I now am probably hedged more than necessary. BUT, adjusting early and too much is always preferable to adjusting too late. So now we watch to see who will win this bull/bear tug of war.

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Written by Dr. Duke

Created: 13 July 2010

Stocks traded strongly upward today as the earnings reports and guidance from Alcoa and CSX encouraged traders about the strength of the U.S. economy. SPX traded up and hit its 50 day moving average (dma) at $1095 mid-day and pulled back; later in the afternoon, SPX broke through the 50 dma but pulled back and closed right at the 50 dma, $1095, up $17 on the day. RUT ran even more strongly to the upside and closed up $21 at $643. Trading volume rose today, increasing 28% on the NYSE, and 2% on NASDAQ. Trading in the S&P 500 stocks rose to four billion shares, but still well below the 50 dma. INTC reported its highest earnings in ten years after the close. Barring no negative surprises in the conference call, that may continue to fuel this rally tomorrow. Many institutional traders watch the 50 dma and the 200 dma as key levels of support and resistance. SPX broke through the 50 dma briefly today before being pulled back. That $1095 level will be crucial to watch tomorrow for a signal of whether this uptrend can continue.

I added a partial adjustment to my Aug iron condor today with a Sept $680 call. This position now stands at a P/L of -$2,895, delta = -$61 and theta = +$94. The hedge reduced our delta risk, but also reduced our positive theta. If this market run continues tomorrow, I will be adding additional hedges.

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Written by Dr. Duke

Created: 12 July 2010

Today was a slow day in the markets with no significant economic reports as traders waited on Alcoa's earnings announcement after the close. RUT opened, traded down and then basically sideways the rest of the day, closing at $622, down $8. The SPX behaved similarly, but slowly recovered its losses, closing at $1079, up less than a dollar. Trading volume remained anemic with a 2% decline on the NYSE, but a 11% increase on NASDAQ. The S&P 500 stocks traded even below Friday's 3 billion shares. The 50 day moving average is about 4.8 billion shares. As you probably know, Alcoa beat expectations and has traded up after the close. My guess would be that this will drive the market somewhat higher tomorrow. The remaining risk would be any pessimistic comments during the conference call regarding future growth. Alcoa receives a lot of attention because its products are crucial to much of the industrial economy; if the economy is beginning to pause, Alcoa should be an early indicator.

Today's weakness in RUT was helpful to my Aug iron condor that now stands at a P/L of -$1980, position delta = -$55 and position theta = +$124. The delta of the $680 calls pulled back to 16. So we have begun the earnings season with the market feeling very nervous, so surprises could occur at any time and push this market over the edge. Analysts are especially focused on the guidance being presented by companies due to fear of a possible "double dip" in the economy.

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Written by Dr. Duke

Created: 09 July 2010

The markets tacked on another bullish day today, although much of it was added in the last hour of trading. However, the trading volume made record lows for the year. Trading on the NYSE dropped 25% and trading on the NASDAQ dropped 23%. Trading in the S&P 500 stocks was under three billion shares today. You have to go back to the first trading day of the year (traditionally a low volume day) to find a lower S&P trading volume day. This extremely low volume makes me leery of declaring that the worst is over, etc. The big players have not fully endorsed this move up as yet. Any disappointing earnings reports over the next week or two could trip this market very easily (Alcoa is Monday after the close). Be cautious.

My Aug iron condor on RUT is starting to get squeezed on the top side. The delta of the short 680 calls hit 19 today. The position delta stands at -$61 and theta = +$106. The theta/delta ratio is dropping, but still in a good range. If the run higher continues, this position will have to be adjusted.

Have a great weekend.

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Written by Dr. Duke

Created: 08 July 2010

As noted in my blog yesterday, I was concerned whether the major indexes could hold as support the resistance levels they broke yesterday, e.g., $1042 on SPX. Well, they did better than that, they closed above yesterday's closing prices. SPX closed at $1070, up $10 after trading as low as $1058, well above the strong resistance level of $1042 that was broken yesterday. RUT closed at $620, up $9. RUT traded down to $612, which was yesterday's close, but then rallied to close at $620. So the DJIA, SPX, and the RUT all traded down and tested yesterday's closing prices before trading higher today. All of this price action was very bullish and supports the idea of a bottom on the correction having been reached. However, it was on even lower volume than yesterday; trading on the NYSE was down 8% and trading was down 5% on the NASDAQ. Less than 4 billion shares of the S&P 500 stocks traded today, down from yesterday and well below the 50 day moving average, which is just below 5 billion shares.

A reduction in the number of initial unemployment claims cheered the market; the numbers came in at 454k this week, down from 475k last week. Similarly, the number of continuing claims dropped by 230k to 4.41 million. However, it is difficult to know how many of those 230k are now employed or whether they simply ran out of benefits.

My Aug condor is pretty much unchanged from yesterday with a P/L of -$1720, delta = -$37, and theta = +$97. The theta/delta ratio is high and the current value of the index is close to equidistant from the OTM call and put spreads. The price action of the past few days may have you looking for bullish trades, but beware of the low trading volume. This market is still dangerous.

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Written by Dr. Duke

Created: 07 July 2010

I am running out of superlatives to describe recent market action. It seems like traders are being jerked back and forth nearly every day. It reminds me of Greek mythology where the Gods toy with the humans - the market Gods are having fun with us. No significant economic news came out today to justify this huge run. In fact, the talking heads on CNBC were having a hard time explaining the move today. Perhaps the absence of bad news was sufficient motivation for traders. Trading volume was light today with a 1% decline on the NYSE and a 3% rise on the NASDAQ. The S&P 500 stocks traded 4 billion shares, flat with yesterday and well below the 50 day moving average.

SPX closed at $1060, up $32, while RUT ran $22 to close at $612. Big moves on light volume shouldn't be trusted so beware of tomorrow's market; don't just blindly start going long. It would not be surprising to see some of today's gains given back. I will be watching to see if SPX can close above the critical $1042 resistance level that was broken today. Closing above $1042 for a couple of sessions will offer some reassurance that a bottom has been reached.

I rolled the 730/740 call spreads of my RUT Aug iron condor down to 680/690 this morning. The put spreads are split between 510/520 and 550/560. At the close today, this position is well positioned with a position delta = -$14 and position theta = +$93.

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Written by Dr. Duke

Created: 06 July 2010

The markets opened up pretty strongly this morning, but soon lost their momentum and started selling off. However, the Russell 2000 Index (RUT) stood out from the pack today and just continued to sell off all afternoon. It was the only major index to post a loss for the day. RUT closed down $9 to close at $590, matching the intraday low set last Thursday. SPX traded up and tested resistance at $1042 before retreating to close at $1028, a gain of $5. The price action of RUT and SPX over the past three sessions appears to be establishing a bottom for the correction. The volatility index (VIX) ran up earlier in the day but ended the day essentially unchanged at 30%. The ISM Services Index reported out at 53.8, down from last month's 55.4; economists expected a drop, but not quite that much. That report, at 10 am ET, appeared to start the slow sell off in the markets. Trading volume was mixed; it was 18% higher on the NYSE and 29% higher on NASDAQ, but the S&P 500 stocks only traded 4 billion shares, well below the 50 day moving average.

The strong market action this morning prompted me to remove the Sept put hedges on my Aug RUT condor and I re-established half of my put spread position down at 510/520. As it turned out, it would have been nice to have had those Sept puts in place, but I didn't see the sell-off coming. My condor's position delta and theta are now similar at +$58 and +$41, respectively. When the delta and theta of your position are similar, you are in a weak position and either a market move or an adjustment is imminent. So I will be watching to see if RUT breaks through support at $590 and SPX breaks through support at $1010. If those support levels are broken, we may be seeing the beginning of a bear market trend rather than a bull correction.

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Written by Dr. Duke

Created: 02 July 2010

Trading volume dropped dramatically from yesterday; it almost seemed as though traders had positioned themselves for the unemployment report and the actual announcement was a non-event. Trading volumes were down significantly across the board. Trading on the NYSE dropped 32% while trading on NASDAQ dropped 39%. The S&P 500 stocks traded 3.2 billion shares, down significantly from yesterday's 5.5 billion shares.

Nonfarm payrolls dropped 125k but much of that was expected due to census workers being released. The unemployment rate dropped from 9.7% to 9.5% and factory orders dropped 1.4% in May. So the news wasn't terrible, but it wasn't very reassuring either. The market traded up at first but then began a slow decline through most of the day. The major indexes tried to recover the day's losses in the last hour of trading, but still ended in a loss. RUT lost $6 to close at $599 while the SPX closed at $1023 for a loss of $5.

My Aug iron condor on RUT at 550/560 and 730/740 stands at a P/L of +$280, delta = -$27 and theta = -$48. The delta of my $560 puts is at 29, so I can't release the Sept put hedge. A combination of the two Sept puts and the fact that I closed half of my put spreads has resulted in my theta going negative. This situation can't be allowed to continue long. If the market doesn't bounce back upward next week, I will be closing the rest of the put spreads and rolling them downward. That will restore our positive theta. Yesterday's and today's market action appear consistent with creating a bottom, but the low volume forces us to defer our conclusion. So remain vigilant.

Enjoy the holiday.

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Written by Dr. Duke

Created: 01 July 2010

The futures were pretty negative about an hour before the open today, but they worked their way up to flat by the open, but the market plunged within a few minutes and worked toward significant lows before starting to rebound. By the end of the day, much of the losses had been recovered. RUT lost $5 to close at $605, but traded as low as $590 before rebounding. SPX had a similar pattern, trading down to $1010 before rebounding to close at $1027 for a loss of $3. Both the SPX and the RUT displayed the classic hammer candlesticks today, a common reversal pattern. However, the lower shadow sets the support level that may be tested several times before a reversal actually unfolds. Tomorrow's unemployment numbers may be the stimulus. Trading volume was up today: up 19% on the NYSE and up 32% on the NASDAQ. The S&P 500 stocks traded 5.5 billion shares, above the 50 dma.

The question on my mind at this point is whether we are still in a correction of a bullish trend, or whether we have started a new bearish market trend. RUT's close today is just below the lower edge of what appeared to be a consolidating range over the past six weeks. With SPX closing below $1040 for two trading sessions, that index has clearly broken out of the consolidating range of $1040 to $1120. However, today's hammer may be establishing a new lower support level for this basing pattern.

The economic news that precipitated this morning's drop was a 30% drop in pending home sales, an increase of 13k in initial unemployment claims, an increase of 43k in continuing unemployment claims, and a weak ISM manufacturing index report. The stage appears to have been set for a disappointing unemployment report tomorrow morning. We may retest those lows set this morning.

I closed half of my Aug 550/560 put spreads for $2.60 this morning and held my Sept 560 puts. This has kept my Aug condor at breakeven since the Sept puts are profiting nicely. In fact my position was actually profitable this morning before the market started rebounding. Now we wait to see how the market reacts to the unemployment report in the morning. Today's rebound on stronger volume was a hint that support has been reached, but the unemployment numbers could cause a selling spree that retests those lows.

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Written by Dr. Duke

Created: 30 June 2010

The markets didn't display the classic "dead cat bounce" today after yesterday's bloodbath, but the major indexes traded modestly higher most of the day. But news that Moody's will be reviewing Spain's debt for a possible downgrade sent the markets lower in the last hour of trading. The Chicago PMI came in at 59.1, down form last month's 59.7 reading. The ADP employment report sees 13k more jobs, down from an increase of 57k last month. Most analysts have gloomy expectations for tomorrow's unemployment claims data and Friday's unemployment rate announcement. Softening of any of this data will confirm the fears of a double dip in the economy. Some of the market's influential analysts (Dennis Gartman, et al.) see the news from the G20 summit of cutting spending together with increased taxes as a lethal prescription likely to drive the world into a deeper recession. President Hoover is credited with the same policies creating the Great Depression in the thirties. Perhaps this recent rash of market weakness reflects that viewpoint.

The Russell 2000 Index (RUT) closed down $6 at $609, just above the support level at $607 set June 8th. If RUT breaks through this support level, the next stop is much lower at about $580. SPX closed at $1031, right in the support range of $1020-$1030 set back in Oct and Nov of 2009. Similar to RUT, a break-out below this level may not find support until around $980 from August of 2009. Trading volumes dropped from yesterday's high levels; trading on the NYSE dropped 13% and it was down 21% on NASDAQ. Trading the shares of the S&P 500 dropped back to 4.3 billion shares, below the 50 dma at 4.9 billion shares.

The Sept puts are nicely holding up the P/L of my Aug iron condor on RUT: P/L = +$180, delta = -$6 and theta = -$20. The delta of my short Aug 560 puts stands at 26. If that exceeds 30, I will close the put spreads and hold the long Sept puts. Play all of your positions very defensively; the mood of this market is decidedly bearish - I doubt that Friday's unemployment report will be greeted positively.