Almost time to go all in...

This past week I missed on a great opportunity to buy puts in SPX weekly. Yet I still manage a profit for the overall week with a short on PCLN. From all the frustration I have been through with the market I am happy with any type of profit. Now to my anticipation of what to look ahead in the markets.

The "flight to safety" has intensify the past week and the first chart shows how bullish the dollar is. As of Friday the sentiment in Europe's ability to pay its debts is again in doubt the dollar is strengthening against the Euro. It is interesting to note that since early July the dollar index UUP has been declining until last week while the SPX 500 index has been stuck in a range since the UUP decline. I would have though with a weaker dollar the equity market would increase, but that is not the case here. I sign that there is weakest in the SPX.


Next chart is the volatility index. There are many very good blogs out there that can go further into the good and bad of volatility indices, but the reason I wanted to post the VIX is because it is becoming very bullish. As shown in chart below the VIX was able to use the 200MA as support at around 23 and it just made contact with the 50MA resistance around 26.7 last Thursday. The sentiment from traders have been more pessimistic than previous weeks. Rightful so to be pessimistic at this point due to the fundametals both on a mirco and marco stand point being negative relative to investors' expectations. For instance Cisco profit estimates for future quarters were lower than expected. First time unemployment claims are going up again and ISM data has been dropping in recent months. The mood on wall street is more uncertain, which can very well lead to VIX spikes. With greater volatility there is better chance for market to move in significant direction, and presently after this week it seems the market wants to move down.


The bond market is just amazing! Yields are at there lowest since pre-Lehman collapse. The yields seem to only want to go down even more and the bond market illustrates that. For instance TLT is rising and it just broke the 102 resistance today. With a flight to safety mentality around the market TLT if can hold above 102 it can go up further. With money going into bonds it would mean then that equity market will have a void. That is another reason to consider why I think the overall equity market will go down further very soon.

The final chart of this post shows how SPX for the week fail to break through 1130 and fail to hold support at 1100. 1100 was just cut through like butter even though there were over 100,000+ calls/puts at that level. I would have assumed that buyers would have at least try to defend the 1100 instead of letting it fail so quickly. This goes to show that SPX is weak at the moment.

I have read through a lot of blogs past few hours and many are anticipating of a quick bounce before further drop in the overall markets. Any bounce here could be significant so rather than playing the short side I will wait for confirmation. My confirmation will come by the end of Monday where if the market stays flat or positive I will sit out, while if it ends in negative territory I would sell vertical OTM calls of the SPX. My values would probably be at 1100. I think there will be a bounce to 1100 but fail to get above it.

Playing with Volatility ?

After reading an Article by Bill Luby about the VIX I decided to look into it deeper. The link to his article: "Take a Longer View on Volatility" Basically I wanted to see if the 10% difference between the 1month CBOE S&P500 volatility and the 3month COBE S&P 500 volatilty will produce a change in the direction of a trend.

The graph above has the green/red line representing the VIX while the blue line representing the VXV. I used 20 days data on an hourly chart. Notice on the closing of June 19, 09 the two lines % difference was significant. The one month volatility subsided that day versus the three month volatility. So what news could have reduce the one month volatility?

Not technically news but the market was set for a Quadruple Witching Day. Simply options were going to expire on that particular day and one would expect a lot of volatility on expiration dates, huh? This goes in line with Bill's theory that the VXV can not be affected as much on a daily event as the VIX. Clearly the volatility was still above thirty for the VXV and oddly enough the following trading day the VIX went beyond the thirty value. Just to add the following Monday the DOW dropped 200 points.

I added a Fibonacci line of retracement and for the following Monday, July 05, 09 the VIX seems posed to move up pass the 50% and 38.2% retracements. So what will this mean for the DOW? Well on Wednesday the VIX hit a bottom while the VXV hit 61.6% retracement. Then without warning the both indexes shot up. Each index gaining about 2 points, thats pretty signficant on a daily move. That day the DOW went up about 50 points. The following day the DOW dropped over 223 points, and the increase in volitilty indexes continued to race upward. My feelings are if the gap between the VIX and VXV are wider the more triple digits movement we will get from the DOW. Whether it will be up or down depends on a lot of factors, but reading through these charts I believe this coming week the market is pose for battle between the bulls and bears. (I know, I know a lot of people have been saying that, but I just got one more evidence as to this being true.) If the upside can not be sustained then we will continue with the downward trend for the past three weeks. Remember trend is your friend.