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Sunday, October 31, 2010

Waiting for Election Results

-SPY ended this past week flat, but the dips did allow us to buy the NOV 117/121 call spread for under $2.00. This spread ended the week worth $2.10, which shows the advantage of buying premium when implied volatility is low. I would expect the market to show greater movement after the elections on Tuesday.

-The question I have to ask myself is whether I am going to add to my long position or exit out of my call spread. At this moment, it is tough to call. Technical indicators are still in bullish territory, although the bullish energy seems to have weakened once again.

-I would look to add if SPY closes above 119.2 and exit out of my long call spread should SPY close below 116.9.

Sunday, October 24, 2010

SPY Continues to Rise Without Meaningful Correction

-I have to admit, in hindsight, my profit/stops were too tight. The biggest problem with having profit/stops that are discretionary without having concrete rules for reentry is that one could miss out on a monster trend.

-I thought SPY would go through a price correction last week, but SPY continues to rise. I was stopped out at 116.6, but SPY closed the week at 118.35. If I get back long SPY and prices fall, I would feel like an idiot, but on the other hand, if I chose to sit this market out, but SPY continues to rise I would feel even worse.

-All of my technical indicators are telling me to get back long the SPY again. Only the Future Volatility Estimate is telling me that the probability of a price decline is increasing. And because implied volatility on options is cheap, I would recommend buying 1 SPY November 117 call option and selling 1 SPY Nov 121 call option for 2.10 or less. This way, we would get some participation to the upside, but limiting our downside to $210.

Tuesday, October 19, 2010

Out of Long Positions in SPY

-SPY undergoing price correction, just as I expected from my posting over the weekend. My technical indicators were and still are showing that the bullish momentum is losing its strength. However, I would not be looking to short this market, but rather wait and see for how long and how much SPY prices correct.

-I would look to go long 1/2 position again should SPY fall to 115.0, but perhaps a better rule would be to wait a few days until stochastic oscillator turns up from low levels.

-FVE indicator has crossed above its moving average, so I would not be looking to short volatility at this time.

Sunday, October 17, 2010

Ready for SPY Price Correction

- Linear Regression Slope has started to turn down. Fair Volatility Estimate has started to move up and Stochastic Oscillator has started to turn down as well. So my technical indicators are signalling the rising probability of a price correction in SPY.

-However, SPY is still in a very strong uptrend, and we don't want to get off this ride. I'm moving my profit/stop level to 116.6 and would consider getting long again around 115.0

Tuesday, October 12, 2010

Raising Profit/Stop to 115.5, Watch the US. Dollar!

- This SPY rally continues to amaze, but I'm watching the US Dollar closely. The rally in the stock market coincided with the fall in the US Dollar, since September 1, as reflected by the prices of UUP (Power Shares DB US Dollar Index Bullish ETF). I'm noticing the lows in the UUP creep up for the past 3 consecutive days, indicating a good probability of a short-term dollar strength.
- If the US Dollar shows any strength, the stock market has high probability to undergoing a correction. My trading rules still tell me to be long the stock market, but I'm moving my profit/stop up to 115.5
- I also believe that SPY implied volatility and the VIX has fallen to a level where I would start to consider going long volatility. The FVE indicator is still below its moving average, however, so I would wait to go long volatility only if negative fundamental news comes out intraday.

Wednesday, October 6, 2010

SPY Right at Trendline Resistance

- In hindsight, 113.9 may have been too tight of a profit/stop to take off 1/2 our position, but that's what my trading rules suggested. SPY has remained very strong, longer than most investors would have anticipated. My feeling is that if you have riden this tremendous run from start of September, now may be a good time to take some profits, but I would still maintain a bullish position.

- Linear Regression Slope, FVE, and Stochastic Oscillator indicators are still bullish, while surprisingly, the Volatility Signal indicator remains in bearish territory. I'm moving up my 2nd profit/stop level to 112.8.

-The FVE indicator has remained in a downtrend since 8/25, correctly instructing us not to have been long volatility all this time.