Divergences don’t matter…until they do…

Over and over again, especially in bull markets, prices keep going higher despite divergences on internal indicators, but when a tumble comes, a “pull back”, even a crash and one looks back at its beginning there is usually a divergence there.

Or a cluster of divergences.

So as of today, we have one in CNN Money’s “Fear And Greed” Index. That index has been wildly over bought as prices have surged on most major indexes (in the SPY ETF surrogate for the S&P 500). It is back off, risen again and as of today put in its divergence by making a lower low while SPY has hugged its high (see the chart below). It is not infallible but if history do tell, it is a reliable context (not the red lines on the chart and subsequent market drops).

And wonder of wonders, the FINRA Margin Debt reading for October came out today (see the second chart below). It is a monthly and always a month behind so there’s always some guess work to be done in real time, but this reading is, indeed, ominous.

Besides having risen way beyond the debt levels of both 2000 and 2007 before those bear markets arrived, it has now been carving out a ledge pattern on its chart (sometimes called a bear flag) for the past few months as the market keeps rising into thinner and thinner air.

Why ominous?

Note it’s the same pattern that was in place as the market was making highs last time and, when it finally fell apart, it was the precursor of the bear markets in both 2000, and 2008. Is it different this time? Is it ever different this time?

History, history, history.

This is to say nothing of the divergences on the McCellan Oscillator (the NYMO) with its Summation Index (the NYSI) declining for the past 10 days even as the market as advanced.

Does this mean we’re about enter a bear market?

Maybe not, divergence don’t always matter. But if a bear comes roaring now there is a good chance when we look back to this day this cluster of divergences will have mattered.

(FEAR AND GREED – CLICK ON THE CHART FOR A LARGER VIEW)

(FINRA MARGIN DEBET – CLICK ON THE CHART FOR A LARGER VIEW)

$SPY #Options – Day trading puts 11/19

Initial Entry:



First Exit:

Breakeven Stop:

#ShortStrangles on #Stocks – stealing money weekly in cash

Let’s say you have $200,000 or so in a margin account at a brokerage — $206,400 to be precise (but more about that number later).

The account is in cash. Probably because as at some point you took to heart Bernard Baruch’s famous comment that he made his fortune in the stock market because he “sold too soon”, and now so have you as this bull market continues to climb leaving you, you think, behind.

What to do? What to do?

Let’s take AAPL, FB, TSLA and NFLX as examples, not as stock holdings, which are far too expensive for a $200K account, but as option trading opportunities using the cash margin your money provides.

I didn’t post these on Twitter this week to verify the timeliness (see more entries below for some of that) so this is a study in retrospect, a look at possibilities, not what was done but instead what could have been done this week, and what can be done any week going forward.

On Monday (11/11), 30 minutes after the open, AAPL was a 259, the price to set up a “short strangle” on its stock. In this case, I’m suggesting selling a 265 call above the market and a 255 put below the market, 10 contracts each, for a combined credit of $1,230 with a margin requirement of about $49,000. Same day, same time, FB was at 189 so a 195 call with a 185 put for a combined credit of $1,100 with a margin requirement of $34,800. Same day, same time, TSLA was at 346 so a 355 call and a 335 put at a combined credit of $6,600 with a margin requirement of $67,700. Same day, same time, NFLX was at 292, so a 300 call above the market and a 285 put below the market for a combined credit of $3,320. The margin requirements are those prescribed for each short strangle strategy by the CBOE, the Chicago Options Exchange.

Hope no one got lost in the thicket of dollar signs in the paragraph above. It all adds up to $12,250 added to you account at the beginning of the week. Now let’s see if you can keep it.

You are going to have to buy back the options you sold to get those credits or let them expire worthless if they are not in the money by the end of the week. All of these options are out of the money and will expire worthless at the end of the week if the stock does not rise above the call strike or drop below the put strike. That is the point of the strangle strategy, to have them all expire worthless.

Drum roll please…

At the end of the week, the AAPL strangle was down $520, which is a profit on the short sale, a gain of about 42% on the position.

At the end of the week, FB had a profit of about $990, a gain of 93% on the strangle position.

At the end of the week, TSLA had a profit of about $6,580, a gain of 99% on the position.

At the end of the week, NFLX had a profit of about $3,500, a gain of 99% on the position.

The total gains on all four stock strangles for the week was approximately $11,590. That is a 94.6% gain on the positions, but not on the margin requirements. The combined margin requirement for the four trades would have been $206,400 (ah-ha!, there’s that “more about that number later” number), which would make the actual percentage gain in the account for the week about 5.6%.

Five-point-six percent may not seem like all that much in volatile options trading but week in and week out for 52 weeks…

It must be said, however, there can be losses, and big losses if there is no stop-loss discipline, but short strangles on stocks could be as close as one can get to safely and legally stealing money in the stock market with just cash to work with.

$SPY #Options – day trading calls 10/15

The market context for these trades is outlined in this post – #MarketTiming – the NYMO low above a low. It is in place.

ENTRY:

FIRST HALF PROFITS:

CLOSE OF TRADE:

All Twitter time stamps are Pacific time.

PLEASE NOTE: None of the entries in this blog should ever be construed as investment advice or trading recommendations. They are presented solely for entertainment and educational purposes, and to record trading activities for my own personal trading journal.

#MarketTiming – $NYSI $10K stock trades

Long-term breadth (the NYSI) turned up Friday giving a buy signal for the open of the market today.

As suggested in this link #MarketTiming – the NYMO low above a low that was expected and would be necessary to have a chance for a rally. Today’s trading was sloppy sideways, probably just digesting last week’s gains, and although the NYSI did decline it stayed in positive territory.

If there is further weakness, there could be a whipsaw, but we’ll see when we see…

In the meantime, I expect more follow through to the upside.

In this link: #MarketTiming with $10,000 to trade I thought I’d sometimes address trading on limited capital — for the fun of it, for entertainment here and for anyone with limited capital.

The late great Kennedy Gammage of the Richland Report and for many years the keeper of the McClellan Oscillator flame, once wisely said: “Buy when the market tells you, sell when the stock tells you.” If I may, I would add to that “Also buy when the stock tells you.”

If one has but $10k, one needs to study up and pick stock favorites that have the ability to move with the market. Most stocks do move with the market but obviously some move better than others.

Today on Twitter I posted some Day-1 results selected by from my own bellwether stock list as examples of buying with the market as measured by the NYSI either turning up or turning down. Although, $10k readily computeS to a percentage gain or loss, I’m stating those gains in dollars gained or lost.

Clicking on the charts here will display larger chart details on Twitter.

THE WINNERS:

AND ONE LOSER TO SHOW NOTHING’S PERFECT:

#ShortStrangles on #Stocks – 10/14-10/18

THIS WEEKS SHORT STRANGLES:

LAST WEEKS RESULTS:

A PERTINENT QUESTION ON TWITTER:

$SPY #Options – day trading calls 10/11

These trades are based on this strategy:

#Options – Buying Calls and Puts

And this context:

#MarketTiming – the NYMO low above a low

INITIAL ENTRY:

FIRST HALF PLUS 50%:

SECOND HALF CLOSE OF THE TRADE PLUS 46%:

All Twitter timestamps are Pacific time:

#MarketTiming – the NYMO low above a low

One of the signs of a true bull market is the follow through off a low-above-a-low pattern in short-term breadth (the NYMO).

The signal is displayed in the top portion of the chart below.

It is buy signal for aggressive traders looking for a rally to begin off a meaningful market bottom. In bull markets, it almost always has follow through to the upside immediately. That hasn’t quite happened in recent months, which has made everything in the current market psychology suspect. See August on the chart as an example.

But it did happen today — after triggering yesterday for today’s open, there was the immediate follow through to the upside.

Now the bulls need long-term breadth (the NYSI) to turn up in the next day or two, which is the trending signal. The NYSI is the smoothed line in the middle of the chart below. It is still falling but…

If both breadth indicators get in line, there is a good chance the market rallies strongly, possibly for several weeks, maybe back to the recent highs, maybe higher.

But, of course, as has happened all through these unstable times, it will be a rally that can be killed by a tweet.

(click on the chart for a larger view)

$SPY #Options – Day trading calls – 10/10

INITIAL ENTRY:

FIRST HALF OFF:

CLOSE OF DAY TRADE

$SPY #Options – day trading puts – 10/8

NOTE ON SECOND TRADE: Took profit of 50%, by habit and close to the end of the day, but sold way too soon as the market continued its selloff making the second put position worth 81% at the close.

These trades were based on this post:

#Options – Buying calls and puts

And this context:

#MarketTiming – okay, we are close to a bounce…

Note the final comment in the link immediately above: “Regardless, a bounce now will still be a bounce to sell again.”

All Twitter timestamps are Pacific Time.

FIRST TRADE:

SECOND TRADE: