Just a short post today as I’m working hard on expanding the resource section of the site: It is quarter end quad witching options expiration today and principally what this means is to expect the unexpected. I don’t plan on doing much today other than to follow the trade plan and scale further into positions on strength. As we are looking to gap above 3 days worth of resistance we may either head straight to new highs with another open gap, or see it filled.
Yesterday’s action saw relative weakness in tech and small caps with markets closing higher on mixed breadth. No matter.
The market’s agenda seemingly remains the same: Ignore all events and buy everything. This week we saw Russia annex Crimea, nobody cares. China misses growth forecasts and the specter of loan defaults is looming, nobody cares. GDP forecasts were reduced and large companies such as Oracle and FDX missed big on revenues and earnings, nobody cares. Russia and the US increase their rhetoric of sanctions and tension, nobody cares. The Fed reduces QE further, reduces its GDP forecast and hints at rising rates coming sooner, nobody cares. Well someone did care as we sold off on very large volume only to creep higher on much lower volume yet again. But so go the games of OPEX. Pin action drives everything and the slushing of liquidity must find its way.
I did have to chuckle at the narrative though as yesterday’s rally was explained by saying that Janet Yellen didn’t really mean what she said. Yet banks rallied to a new high on the index saying that she did mean it as rates maintained their Fed induced spike. Nobody cares.
Per my trade plan a push to new highs remains a distinct possibility and I’m keeping my scale ins light & fluffy to account for this possibility, but I also want to have enough meat on the bones to be able to reap the rewards for the turn when it occurs. And it will occur. No trend like the one on the right maintains forever. Yet to get a comfortable balance here is more art than science and is frankly a judgment call.
As we saw on Wednesday: Things can change on a dime and when the selling finally sticks I’m expecting shock & awe as the chart patterns continue to exhibit deviations of historic proportions. But for now it’s a grind. Yet as we look at the monthly chart pattern as with the IWM here we can clearly see the disconnect from the upper monthly Bollinger band that has begun in 2014 deviating from the 2013 pattern. What hasn’t happened yet is a sustained break below the monthly 5EMA. As previous patterns have shown, these breaks tend to occur extremely quickly as we saw in January. This initial break was obviously a buy in hindsight, but, as I’ve seen with these type of breaks in the past, they were warning signs of what was to come. And I have no reason to believe this time is any different:
As I pointed out I’m leaving option entries for last to minimize risk of decay and I want to wait for a definitive sell signal to occur. Given seasonality the best risk/reward appears to be today & possibly into early next week.
One would think that sensible minds would want to lock in some profits ahead of weak seasonality and overseas risk, but I have long learned not to assume anything and certainly not anything sensible.
Trade Plan: Expand short book on strength using wide scales (I added on the overnight ramp) I’m specifically interested in expanding into volatility. Given the erratic nature of OPEX day I’m inclined to stay away from weekly options today as they are likely even more risky than usual today.