Friday, June 1, 2007

HOTS Weekly Options Commentary

HOTS Weekly Options CommentarySocialTwist Tell-a-Friend
Peter Stolcers

Last week was shortened by the holiday. Traders often struggle to get their bearings after a long weekend. The tone was set two weeks ago when the S&P 500 dropped 16 points on Thursday. Jitters going into the week were exacerbated Wednesday when the Shanghai Index dropped 6% overnight. A .2% increase in the stamp tax placed on Chinese stock trades was to blame. The media sensationalized the event by emphasizing that the rate had tripled. While accurate, it made the news seem bigger than it actually was. From a trader’s perspective, if I'm trading a parabolic market, higher margins or commissions or exchange fees are not going to impact my activity - especially when it only amounts to .2%. Our market opened lower and it looked like profit taking might set in. By mid-morning, prices stabilized and the stage was set for a huge intraday reversal. This pattern has been very pronounced over the last few months. The market has a big one day drop and then it reverses and surges higher. The take away from all of this is that the China "bubble" is factored into prices. That market has made a huge move and everyone is expecting a pullback of decent magnitude. It’s a "closed market" and judging from this week's reaction, the consensus is that the selling can be quarantined. This was not the same reaction we saw after the one-day 10% drop in February. The Chinese can change the rules of the game at a whim and that market is treading on thin ice.

As the week progressed our market digested economic numbers and it continued to make new all-time highs. The biggest move came on Friday’s Unemployment Report. Despite a .3% rise in hourly wages, the market pushed higher. Two months ago the reaction to wage inflation would have caused a sell off. That's because some traders still hoped for a Fed ease and that component of the release would have dashed their spirit. The market is growing accustomed to the Fed’s "tight light" bias. Now it's almost a matter of how long they will wait before raising rates. I believe interest rates will remain unchanged the rest of the year.






The week ahead is very light in terms of economic releases (ISM services, productivity, unit labor costs, wholesale trade, consumer credit, trade balance) and I don't see any of these numbers driving the market. When the earnings calendar is highlighted by stocks like GES, ZQK and SFD, you know it's going to be a quiet week.

Next week we can expect dull summer-like trading. There is no news to drive the market. We are past end-of-month fund buying and we are a week away from option expiration. The path of least resistance is up and until I see a breakdown with follow through, I will stay bullish.

Thursday, May 31, 2007

Equity Index Update

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Brad Sullivan

The index markets reversed overnight worries from a Chinese decline and pushed significantly higher. In fact, the SPX joined the All-Time High Club as the index finally pushed through the 1527ish previous high close registered in March of 2000. Now the index has the intraday highs of 1552 and change in its sights. Without question yesterday’s sharp move caught many traders flat-footed. Given the China news, and the fact that this time there was a catalyst for the decline (raising the stamp tax on stock transactions from 0.1 to 0.3%) it should have come as no surprise that the indices were not going back down the Feb. 27th path. However, to predict new highs across much of the board was not something many were thinking when the SPM was trading around 1516.

And there lies the proverbial rub of the index trade in our current climate. By most measures we are overvalued/stretched and should be looking for a moderate decline. However, the indices keep on chugging higher and for those fighting the tape it has been a painful experience both psychologically and financially. As I pointed out last week in a couple of comments, the indices were stretched on a variety of readings…normally this plays out 1 of 2 ways: either a sharp decline or a moderate decline followed by sideways action. Neither of these scenarios is playing out. The decline was shallow, but only a couple of sessions of range oriented action followed. This leaves me with a scenario that rarely comes into play and that is the blow-off rally. Simply put, the DJIA and SPX have POTENTIAL to stretch this rally significantly higher throughout the summer. There are now 3 options on the board and it should make for some very interesting trading over the next 6 to 8 weeks.

For today’s session here are the levels in SPM I am focusing on: The first area of resistance should be found between 1535.50 and 1537.50…above this look for a push towards 1541. I would be looking for the zone between 1540.50 and 1542.50 to establish a moderate short line. Above 1545 on a 30 minute close, the white flag is waived on this transaction.

On the downside, support should be found in our old resistance zone of the low 1530’s…essentially look for support between 1533.50 to 1531. If this zone fails to hold, look for selling to accelerate towards 1528. Support is found within the 1529 to 1527 zone and again from 1525 to 1524. Clearly any move towards this area would leave many scratching heads.

All told, with the month end and tomorrow’s employment report, I would asses the odds of a significant move higher or lower as remote. Keep it close to the vest, but be ready to play if something changes during the session.

Friday, May 25, 2007

Equity Index Update

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Brad Sullivan

The index markets took a spill yesterday on heavy volume. The SPM opened in my support zone between 1524 and 1526, quickly finding a bid just before the release of New Home Sales which rose by a staggering +16% and well outside the highest end of expectations. Accordingly, players bid the indices in the wake of this number…however; the key resistance area in the low 1530’s put a ceiling on the session. Once the day trade longs were forced to liquidate the downside picked up some serious momentum and pushed through a variety of support zones established in the last two weeks of trading. Program trades were the flavor of the session as -1000 readings on the NYSE TICK were plentiful. When the session ended, with a minor bounce off the session lows, the SPM lost -13.50 for the session. However, measured from high to low on the session, the contract fell nearly -25.00.

This morning the indices are called to open higher as Europe remains moderately higher for its session. The SPM is trading at 1515.50, up 4.00 on the session and +5.20 above fair value readings. Keep a close eye on the 1515-1518.50 zone as the trade unwinds this morning. Early closing in the US debt markets should leave many traders heading out for the weekend after the first hour of trading. Accordingly, keep a close eye on some volatile trading during this period. In addition…if I hear one more pundit on CNBC talk about the bond market and the 10yr. yield approaching 5% being the reason for equities reversing course yesterday I may have to turn it off for good. During the past four years, yields have generally moved higher while equities have taken off to the upside. Now…if we were to push the 10yr to 5.25% in a velocity driven/inflation fighting trade – THEN I would say the yields are impacting equities. Until then, too many people looking for a reason that the indices broke -2% from All-Time highs.

Here are my levels for today’s session in the SPM contract: On the upside we are scheduled to open in the 1515 to 1518.50 zone…this zone is acting as resistance once again and only a 30 minute close ABOVE 1520 will change that picture. If we were to push above 1520 on a 30 minute basis I would not chase em up. Rather, the picture would become mixed for the rest of the session. Given the anti-upside momentum that I outlined yesterday, we could very well hit the 1524 to 1526 zone and fail there. In other words, rally selling remains the key in the short term.

Equity Index Update

Equity Index UpdateSocialTwist Tell-a-Friend
Brad Sullivan
Thursday May 24, 2007

The SPX index failed to close above the All-Time High close yesterday, and for the third consecutive session this index could not generate any “follow” buying. Accordingly, late selling has hit the market each session, pushing the index below its ATH close from March of 2000. The question on everybody’s mind is pretty simple…are we beginning to move into a resistance area that will hold prices down for the next few weeks?

On any technical measurement, the indices are clearly overbought – IN THE SHORT TERM. Consider the performance of the major indices from their respective March trading lows (seems so long ago doesn’t it?) to their recent highs. The DJIA is up about +12.8%, the Midcap 400 is up 11.5%, the SPX is up 11.2%, the NDX is up 9.9% and the Russell 2000 is higher by +8.8%. All of this taking place in about 9 trading weeks. That is a tremendous rally in both net change and velocity (measured in time). The odds are favoring a pause/contraction/slowing of this move. However, let’s keep in mind that ODDS only tell part of the story and if this is a stealth/blow off move to the upside there is plenty of room left in higher price zones.

As for today’s trade, the housing reading at 9:00cst should add some intraday volatility and the Durable Goods reading was able to push the SPM from -2.50 at 1523 to the current +0.50 at 1526. In addition, all eyes remain squarely focused on the holiday coming up this weekend as well as any happenings in China, where it appears that Mr.Greenspan does not have the same pull as he did several years ago. His overtly bearish comments on the Chinese market produced a settlement of -0.5% in their session…not exactly the earth shaking response one would anticipate.

Here are my levels for the SPM today…We are called to open within my key support zone from 1524 to 1526, I anticipate this zone to be the transitional area for a red light/green light type of session. Above it, is green light (buying) and below it is red light (selling). Above this zone we should hit resistance between the 1528.50 and 1530 area, followed by 1532.50 to 1534. The levels above 1528.50 have been probed for 3 consecutive sessions with yesterday’s action creating a new contract high…however, the failure to close any of these 3 sessions in positive territory has to be considered a NEGATIVE. Whether or not strong selling appears at LOWER pricing zones remains to be found, however, what should be important from a trading perspective is the ability to sell this market in the lower 1530’s for a move lower by the close of trading. In other words, we are not finding a boat of sellers at 1520 (assuming we get there) but we are finding them at 1533. It is the opposite of momentum, one in which a trader can sell higher highs and profit. Keep this thought in mind the next two sessions.

On the downside…below the opening support zone, 1522 to 1520 is CRITICAL support. If we move below this zone on a 30 minute closing basis it should create a trade towards the bottom end of the old resistance zone 1518.50-1515. That zone is now neutral/transition…below this is key support between 1512.50 and 1510. Barring an outlier news event, I see no reason to chase ‘em down below this level.

I have included a chart on the DJIA and its 200 day MA “extension.” We are holding at the highest levels since the start of 2006, but more importantly, the highest levels since the 1980’s. Is this a sell signal? Possibly, but remember this…in 1999 the NDX went to +51% above its 200 day MA.




Wednesday, May 23, 2007

Equity Index Update

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Brad Sullivan

The indices continued their divergent path in yesterday’s session and for those that use one index as a lead indicator to trade another index, it has been nothing but a painful existence over the past couple of weeks. Indeed, the only game in town right now is the spread trade between the mega-caps (DJ and SP) versus the small caps (ER2) and to some extent the NDX. As I outlined earlier this week, the volatility has been nothing short of amazing in these spreads, and the highest levels I have seen since the run higher in 1999 and subsequent collapse in the NDX. Rumors continue to abound about the trade over the last two weeks in these spreads, but, the only thing that really seems to matter is what we examined the other day with a couple of spread charts. Simply put, it was “mean-reversion” time. The last 2 sessions have been a painful reminder of how these spreads can operate – at least for those that stayed too long at the party. I have included an updated table that I first put into Monday’s update and a chart to show the extremes.


This morning, the SPM is trading higher on the heels of another +1% rally in China (why I’m not long the great wall I’ll never know) and more all-time highs in the DAX. Currently the SPM is trading at 1531.50, up 6.50 on the session – just shy of yesterday’s high and contract highs. Without any hint of economic today, save the DOE weekly inventories, one has to wonder -- is today finally the day the SPX takes out its All-time closing high?

The SPM was a pretty interesting trade yesterday as the market attempted to consolidate below my key 1528 level, but could not muster any sustained selling and gradually firmed up between 1527 and 1529. Lunchtime provided a bid and pushed the market a bit higher…however, by the time the final hour was underway the index could not hold onto the gains. In the final 30 minutes of trading the contract was sold into the bell, producing a new session low at 1524.75. Much of this seemed to be spread related and day trade long selling. This theory has gained traction in my mind with today’s solid open higher. Now the question becomes…where do we go from here?

Here are my levels for the SPM today: On the upside…resistance should be found between 1531.50 and 1534.50…if we can get a 30 minute close above this zone it is bullish. However, I do not think one need’s to chase ‘em up. Instead wait for a move back into this zone (31.50 and 34.50) to build up a long position that pushes towards the 1538 level. Stopping points along the way should be 1535.50-1536, then strong resistance between 1538 and 1541. IF THE SPM TRADES ABOVE THE RESISTANCE ZONE (31.50-34.50) AND DOES NOT COME BACK IN…CANCEL THE IDEA OF BIDDING IN THAT ZONE. In other words…if we trade up to 1538, I don’t want ‘em back at 1532.

On the support side…1530-1527 is a transition zone. It should provide support, but, not support that one utilizes to get long. 1526 to 1524 remains key support and should be used to establish buying points…below this 1522.50 to 1520 is CRITICAL. Only a 30 minute close below 1520 turns the switch to “sell” and even then it most likely will be tomorrow or Friday that the trade comes to fruition. In other words…don’t chase lows below 1520 to establish a position.

All told, volatility is already on its holiday and one needs to be cautious in this trading environment.







Tuesday, May 22, 2007

Equity Index Update

Equity Index UpdateSocialTwist Tell-a-Friend
Brad Sullivan

The index markets continued their ascent into higher ground yesterday for much of the session. However, a late reversal in large cap oil issues seemed to bring an overall sale to the large cap indices. When it was over the SPM had dropped from its new contract high area of 1534 to its session low of 1526.50 before rebounding a touch at settlement. In addition the DJIA fell for what feels like the first time in about one year. However, the big story continues to be the action in the spreading between the various indices.

Yesterday, the ER2 and NQ rallied sharply. The spreads which I discussed at length yesterday – DJIA vs. Russell 2k, SP vs. Russell 2k – gave back a substantial portion of last week’s gains. How volatile was the spread action? Consider this a 1 unit spread of long 11 DJI minis and short -9 Er2 minis lost a WHOPPING -$10,540 ON THE DAY. The Spread trade of Long 10 SP minis and short -9 ER2 minis lost -$9,250. I CANNOT EMPHASIZE ENOUGH…THESE MOVES ARE OUTSIDE THE “NORMALIZED” PARAMETERS. To use option jargon…the tails are pretty fat in these spreads right now. I would associate this with someone, or a group of somebody’s being take to the shed and forced to cover this spread. Typically, when such a move happens, the size player on the wrong side of the bet is forced to pay up in order to get out. Whether or not this has been the reason for the dramatic move in these spreads is a bit of conjecture and rumor mongering. And, most importantly, it does not begin to tell the whole story about what is actually happening in the mega-cap arena. The bullish move in the mega-caps continues to play out on a liquidity driven theme…as traders our job is stay in touch with that theme. Final hour moves like yesterday afternoon tend to make one think that the “to is in.” Yet, for all these final hour sales…the market continues to find its way to higher ground. Keep this thought in mind when hitting bids.

I had a resistance zone yesterday that encompassed the 1528 to 1531 levels…the SPM gradually carved through that zone in the late morning and continued to hold above it as the CASH index made it above the 1527ish AT closing high…however, the market could not sustain the buying interest at the highs. Around 1:45 cst the SPM made another push to get above 1534 and failed…this time day trade longs ran for the exits creating a pretty good selling vacuum. That move pushed the SPM towards the morning and session low of 1526.50, before a slight bounce into the bell. The CASH index missed closing at AT high levels by a couple of points. The question today is this…will there be more selling?

Here are my levels for today’s trading in the SPM…on the Upside : Resistance should be found between 1530.50 and 1531, above this 1532.75 to 1534.50 is CRITICAL. If the contract can get a 30 minute close above this zone, it should produce a “walk em up” type of trade towards 1538.50. If long…I would look to exit between 1538 and 1541 as this zone will be difficult to push through for the contract.

On the downside…I have a neutral zone between 1530 and 1528. A 30 minute close below this neutral zone should provide a push lower. 1526 to 1524 remains a support zone and will be difficult to close below on a 30 minute basis. However, I would look for some “spike” oriented selling that would push the index towards 1522 before bouncing. Support is found at 1523.50, then 1522.25 to 1520. Any 30 minute close below 1520 and things will get interesting…however, much of that interest will most likely be tomorrow and Thursday. I suspect that below 1520 and we will have pushed as far as possible for today’s session.

Monday, May 21, 2007

HOTS Weekly Options Commentary

HOTS Weekly Options CommentarySocialTwist Tell-a-Friend
Pete Stolcers

Last week we had the choppy price action and the bullish bias that I forecasted for the week of option expiration. The economic numbers had little impact on the market. Tuesday was a classic example. The CPI came in lighter than expected and the initial rally was reversed by the end of the day. The real impetus for the week came from option related buy programs. Next week the economic numbers are fairly light and I don't believe the Durable Goods number or the GDP will have a big impact.






The earnings releases will also be fairly light. They are predominantly retail companies. Based on the recent retail sales numbers, the expectation for "light" numbers is already built-in. The overall guidance from these companies might indicate the strength of the consumer. Those companies that miss their number are likely to blame it on the weather and high gasoline prices. Here are some of the companies that will announce:

AZO, BJ, LOW, SNDA, ADI, MDT, GME, MW, ANF, DKS, TGT, GYMB, ZUMZ, MYL, ARO, LTD

The interest rate and earnings front will be relatively quiet so let’s take a look at some of the other market influences. Energy is the hottest market sector. Unrest in Nigeria is driving oil prices higher. Currently that country is our third largest source of oil. The market is oblivious to higher commodity costs and the inflation indicators seem to be keeping a lid on those concerns. M&A continues to keep a strong bid in this market. The shorts are running scared and it has been almost impossible to make money on bearish trades. In the chart you can see that the SPY is close to an all-time high. The market has a parabolic feel to it and it has rallied 22% in less than a year. In the chart you can also see that interest rates contributed to a lengthier decline in 2006. During that period the market wanted the Fed to stop raising rates. That finally happened in August. This year, the rates are stable and the market recovered very quickly. The market is so strong that it erased the losses and made new multiyear highs in the course of a month. This type of setup can lead to a "melt up" and a sharp decline. If that happens there will be plenty of money to be made on the upside, but you'd better be quick to pull the trigger once the peak is established. I have a couple of stocks this week that I believe will rally with the market and hold up well if it declines.

Equity Index Update

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Brad Sullivan

The index markets opened higher and stayed firm throughout Friday’s option expiration session. Mega-Cap issues continued to dominate the trade as the SPX came within a whisper of its All-Time closing high of 1527ish and the DJIA just kept on trucking into unknown territory. The session itself was pretty mundane, but the buy side pushed pretty aggressively over the final 30 minutes of trading to create new high prints. This morning we are called to open around UNCH as Shanghai was able to gain another +1% in spite of a rate hike…the rest of the global indices are trading – on balance – slightly higher as well. On the currency front, the dollar continues to catch a bid in here and one has to wonder, given the sharp correlation the last few months between a falling dollar and rising equity market, whether or not there will be any “give” in the equity trade this week.

It is on this front that I am examining the SPREADS…simply put, the movement between the SP and DJIA vs. the small cap Russell 2000 is astounding. Last week alone, a single unit (for my purposes) pushed into the stratosphere of expected returns. I have included a spread table with explanations in today’s chart section.

In my opinion, this spread action is about the only game in town. Is the shift into mega-caps the final leg of this 5 year old bull market? How much more is on the table in these spreads? Is it time to play a reversion-to-mean trade? One thing I do know from years of index trading…a shift out of one area/sector of the market typically requires a several week period of overall market disruption. The disruption is characterized with higher volatility and increased trading setups for those making a living in this game. So far, we have not seen any extended periods of this action. I would suggest that we may have a summer trade that surprises many with the above listed characteristics.

For today in the SPM contract, here is what I am looking for…on the upside, the index should find solid resistance between 1528 and 1531 as this zone should halt the market in the short run. If we get a 30 minute close above this zone, I will not chase ‘em up intentionally but one has to be prepared for a potentially buy stop rally above the cash closing highs in 2000 (call the trigger zone 1528 to be safe). Up here…it is pure guesswork. I would suspect stopping points to be 1535, 1538 and 1541. I must state that I put this rally scenario’s odds in the longshot category.

On the support side of the equation…1526 to 1524 is a key zone…any 30 minute close below this level should shift the trade to bounce selling. Accordingly, I would look to get short on any bounces into the aforementioned zone. Targets for this trade would be scale down from 1522.50 to 1519.50. Below this level we hit our old friend 1518.50 to 1515. This zone has now become a neutral/transition zone. Let this area play out and examine to see if it becomes support. An HOURLY close above 1520 (after testing this zone) would do the trick. Keep an eye on the SPREADS.
















Friday, May 18, 2007

SP-500 Cash Index 7 Weeks of Higher Highs

SP-500 Cash Index 7 Weeks of Higher HighsSocialTwist Tell-a-Friend
Jason Roney

This is note worthy:
A) SP 8 higher lows weekly into expiry. Monday close down 4 of 4. week close down 3 of 4.
B) SP just 6 higher lows into expiry. Monday close down 78.5% 15 times and week close down 73.33%.





Editors' Note: This was posted in our Virtual Trading Room on Thursday, May 17th about 1106 PDT.

Equity Index Update

Equity Index UpdateSocialTwist Tell-a-Friend
Brad Sullivan

The index markets spent most of the session in range trading conditions before a spirited push to new contract highs in the mega-cap SP and DJ contracts. However, the buying power was offset by long liquidation (whether or not this was day trade long selling remains to be seen) in the final 30 minutes of trading. When the session was finished, the SP finished nearly -3.00 on the session and -6.00 from the daily high reached during the afternoon. HOWEVER, this morning finds the market bid sharply higher with the SPM contract trading +5.25 at 1520.50 – only -1.25 to the contract high made yesterday at 1521.75. The news is limited; however, retailers JCP, KSS and JWN reported solid earnings last night and GE agreed to sell its plastics division for a smooth $11bln and INTC was upgraded to a buy at MLynch. In addition, European indices are rallying nearly +1% across the board.

While all was quiet on the domestic index front during yesterday’s action, the commodity markets went wild. Copper was down nearly -5% on the session, while the energy complex shot higher on a couple of production disruptions. As far as the indices are concerned, the Copper story, in my opinion, is where the potential issues lie. Why, simple one word CHINA. Copper inventories in Shanghai have risen to over 14,000 tons, suggesting that we may have economic growth slowing in the belly of the beast. Obviously this China slowdown has been discussed widely…but it has not shown its face the past few years. Is this the time for a Chinese recession? It’s doubtful…but for the short term trader it is worth focusing on what Shanghai does each and every session. So far…not much, but keep your eyes open the next few weeks for some disruption in the Asian rally.

Option expiration today and EVERY NOW AND THEN a potential trade comes into the zone around the opening bell. Today may be such a day. With the market trading around yesterday’s high zone watch FOR A POTENTIAL PRE-MARKET PUSH TO NEW CONTRACT HIGHS AROUND 1525. THE OPENING SHOULD BE VIOLENT AND CHOPPY IN A ZONE BETWEEN 1524 AND 1526 BEFORE REVERSING COURSE BELOW 1521.50 TOWARDS 1518.50. THIS TRADE SHOULD NOT TAKE MUCH LONGER THAN 30 MINUTES TO COMPLETE. Keep in mind that the SPM needs to trade well above yesterday’s highs for this SCENARIO to be worth betting on. In addition, it must happen before are immediately after the opening bell of trading.

As for today’s levels in the SP contract…pretty much the same as we have had the past several sessions. On the upside…1520.50 to 1522 is a Mild resistance zone, above this comes the 1524 to 1526 level which should provide a tougher test to get through. On the extreme upside today, 1528-1531 is an excellent target area to liquidate trading longs. Keep in mind that expiration sessions typically get very stagnant after the first 90 minutes of trading is completed.

On the downside…1518.50 to 1515 is now a Neutral/Transition Zone. The first key support zone lies between 1512.50 and 1510.50. Only a 30 minute close below this zone is a negative…and that brings us to the ballgame support area of 1507 to 1504.

When all is said and done…expiration Friday’s are normally sessions to keep it close to the vest. If the opening trade I outlined plays out, it typically creates the entire session’s range within its boundaries…so be wary of playing any “follow” trades after the morning is complete.

I have included 3 charts today…one is a 1 minute SPmini chart with volume from yesterday’s high print. Also the weekly OIH chart, as the oils continue to explode and finally the monthly gasoline futures.











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