Last week unfolded just as expected as we got a head fake early on that stalled perfectly in the 1100 area on the SPX. Stocks then completely collapsed into the end of the week before reversing in the last two hours of the day on Friday with capitulatory type volume. In fact Friday volume on the SPY was the highest since last March when we bottomed. The volatility on Friday was truly spectacular. While the huge deficits and failing bond auction's in Europe are a real problem and have only just begun to show us pain; I think the reversal on Friday is a short term signal to play the long side side this week.

We bounced perfectly off the 200 day ema on the SPX near 1046 and closed up at 1066. Of course the 1080 level is huge resistance I think we at least test that this week if not try to fill the gap left from last week up near 1100 ish. However, I do have some suspect feelings about any reversal I see on a Friday. That's because they are rare. It did feel like a short term low being put in but what really matters is the confirmation day on Monday. We need to see Monday close above Friday's close for the reversal to matter to me.

The sovereign debt issues in Europe are just beginning to show its face globally and if you add China to the mix we could be staring a much larger Dubai situation in the face in the next 6-12 months. All I am saying is that the warning signs are here and it reminds us that we are still in bad shape globally. The Obama administration put a bandaid on it last year and now are boasting of the "improvement" in the economy we have seen. When in fact they are doing everything they should not be and more due to their poor understanding of how markets function. Anywho that's a discussion for a different day.

Sentiment is quickly bearish once again after being extremely bullish in early January. The American Association of Individual Investors weekly survey showed that less than 30% of those surveyed describe themselves as bullish on the market. This is the first time since November 2009 that the percentage of bulls fell below 30%. The percentage that describe themselves as bearish rose to 43%, also the highest since November 2009.

The dollar rally has been a big part of why stocks are fallen recently as the Euro specifically gets crushed. With the dollar index clearing 80 last week and the Euro hitting the 1.3550 area I think you get some kind of retracement near this level. This is one of the main reasons commodities are gotten slaughtered as well.

Last week we saw a complete liquidation of copper, gold, and crude oil. In that order. The did slightly rebound on Friday by end of day and you may see a similar retracement here as it seems lots of weak hands got taken out violently.

Bottom line, expect some kind of retracement rally in stocks this week but watch the 1080 level for the first sign of resistance and then 1100-1105 if this thing really gets going higher. On the flip side, if we get rejected and lose 1050 then the selling could get hardcore.

Buy the dips>> AMZN, RYL, EL, EAT, GLD

Sell the rips>> LFC, MRO, YUM, BCS, FCX  

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After yesterday's market pummeling I was on the lookout for an adjustment this morning to the calendar I am running this month.  Deltas began to get quite long so I adjusted by selling the 640 long calls (I kept the shorts), and half of the 620 calls.  

Adjusting a calendar by selling some or all of the long positions on one side has benefits and drawbacks.  On the plus side, Deltas adjust very quickly and Theta increases nicely because you don't have any Theta offsetting your short position.  On the downside is mainly Gamma.

 

As you can see in the picture, if price goes over the hump on the right side the slope gets steep very quickly.  You can see that the Deltas go from +22 to -145 with a one standard deviation move on the upside, but only to 63 on the down side.  That's the effect of the Gamma created by having a naked short position on the upside.  In this case I am okay with the risk for a few reasons:

• If things get ugly on the upside I can easily adjust in a number of ways.
• We only have 13 days left until expiration so time is on my side.  That's a big move in a short time.
• I'm all bear right now.  I am much more concerned with protecting the downside and feel the calculated risk of the upside Gamma is appropriate.

I further added a calendar at the 570 position to balance things a little more.  Overall I like the current position.  Breakevens are now happily resting well inside the standard deviation lines, meaning probability of profit is increasing with each passing day.  I will stress that this picture represents my current position and does not account for the adjustments I've had to make.  I am still down a few hundred bucks on the position, but I we're managing it and will do our best to squeeze out a profit before expiration.

 

Finally, I've included a picture of my overall RUT position which has a condor overlaying the calendars.  On nice effect of the condor is that it has flattened the Gamma substantially.  You can see that the Deltas at one standard deviation on the upside are much lower (157). 

I have a feeling that this last two weeks will be a long one.  The market is getting crazy and IV is through the roof as of the last couple of days.  In some ways, managing in the environment is the most challenging and fun, but its also the most risky and it's NEVER fun to lose money.

Good Trading...

 

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Today I made a minor adjustment to the Calendar that I am tracking this month.  You might remember, we entered this one as a "double-double"... a double calendar, overlayed by another double.  Currently it looks like four calendars, but we manage it a lot like a triple.  

With today's bounce, and feeling still quite bearish, I took the opportunity to unload half of my long 640's.  I kept the shorts, but they are a long way out and we would need a huge rally in the next few days to create danger.  I feel so strongly bearish that I'm not worried about it. 

 Leaving a naked position like this is great for balancing Deltas quickly and increasing Theta a lot, but it does increase Gamma risk a bit.  The bottom line is that it has to be managed.  If we have a strong rally you will see me doing something else... either buying the longs back or unloading the shorts. Another option would have been to simply dump the entire 640 calendar (longs and shorts both).  For now here's how it looks:

As you can see, Deltas are still long, but much closer to balanced than what they were yesterday (+70!).

 Good Trading...

 

 

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Last week was another very poor week of price action as I thought we could see. The markets continue to be rattled by political risk, dollar strength, and overall bad reaction's to positive earnings. We have had roughly a 6.5% decline in the SPX and I do believe we could see that 10% correction into Feb. which should take us somewhere in the neighborhood of the 200 day ema on the SPX which sits at about 1044. However, not before some kind of bounce takes place early this week which I think could retrace back to the 1090s or even 1100 to head fake some people.

The dollar was strong and I think will test the 80 mark later this week and that should provide some mental resistance if nothing else. The Euro reached the 1.39 target I had for the last several weeks and continued a bit lower under that friday. It, like the stock market is stretched to the downside a bit much and could snapback quickly from these levels.

Commodities got killed last week as copper and oil took it on the chin. Crude is now down over 10 bucks from the highs just a few weeks back and copper is down 16% from the highs. No doubt alot is on the back of the strong dollar but also the scare that China might be slowing down its buying of commodities. Whether that's true or not does not matter. The price action is what matters and right now its downright bearish.

Overall I would not get excited about rallies in this market until we can see the market prove itself above 1120 for example. Instead use rallies to sell your longs or even go short on your swing trades. I really think a test of the 200 day ema is where you want to anticipate a more broad based bounce.

Buy the dips>> RYL, GNW, DPZ, VLO, SII,

Sell the rips>> AAPL, TSM, GT, STP, LMT Add a comment

Adjustment entered:  I continue to feel ever so bearish about this earnings season and decided to go ahead and enter the second half of the calendar campaign for this month.  As I mentioned in my last post, this month is a double-double... that is, its a double calendar, overlayed by another double.  Prior to the yesterday's order my position looked like this:

 

Immediately after the adjustment, this is what it looked like:

 

As you can see, I simply bought another double-calendar at the 590/620 strikes, which overlays the first.  Now I have all of my capital deployed, Deltas are flattened, and a slightly wider breakeven range.  From here I will manage it much like I do the triple-calendars, by adjusting if I hit one of the outer strikes.

 Good Trading...

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Going into the meat of earnings season this week as a ton of big companies report. Also we have a FOMC meeting that should get the market moving even more on Wed. Last week Obama threw plenty of fuel on the fire with talks of bank regulation so it will be interesting how much more of this talk and threat we see. In addition to Obama we saw generally lackluster earnings results and China news took the steam out of commodities.

I am thinking that what we saw last week is a mild correction that was overdue for us to see. I think we can ultimately correct 8-10% from the high. Short term this week indicators are already oversold so I think we have a chance at seeing a weak bounce back into mid week that could be a nice shorting opportunity because I do think we see 1070 as a next leg down.

The currencies had a bearish week as the dollar rallied into Friday where it finally pulled back a bit and the euro found support near 1.4050. It does look like to me that the euro is still going lower and could see 1.39 quickly.

The other big story was the move int he VIX. Up from 18 to 28 in three days. Wowza. That was a quick swing from complacency to fear. People were obviously unhedged last week and rushed for put protection when the market started to tumble. Friday's VIX move was even more fierce and I think was a bit overdone and should come in a bit early this week even with a flat market.

Overall, its tough to make much of a good watchlist with these current market conditions but I would be more of the opinion that you want to be shorting rallies for the next few weeks until the market tells you that its recent swoon is reversing back higher on the daily charts.

Buy the dips>> DECK, MGM, EOG

Sell the rips>> GS, FCX, AMZN, HES Add a comment