Investing With Options

Market Wrap, 3-11

stevenplace — Thu, 11 Mar 2010 22:22:42 +0000

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Portfolio Update, 3-11

stevenplace — Thu, 11 Mar 2010 20:10:11 +0000

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The Reversal Pattern I’m Watching For

stevenplace — Thu, 11 Mar 2010 13:42:57 +0000

The strength in the market has been quite evident over the past few weeks, and calls of “overbought” haven’t been confirmed by a reversal of momentum. On top of that, the Russell and Nasdaq have already broken out from previous price resistance levels.

There is, however, an undersubscribed chart pattern which may fortell any sort of reversal. It’s called a 2b reversal pattern. A 2b reversal pattern is the result of a failed pattern which I call the pb2bo pattern. Often when a market breaks out from a key price level, it will come back and retest that level and previous resistance will become support– it’s a pullback to breakout, or pb2bo. Sometimes this pattern fails, and the failure is a pattern of itself known as the 2b reversal.

Here are the rules:

Find the candle that closed above prior resistance.
Draw a line at the candle’s LOD
If price closes below that line, it’s a reversal

This is a very nice pattern because you will have stubbon, trapped longs from the breakout who will provide extra selling pressure. Also, you can use the converse of this to look for 2b reversals on bottoming patterns (see GOOG).

Here’s the chart and the price levels I need to see on the RUT and NDX to signal a reversal:

Happy Hour Recording, 3-10

stevenplace — Thu, 11 Mar 2010 02:10:52 +0000

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Portfolio Update, 3-10

stevenplace — Wed, 10 Mar 2010 20:36:16 +0000

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A New Way to Look at Market Volatility

stevenplace — Wed, 10 Mar 2010 16:21:09 +0000

I’m always searching for different ways to approach and perceive the market– I feel that sticking to a set of knowledge without flexibility or adaptation will lead to underperformance in the market.

One relationship I’ve been watching was the relationship of smallcaps and the S&P. The rule of thumb is that when smallcaps are outperforming, that means there is an appetite for risk and beta-chasing in the market, and upside momentum should follow. However, we’re still in a period of a highly correlated market so while that signal is valid, I started to look for other indicators related to this relationship.

Enter the volatility indicies. We normally hear of the VIX, which is the normalized expectation of volatility 30 days out. This is based on the perception of market risk via the SPX options board. We also have the RVX, which is analagous to the VIX except it uses RUT options. So there are two measures for market risk, but they are different markets.

What happens when we compare the movement of these two tickers? The results are very interesting:

Now this method is by no means scientific, I simply eyeballed the past 2 years of data.

The top pane is the SPX, the bottom pane is the line chart for the RVX/VIX. So when the value is high, that means there is a higher perceived risk in smallcaps than the S&P, and the opposite at lower values. To smooth out the data, I used a 20 day moving average.

By looking at the key “turning points” in the moving average, we can see that this is a leading indicator in the markets. This makes sense– when higher premiums are being paid for “riskier” names, that means option players are starting to anticipate a slowdown in risk assets, which also include equities.

I’m not sure if I can derive any predictive power out of this relationship, but it is something worth looking into.

Trade Adjustment in FAZ

stevenplace — Wed, 10 Mar 2010 14:53:29 +0000

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New Semi Trade

stevenplace — Wed, 10 Mar 2010 14:41:53 +0000

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Market Wrap, 3-9

stevenplace — Wed, 10 Mar 2010 03:42:29 +0000

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Portfolio Review, 3-9

stevenplace — Tue, 09 Mar 2010 20:09:53 +0000

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