| | 21 | | |  Last week the Dow went 20 for 20. To be clear, prior to today, the Dow Jones had closed up for 20 straight Tuesday’s. A few other days (not many though) the market closed lower, but not on any of those Tuesdays. On these days, the average close was nearly +80 points and was responsible for an 11% gain. Without the prior 20 Tuesdays, the Dow was only up +0.2%. Tuesday #21, however, was different. The market *gasp* closed lower. The morning trade started out with a bang – the ES and Dow traded straight up and we all thought it had to be another Tuesday miracle. Oh, and more free POMO money from the Fed, I guess, but let’s stick with the Festivus Tuesday miracle for now. Some folks put the blame for the fall of the “truthiness” that was said by Esther George, who is the Kansas City Federal Reserve Bank President and is an FOMC Voting Member, so he words carry weight. She gave a speech on the economy in Santa Fe, New Mexico at 12:30pm ET. The decline, however, started long after her speech began – at 1pm ET. At some point she said that there was no (paraphrasing) “magic single policy” that the Fed had that could increase employment – thus throwing water on the whole “One Trick Pony” QE of the Fed. Afterwards, Bloomberg gave its synopsis of the speech “Kansas City Fed President Esther George voiced further support for early tapering in Fed asset purchases. She sees slowing asset purchases as an appropriate next step for monetary policy. But the Kansas City Fed president sees changes as measured-according to economic progress. She sees gradual tapering as not tightening but a slowing in easing. Her concern is that monetary ease risks waiting too long to unwind. On the other hand, George sees economic growth may be tempered by fiscal restraint.” Regardless of why the market dropped, it was another good trading day with heightened volatility. Trade well and follow the trend, not the perma-bull OR perma-bear “experts.” | | ---Larry Levin |
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In conjunction with TheStreet.com and Bar Chart, Trading Advantage Senior Market Analyst Alan Knuckman provides a daily morning update on the global action in stock futures, gold, oil and interest rates. |
| | | | | | | | | Congratulations to Jeff Lynn Congratulations to student of the day Jeff Lynn who made $200 trading the ES. With actvie equity markets, we are looking for plenty of trading in the week ahead. Congratulations Jeff for navigating these volatile markets! | | | NOTICE: Testimonials are believed to be true based on the representations of the persons providing the testimonials, but facts stated in testimonials have not been independently audited or verified. Nor has there been any attempt to determine whether any testimonials are representative of the experiences of all persons using the methods described herein or to compare the experiences of the persons giving the testimonials after the testimonials were given. The average reader should not necessarily expect the same or similar results. Past performance is not necessarily indicative of future results. No person was compensated for providing a testimonial. |
| | | | | OPTIONS: Volatility Commentary | ---Steven Lee / Michael Shorr | The yo-yo that is the Nikkei continued its wild swings today jumping over 2% as the yen weakened against the dollar. Also contributing to this poor U.S. manufacturing data yesterday helping to calm any fear of aQE tapering for the time being. Again, a bright spot coming from all places, Spain. The number of people filing for jobless benefits fell for the second straight month by 98k to 4.89M. Australia held its interest rates unchanged at 2.75%, in line with all expectations. The RBA did warn that "the inflation outlook, as currently assessed, may provide some scope for further easing, should that be required to support demand". Today, a lesson in the actual dynamics of an option spread. Specifically, we have on in Merck (MRK) the July 47/49/50 Broken Wing Call Butterfly. So, we are long +1 July MRK 47 C, short -2 49 C, and long +1 50C. Initially, we paid .65 for this spread. This is largely a directional play, in this case, a bullish spread. We initiated the spread with MRK trading at 46.90. Today, we generated a sell signal to sell the spread out at $0.85 with MRK trading 49.70. Given the delta (directional component) of the trade, we should have been easily filled. We had to work this price level quite hard. Why were we having this issue? From the theoretics, this is not purely a directional play. Given the time to expiration (July expiration) there is a significant vega (implied volatility) component to this spread. Normally, implied volatility is inversely related to price movements. Price of stock goes up, IV down, price of stock goes down, IV goes up. But, in this case, the speed at which the upwards move occurred, IV actually went up. It went up about 2 vol points or almost 11%. At 49.70, the spread actually had a negative vega of -.05. So for each vol point up, the spread decreased in value .05 simply due to the increase in IV. What is the real lesson to be learned here? When constructing an options strategy, you must take into consideration all aspects of options analysis. What is the delta (directional) component, what is the theta (time) component, and what is thevega (implied volatility) component? Assumptions need to be made on each component. Obvious ones like delta are relatively easy to quantify. Am I biased to the long side or short side? Given that, what are my opinions on how soon and how quickly the potential move will occur? Given that, what do I think the ramifications of implied volatility will be. Will IV be higher or lower given the parameters I have set forth so far? This is not an exact science, but you must be careful to incorporate all of these factors into any trade you construct. |
| | | | | FOREX: Currency Spotlight | ---Ed Moya | | | Currency trading took a breather yesterday as trade flows remained firmly capped in North America. Fridaycannot get here soon enough. With the whole “taper” trade on hold, market participants had limited moves to trade on. While equities remained active in NY, USDJPY traded in a tight 44 pip range with the afternoon providing limited moves. The EURUSD remained comfortably above the psychological 1.30 level, and stuck in a 47 pip range. Central bank talk will remain a key focus for currency traders and yesterday delivered a couple of opportunities of looking deeper into the Fed’s mind. Governor Raskin highlighted that the US is nowhere near being considered a healthy economy. The recovery is disappointingly slow and unemployment is still elevated. The comments were rather dovish for the supposed hawk. The Kansas City President, Esther George had her speech posted on their website as she was ill and unable to read it and provide additional comments. The roles appeared to have been reversed as this dove seemed more hawkish in her statement. She focused on reducing the pace of QE and bond yields and USDJPY rallied tentatively. In the end, what matters most is Bernanke. If Friday’s jobs number impresses, everyone should market their calendars for Bernanke’s 2:30pm EST press conference on the 19th. If we see a big disappointment, the QE trade may help the high-beta currencies rally. |
| | | | | STOCKS: Watch List | ---Charles Moon | | | | The long streak of finishing in positive territory on Tuesday's is finally over. The Dow finished down over 76 points, but well off the lows of the day. After a slight pop up early on, we faced an aggressive sell off after we hit the highs of the day. The markets did make one last ditch effort to rally into the green, but alas they faltered and fell the last 20 minutes of the trading session. Seeing how these markets have bounced around with sporadic moves, this is now getting into treacherous waters as we are facing strong reversals and moves on a daily basis. The VIX and VXX has been rising, as we are now seeing fear and uncertainty creep in the markets. This is helping fuel the fast slides down, and quick rally pops as investors are buying in on the dips. Watch for this fluctuation to continue here in the near term. Home Depot(HD) took their worst loss since 2/25 of this year, as they closed down over 2.6% for the trading session. This might be were the stock finally reached its peak, but I caution trying to aggressively sell as it is quite early. This stock has been on a tear to the upside over the last 52 weeks, and it has been primed for a correction of sorts. Also the last time the stock had dropped this much, the rally was immediate the following day. So if the rally does NOT come in, then that can be the start of the correction that has been long due. Watch the trading action closely, as it can clue you in if the bears or bulls are truly in control. The 50 day moving average is of special interest to me on this stock. If it can flush through this technical level, then the short might be the best play available in the short term. I will be watching what the stock does at $74.36 with particular interest. With the see saw action and whippy nature the markets have been trading in, I still maintain trading cautiously in these volatile conditions. If you are new to these conditions, then I recommend being prudent and not to react without cause. Watch the technicals closely here, as they are offering up increased value. The markets and traders are still respecting these levels, and in this instance so should you. Keep playing it tight and look to take profits early and often when you can get them. Open Position: TSL Stocks to Watch: INTC AAPL GOOG IBM AMZN FB TSLA GRPN CTXS CSCO BAC C PRU WFC GS JPM MS CMI CAT NFLX WDC GE AIG LULU LNKD DIS KORS COH FOSL CROX STZ NKE UA CHKP JNPR POT GMCR HOG YUM LOW HD LEN TOL V MA AXP DFS LVS MGM TSL FSLR JASO |
| | | | | FUTURES: Technical Data | | | | | ES 1641.75 / 1626.75 POC… 1642.75 YM 15268 / 15134 NQ 2999.00 / 2969.50 | |
| | | | | COMMODITIES: Play of the Day | ---Patrick Assalone | | | | Based on our educational methodology, we are looking for multiple signals in the active crude oil makret ahead of a choppy week ahead. Friday's U.S. nonfarm payrolls data for May are the focus for crude-oil investors this week, as the figures will likely give clues on whether or not the Federal Reserve will maintain its stimulus measures. A disappointing reading could stoke hopes that the central bank will continue buying bonds, which would be supportive for oil prices. |
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