The Reversal Pattern I’m Watching For

• Posted by: stevenplace, March 11th, 2010 at 9:42 am
• Comments: 0

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:

1. Find the candle that closed above prior resistance.
2. Draw a line at the candle’s LOD
3. 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:

A New Way to Look at Market Volatility

• Posted by: stevenplace, March 10th, 2010 at 12:21 pm
• Comments: 0

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.

How Will You Adapt Your Trading Style to the New Market?

• Posted by: stevenplace, March 9th, 2010 at 1:02 pm
• Comments: 0

Disclosure: Me writing about the absurdly low volatility may be a contrarian signal and mark the bottom (in terms of vol) for a while. I would gladly welcome this, and am positioned to do so.

I want to show a chart. This is a 10 year daily chart of the SPX with the bottom pane showing the average true range for a 14-day window. That study is a measure of volatiltiy.

I’ve shown this chart before, but given the current market environment, it warrants another look.

The main point to derive from this study is that this is not the 2008 -2009 market. Both markets were extraordinary in terms of volatility, and it is the exception, not the rule. Trading strategies that worked a year ago may not necessarily work if we get back into an environment similar to 2004-2007. A little more fading, mean reversion; a little less stock correlation and market breakouts.

The question here is: are the strategies you’re currently implementing in the market going to work if the market vol dies? It’s something worth analyzing going into the summer months.

ITMN Results and the Video of Me Explaining the Trade

• Posted by: stevenplace, March 5th, 2010 at 10:29 am
• Comments: 0

FDA briefing came out positive for Intermune, or something like that.

I’ve been talking about this trade for a few weeks now, noting the very bullish options activity that’s been going on in the name.

I chose Covered calls, buying common and selling the 12.5 calls– the stock’s now at 25-ish. Will exit or roll to a collar.

In this video interview with@howardlindzon, I talk about the trade and my expectations for the move. It shows a little insight on how I structure my risk given the current volatility of the underlying. The talk starts at 16:00 in.

Also, this was a trade for my subscribers, you should join up if you want to learn how to trade options.

The Running on Fumes Chart Pattern

• Posted by: stevenplace, March 4th, 2010 at 2:52 pm
• Comments: 0

This is a pattern that pops up every once in a while during the opening session. It’s actionable and fairly reliable– and most importantly, it’s undersubscribed.

Here’s the pattern:

This pattern requires a little more context. First, we’re near the top of a potential trading range and have made lower intraday highs over the past two days.

This pattern only happens at the open, and it shows when the market is “running on fumes.” Essentially if we are getting a runup in futures but it’s not confirmed by the underlying markets, it is fadeable. This confirmation can be seen by looking at a basket of heavily traded names, or by looking at the TICK readings (yellow circle). If we don’t see extreme positive TICK readings, it’s time to be very skeptical of the upmove.

So when does the market fade? Well, the market structure generally changes around 10AM EST as different participants come into the market. The “10AM Turn” is quite reliable as a pivot point.

What GLD Options are Telling Us

• Posted by: stevenplace, March 2nd, 2010 at 1:28 pm
• Comments: 0

This week started with a bang as risk assets continue to get a bid into Tuesday. It appears that the Big Macro Conveyor Belt turned back on.

We’re also seeing some interesting technical developments coming into the gold space again. First, a 6 month daily chart:

After some weakness in Febrary, it has regained all the major moving averages and is currently breaking out of some significant price levels. If you squint hard enough, you can see an inverted head and shoulders formation, whose target would be around the 119 mark. There’s also a big level of resistance at 113, and any fast run to that level would put us at the underside of a major trendline that was broken in January. Momentum is up, but I’d be a little cautious.

But that’s not the interesting point.

Let’s talk about GLD options. The value of options is the sum of two parts: intrinsic and extrinsic. The former is the “high ground,” or the distance between the strike price and the current price of the underlyinig. The latter is the premium in the option. That is the premium option buyers are willing to pay because they think the risk of a fast move is very high.

Reread that last sentence. Notice that I didn’t talk about any sort of direction! In option pricing models, we make very few assumptions with respect to direction. However, the general rule of thumb is that if a stock price is falling, we will see premiums (extrinsic value) go up as “fear” comes into the options market.

I can think of two exceptions to that rule: when a stock gaps up huge on earnings and continues to run, it will see premium hold steady and get bid up. The other exception is GLD. Or it was until recently.

GLD options behave a little differently than equity options due to fundamental and sentimental reasons. GLD spiking can also be considered the “fear trade,” as geopolitical risk comes into play in the supply and demand. We also see that in the options board. When we see a spike in GLD price, we also see a spike in GLD premiums as option traders “fear” an upside move.

A way to measure the supply and demand (premiums) for GLD options is through GVZ; consider it the VIX of gold:

The bottom pane shows GVZ, and I have a bollinger band on there to denote overbought levels in GLD premium.

Note that over the past 9 months, we have had a positive correlation with GLD premiums and the underlying price. The most recent spike, however, was on a significant drop in GLD.

What does that mean? Personally, I feel that the underlying sentiment of why to own gold is changing from a “fear” asset to a “reflation” asset. I also think that this is evidence that there could be a reduction in the long term momentum that GLD has seen– this is supported by my technical thesis of a rangebound market until about May.

Global Dispersion Trading

• Posted by: stevenplace, February 25th, 2010 at 11:00 pm
• Comments: 0

In this video I did recently for stocktwits.tv, I discuss a volatility trading strategy that has paid out extremely well for large funds so far in 2010. Definitely worth a watch.

Signs of Further Weakness Ahead

• Posted by: stevenplace, February 25th, 2010 at 9:06 am
• Comments: 0

After a very strong bounce from those levels from early Febrary, we’ve been in a range between 1092 and 1113. There’s still a lot of uncertainty in risk assets, especially with the news coming out of greece as well as some other intermarket themes.

A potential chart pattern is setting up on the futures, a head and shoulders pattern.

If we do get a breakdown of the range, the expected downside move is to about 1075. That’s also some weekly pivot levels and some other levels of technical support. I’ll be playing short side momentum on a breakdown and then start nibbling on some longs if the ES tags that target.

February Results

• Posted by: stevenplace, February 22nd, 2010 at 4:01 pm
• Comments: 0

Webinar Recording

• Posted by: stevenplace, February 10th, 2010 at 8:51 am
• Comments: 0