Dr. Duke's Blog

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Written by Dr. Duke

Created: 12 July 2011

European sovereign debt issues loomed large in traders' minds today. Late in the day Moody's added to the gloom by downgrading Ireland's debt. SPX closed down $6 at $1314 and RUT lost $4 to close at $830. SPX bounced off of the 50 dma yesterday and earlier today, that support level appeared to have held once again. But late afternoon trading pushed markets lower and SPX broke through and closed below the 50 dma. Given that all of this occurred on higher levels of trading volume is not a good sign. Trading in the S&P 500 stocks rose above the 50 dma to 2.9 billion shares and trading volume was up 12% on the NYSE; Volume on NASDAQ was up 14%. IBD moved from a market assessment of "Confirmed Uptrend" to "Uptrend Under Pressure" yesterday.

IVolatility.com noted the possible head and shoulders pattern in the S&P 500 in their newsletter this week: left shoulder at $1345 on 2/21, head at $1370 on May 2 and right shoulder at $1355 on 6/30. The head and shoulders pattern is a classic upward trend reversal signal. It is confirmed when the price breaks down through the neckline of the pattern. In the case of SPX, that is around $1260 to $1265. My first reaction when looking at this was simply that by the time SPX breaks $1260, everyone will know the trend has turned. However, it isn't the prettiest head and shoulders pattern I have ever seen.

My Aug iron condor is essentially at break-even with a position delta of -$76 and theta = +$109. The delta of the 890 calls has returned to 12 and the call spreads are roughly one standard deviation OTM. So enough of this; now we return to worrying about Europe.

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Written by Dr. Duke

Created: 11 July 2011

Traders' concerns turned once again to the European Union and the sovereign debt issues that threaten to tear the union apart. Selling was even more intense today than on Friday after the disappointing jobs report. The SPX closed down $24 at $1319 and RUT closed at $834 for a loss of $19. Trading volume bumped up a bit with 2.6 billion shares of the S&P 500 trading; however, this is still below the 50 dma. Volume was up 8% on the NYSE and was up 10% on NASDAQ.

There were no economic data reports of any consequence today. I tire of the talking heads on CNBC "explaining" today's declines as due to worries about European debt issues when the same analysts told us last week that European debt was old news and the market had moved on. There is no explaining or predicting of human emotions and fear of the unknown.

My Aug iron condor stands at -$218 with a position delta = -$72 and position theta = +$108. I removed the hedge today. Only the 700/710 put spreads remain from the July iron condor on RUT; I will allow them to expire worthless.

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Written by Dr. Duke

Created: 08 July 2011

 The jobs report (officially, the nonfarm payrolls report) reported an increase of 18,000 jobs in June. Analysts expected 80k. It seems a little surprising that the market reacted as strongly as it did; a weak economy that isn't creating jobs should not have been a surprise. Unemployment moved up a bit to 9.2%. SPX closed down $9 at $1344 and RUT closed at $853, down $6. We will continue to watch the SPX level of $1370 to see if this bull trend is going to resume. That was the high set back at the beginning of May. A pullback from there will suggest a broad trading range of $1260 to $1370. Pull up a longer term chart of SPX and you will see my point.

The market's explosive run upward caused me to close the 880/890 calls on my July iron condor on RUT yesterday. Today's pull back is frustrating, but you have to follow your rules or risk much larger losses. Assuming that the 700/710 puts expire worthless next week, my July condor has closed at a gain of $820 or 5%. My Aug condor has already been adjusted and is now flirting with forcing me to close the call spreads and re-position the spreads. It is now underwater  by $758 and position delta = -$62 and position theta = +$43.

Some analysts recommended today's pull back as a trading opportunity. We'll see next week.

Have a great weekend.

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Written by Dr. Duke

Created: 06 July 2011

The markets traded largely sideways today. Some of that may have been due to a relatively light economic news day. Some traders may be waiting to see Friday's jobs report before placing their trades. SPX closed at $1339, up $1 but RUT tacked on another $4 to close at $845. Trading volume in the S&P 500 was flat at 2.4 billion shares. Trading on the NYSE was up 2% and trading volume on NASDAQ was up 6%. Challenger reported a 5.2% increase in layoffs for June, up from a 4% decrease in May. This is focusing attention more on the ADP employment report and unemployment claims tomorrow, with the jobs report following on Friday. The ISM Services Index was basically flat at 53.3 for June, down from 54.6 in May.

My July iron condor stands at a P/L of +$3,160 with delta = -$43 and theta = +$74. The steady rise in RUT triggered my adjusting the Aug condor by buying Sept $890 calls; the Aug position stands at a P/L of -$588 with delta = -$52 and theta = +$44.

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Written by Dr. Duke

Created: 05 July 2011

Last week's inexhaustible run upward was most unusual, so today's pause was very natural and probably expected by many traders. SPX dropped back by $2 to close at $1338 and RUT gained $2 to close at $842. Trading volume was down with 2.3 billion shares of the S&P 500 trading (well below the 50 dma of 2.9B). Trading volume decreased 3% on the NYSE and volume dropped 7% on NASDAQ.

Moody's downgraded Portugal's debt today and the market dropped but then immediately traded back up to roughly where it was before the announcement. This downgrade wasn't a surprise for traders so I'm not sure why the market dropped. Factory orders increased 0.8% in May after decreasing 0.9% in April, but most analysts were expecting a 1% increase.

My July iron condor on RUT stands at +$3,060 with delta = -$47 and theta = +$94. The Aug condor stands at a P/L of -$140 with delta = -$100 and theta = +$71. The delta of the short 890 calls = 18, so we are near the point of adjusting this position.

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Written by Dr. Duke

Created: 01 July 2011

Many analysts, including me, were doubtful this rally would continue after month-end. but we were proved wrong big time today - wow! SPX gained $19 to close at $1340 while RUT closed up $13 at $840. The Jun ISM Manufacturing Index came in at 55.3, up from last month's 53.5. This wasn't really much of a move upward, but analysts were expecting a decline, so this fed the Bulls' predisposition to keep the rally going. The University of Michigan Consumer Sentiment Survey came in at 71.5, down slightly from last month's 71.8.

The next significant resistance level on SPX is $1345, the peak hit at the end of May before the market collapsed hard from there. Trading volume was down even further today with 2.5 billion shares of the S&P 500 trading. Similarly, trading volume was down 11% on the NYSE and was also down 10% on NASDAQ. It will be interesting to see what happens next week after everyone returns from the holiday.

My July condor on RUT stands at a P/L of +$2,700 with delta = -$61 and theta = +$114; the 880/890 call spreads in this position are still over one standard deviation OTM, so this strong rally hasn't stressed the July position very much. The Aug iron condor on RUT stands at a P/L of -$380 with delta = -$93 and theta = +$78. The delta of the short 890 call stands at 18, so we will have to adjust this position next week unless the market pulls back. The theta/delta ratio also reaffirms the stress this market run is applying to this position - it has dropped below one.

Have a great holiday weekend everyone! Fly the flag proudly and enjoy those cookouts.

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Written by Dr. Duke

Created: 30 June 2011

The broad market indexes continued to tack on positive gains today, albeit with low trading volume. The question prominently in my mind these days is, "What happens after the holiday?" After everyone returns from vacation, will this bullish run continue on stronger volume? But one cannot deny that the last few days have definitively broken the indexes out of the downward trend. An alternative explanation for the recent bullishness is that this is simply the result of end of quarter institutional buying and selling, but I would have thought we would see more trading volume if that were the case. SPX closed at $1321, up $13 and RUT gained $8 to close at $827. Trading volume was down with 2.9 billion shares of the S&P 500. Trading volume on the NYSE was flat and up 3% on NASDAQ.

Initial unemployment claims reported at 428k, basically unchanged from last week and the continuing claims remain flat at 3.7 million. The Chicago PMI came in at 61.1 for June, a big improvement from last month's 56.6.

My July condor on RUT is up $3,300 with delta = +$1 and theta = +$40. The Aug position stands at +$740 with delta = -$57 and theta = +$74. We will probably see trading volume fall off even more tomorrow and it seems likely the markets will take a breather from this strong upward trend before the holiday weekend.

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Written by Dr. Duke

Created: 29 June 2011

The broad market indexes tacked on another positive day and managed to get trading volume up to recent averages. SPX closed at $1307, up $11 and RUT gained $3 to close at $820. The SPX tried hard to get to $1310, but could not manage it. It hit $1309 twice, but pulled back each time. Many analysts are viewing $1310 as "the line in the sand" defining the end of the correction and resumption of the bull market trend. Pending home sales rose 8.2% in May, quite a contrast with the 11% decline in April. The VIX pulled back to 17.2%, somewhat encouraging for the bulls. The RUT candlestick was the classic doji, the sign of indecision and a possible turning point. But SPX had a strong bullish day. This three day rally may be due to institutional buying and selling at the end of the quarter; if that is the case, the market's move on Tuesday after the holiday will be interesting. Trading volume was up from yesterday, but trading in the S&P 500 was simply up to the 50 dma. Trading on the NYSE was up 15% and trading was up 7% on NASDAQ.

My July iron condor on RUT continues to grind out its gains with a net profit at this point of $2,820 with delta a modest +$12 and theta a substantial $122. Condors are fun at this point - unlike the times when you only established the trade a week ago and you are already scrambling to adjust the position to avoid being run over. The Aug condor position stands at a P/L of +$860 with delta = -$49 and theta = +$71. This condor is "muddling along" at this point: not in a great position, but not sufficiently stressed to be adjusted either.

Check out our free webinar this evening. I will be discussing trading the iron condor in bear markets. Webinar attendees will receive a $100 discount on my new course, Delta Neutral Options Trading, that will begin next week.

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Written by Dr. Duke

Created: 28 June 2011

Trading opened upward this morning and never paused, plotting a steady upward path all session. SPX gained $17 to close at $1297 while RUT closed at $817, up $12. But trading volume was down a bit even from yesterday's low numbers with 2.5 billion shares of the S&P 500 trading; volume fell 4% on the NYSE and dropped 2% on NASDAQ. But the market remains cautious - note the VIX, closing at 19.2% in spite of two strong up days in succession. Also note that the SPX has not broken through the highs set last week before it turned back downward. The downtrend on the SPX defined from about May 1 needs a clear break through the range of $1300 - $1310 before it may seem safe to begin some bullish positions. Perhaps this recent upward move is due to end of quarter buying?

My July iron condor stands at a P/L of +$2,860 with delta = -$10 and theta = +$95. The Aug position is showing some strain with a P/L of +$660 and delta = -$41 and theta = +$71. The theta/delta ratio dropping below 2:1 is a warning sign. Delta of the 890 call has risen to 10; it is too early to adjust, but the Greeks show the early stresses posed by these two strong upward moves. 

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Written by Dr. Duke

Created: 27 June 2011

Today's markets were steadily positive all day, but the volume dropped dramatically. Perhaps the July 4th weekend holiday has started early. SPX gained $12 to close at $1280 while RUT closed at $805 for a $7 gain. Trading in the S&P 500 dropped to 2.5 billion shares, well below the 50dma. Trading on the NYSE dropped 32% and trading volume was down 40% on NASDAQ. In fairness, some of the volume Friday was due to rebalancing the Russell indexes, but I think this decline was more than that alone. In any case, this decline in volume forces us to look at the gains today with some suspicion. One must conclude that we remain in a downtrend; at best, we are consolidating sideways.

My July iron condor on RUT is just treading water and making money these days with a net P/L of +$2,780 and position delta = +$9 and theta = +$84. The 880/890 call spreads are nearly two standard deviations OTM and the 700/710 put spreads are over two standard deviations OTM. So this position is pretty safe at this point. My Aug iron condor is up $600 with delta = -$26 and theta = +$73.

I will be hosting a free webinar this Wednesday evening on "Adjusting the Iron Condor in Bear Markets". Click the Coming Events tab to learn more and register for the webinar.