The S&P500 broke out to new highs yesterday and should support further gains from here, right? Well, not so fast. Ever been on a family trip where one child is a little tired and cranky? It’ll slow down the whole group, and that’s what we’re seeing with the S&P today.Â
The correlation between the Euro (versus the Dollar, or EUR/USD) and the S&P 500 (SPX), which had been running at close to 0.9 as recently as late November, is breaking down a bit, and is currently at 0.71.Â The implication of a 0.9 correlation is that a move higher in the Euro (lower for the Dollar)Â is very closely associated with a move higher in stocks.
A less robust relationship, as indicated by the currently lower coefficient, is a positive for U.S.equities, since the Euro remains under pressure, despite some reduction in the fear level. In particular, there appears to be hope that France’s sovereign debt ratings will not be downgraded, although it seems highly likely that Italy will be less fortunate.
As the chart above illustrates, the index has in fact finally broken – just – above the previous high at 1292.66, which was reached back in October. For those trading the E-minis from a 3 minute chart – as I enjoy doing when I’m at home – this is irrelevant, but for those of us who have some longer-term risk on, this matters, since it makes the double bottom at 1158.67 a pivot low, permitting an adjustment of the Fibs. It now appears that decent support can be expected around 1230, which is approximately the 50% retracement of the move from 1158.67 to 1296.46 (to be precise, 1227.56).Â Here’s the new, improved chart:
So far, this move is continuing to demonstrate an orderly pattern, with the price action marching neatly between the upper- to mid-Keltner Channel bands, a bullish phenomenon. It may be tempting to take profits, as this move has been in process for a while, and has done well, but technically there doesn’t seem to be much reason to do anything except let profits stroll. As always, for those who are reluctant to give too much money back, a trailing stop (perhaps below the previous session’s low, which today would be around 1274.50) can always be employed. Assuming that today’s current low remains in place, tomorrow the stop could be pushed up to around 1280, and so on.
Here’s hoping that everyone’s year is off to a good start; best of luck.
Pretty good with price patterns? Barely known just a few years ago, it seems like everyone has a bead on them now and you’re even seeing analysts calling out patterns on TV. If you see the same thing as everyone else, however, that won’t give you an edge. Those that understand what’s going on underneath the hood of the market gain far more information about a price pattern.Â
What is implied volatility and why do we need to follow it? In essence, it’s the factor in the Options chains that “implies” the future move that is priced into the Options. If the implied move isn’t expected to be large, then the premium in the Options will be lower. That affects the way that I trade because I can’t get the same amount of “distance” in my credit spread trades. Because of this, I have to adapt and adjust my portfolio to account for this.Â
Options give you…..OPTIONS. I prefer to add these Active Defensive positions to act as a “moat around the castle” to help my credit spread income positions “fend off” strong attacks in price.
What are the Options Greeks and why do you need to understand them? Well, let’s start with one of the most important reasons….the professionals are using them to manage the risk on their positions. Can you do a better job than they do with fewer tools? Probably not. They’re not really that hard to learn, so let’s start today…..
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