Major Averages Go On Defense
CNBC has revised their Option Action show which is aired every weekday night at 5:30. They have really beefed up the Friday show to the point that we think it is one of the best option oriented shows on the air. Check it out.
The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
The major averages were unable to make much progress this week as an early rally stalled and sent the different indexes tumbling into April before finishing the period mostly higher. Led by a +8.03% spike in shares of Tesla (TSLA) after announcing a stock split, and a -9.14% drop in oil prices on Monday, the market rallied to kick off the week and was able to cross back above key resistance levels. The S&P 500 and NASDAQ had recouped all of the losses since the Ukraine invasion in a broad-based rally on Tuesday but failed to hold those highs. A lack of progress in peace talks between Russia and Ukraine on Wednesday disappointed investors and the major averages sold off hard on Thursday closing out the first losing quarter in two years but were able to bounce again on Friday. Economic data was mixed with strong job numbers being offset by a +6% YoY jump in the Personal Consumption Expenditure Price (PCE) Index and signs of slower consumer spending. The sectors were mixed with defensive groups REITs (XLRE), Utilities (XLU), Consumer Staples (XLP) and Healthcare (XLV) outperforming, while Financial (XLF), Energy (XLE) and Industrials (XLI) lagged the broader market. The yield curve between the 2 and 10-year Treasury inverted during the week weighing on banking shares. Crude oil prices dropped, ending the period at $99.51 a barrel after the White House said it would release 150 million barrels of oil reserves to help counter soaring prices at the pump. While the S&P 500 and NASDAQ finished higher for a third consecutive week, the DJIA was unable to keep the pace, snapping its two-week win streak.
For the period, the DJIA eased 42.97 points (-0.1%) and settled at 34818.27. The S&P 500 picked up 2.80 points (+0.1%) and closed at 4545.86. The NASDAQ added 92.20 points (+0.7%) finishing at 14261.50. The small cap Russell 2000 gained 13.13 points (+0.6%), finishing at 2091.11.
Market Outlook: The technical condition of the market deteriorated during the week as the major averages snapped a two-week win streak and slipped below key moving average (MA) support levels. Weakness in the market left only the S&P 500 and DJ Transportation Index trading above their 200-day MA. The DJIA slipped below that support level on Thursday’s selloff. The recent rally in the NASDAQ and small cap Russell 2000 stalled at their respective 100-day MA and closed the week below that level. The NASDAQ had surged +13.34% off its 3/14 low. The DJ Transportation Index and Philadelphia Semiconductor Index both suffered heavy losses on Friday which sent them below key MA’s and signaled a possible bearish reversal for the broader market. The DJ Transportation Index closed out the week with a -5.3% loss and the Philadelphia Semi Index lost -4.5%. The technical indicators for the indexes weakened with Momentum, as measured by the 14-day RSI, slowing, and finishing in neutral ground. Underlying breadth was mixed with the NYSE and NASDAQ Advance/Decline lines, leading indicators of market direction, little changed. New 52-week highs outnumbered the new lows this week on the NYSE for the first time in 11-weeks, which is a positive, while the NASDAQ recorded more new highs than lows on Tuesday for the first time since January 4. Despite volatile swings in the market during the week, volume was below average showing investors are neutral on the market and the Market Edge Investor Sentiment Index closed in neutral ground for a second week after reaching extreme bearishness levels in early March. The American Association of Individual Investors (AAII) showed a small uptick in the bulls this week which topped the level of bears for the first time since the last week of December. In addition, the Percentage of Bullish Investment Advisors topped the Bearish Advisors for the first time since February. While these readings are contrarian indicators at extreme levels, the increase in bullishness is a positive for the market as investors move towards more equity exposure.
A look at the Market Edge/S&P Short Range Oscillator (SRO) shows the stock market went from an oversold -6.97% reading at the end of February to an overbought +6.69% this week before the major averages consolidated some of the gains. It’s rare that you’ll see swings like that over a short period and shows the volatility and indecisiveness in the current market. The fact that defensive sectors are leading the market is also a sign that investors should be cautious. Between the Fed’s rising rate cycle to battle inflation and the unknown outcome of the Russian invasion, investors will have to step lightly to avoid land mines. As it appears that neither of these headwinds for the market will be resolved quickly, it’s looking more likely that the different indexes could be in a trading range over the near-term unless a cease-fire is reached. For the S&P 500 a trading range between 4200 and 4600 could be in play. The DJIA could trade between 33,000 and 35,250, while 12,800 and 14,600 would define a range for the NASDAQ.
A chart of these indicators can be found by going to the Market Edge Home page and clicking on Market Recap, which is on the right-hand side of the page just below the Second Opinion Status numbers.
Cyclical Trend Index (CTI): The underlying premise of the CTI is that the market, as measured by the Dow Jones Industrial Average (DJIA), tends to move in cycles that often resemble sine waves. There are five identifiable cycles, each with different time durations at work in the market at all times.
Currently, the CTI is Positive at +12, unchanged from the previous week. Cycles A, B, C, D and E are bullish. The CTI is projected to remain in a Bullish configuration until June.
Momentum Index (MI): The market’s momentum is measured by comparing the strength or weakness of several broad market indexes to the DJIA. Readings of -4 and lower are regarded as bearish since it is an indication that a majority of the broader based market indexes are weaker than the DJIA on a percentage basis. Conversely, readings of +4 or higher are regarded as bullish.
The Momentum Index is Positive at +9, down two notches from the previous week. Breadth was positive at the NYSE as the Advance/Decline line gained 1856 units while the number of new 52-week highs exceeded the number of new lows on four of the five sessions. Breadth was mixed at the NASDAQ as the A/D line added 57 units while the number of new lows out did the new highs on four days. Finally, the percentage of stocks above their 50-day moving average rose to 55.8% vs. 54.4% the previous week, while those above their 200-day moving average increased to 41.4% vs. 40.9%. Readings above 70.0% denote an overbought condition, while below 20% is bullish.
Sentiment Index (SI): Measuring the market’s Bullish or Bearish sentiment is important when attempting to determine the market’s future direction. Market Edge tracks thirteen technical indicators listed below that measure excessive bullish or bearish sentiment conditions prevalent in the market. The Sentiment Index is Neutral at +2, unchanged from the previous week. In addition, we track money flows into and out of Equity Funds and ETFs which as of 3/30/22 shows inflows of $3.8 billion.
Market Posture: Based on the status of the Market Edge, market timing models, the Market Posture is Bullish as of the week ending 3/18/2022 (DJIA – 34754.93).
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Question: How Do You Calculate The Probability Of Profit (POP) For A Vertical Credit Spread When Using the Think Or Swim (TOS) Platform?
Answer: The key element when calculating POP is the Break-Even (BE) price of the credit spread. For example, if you sell a Bullish 100.0 – 95.0 vertical put credit spread for a $2.00 credit (40%) when the underlying is trading at $100.00, the POP calculation is as follows: Subtract the $2.00 credit from the short put strike price (100.0) to get the BE price ($98.00) for the trade. If the underlying settles at $98.00 or higher, the trade will make at least a $0.01 profit. Now click on the Analyze tab and enter the symbol for the underlying. Put the cross hair on the expiration date at the bottom of the chart (x axis) and scroll to the breakeven price on the left side of the graph (y axis). The percentage above the BE price line is the POP for the bullish, put-credit spread.
If you are initiating a Bearish 100.0 – 105.0 vertical call-credit spread, add the credit ($2.00) to the short call strike price (100.0) to get the BE price ($102.00) for the trade. If the underlying settles at $102.00 or lower, the trade will make at least a $0.01 profit. Check the TOS, Analyze screen. The percentage below the BE price line is the POP for the bearish call-credit spread.
Bullish Vertical Put Credit Spread: 1) Subtract The Credit From Short Put SP = BE Price. 2) The % Above The BE Price On The Analyze Screen Is The POP For The Trade.
Bearish Vertical Call Credit Spread: 1) Add The Credit To The Short Call SP =BE. 2) The % Below The BE Price On The Analyze Screen Is The POP For The Trade
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