Bullish? Bearish? Neutral? At the moment the only true confirmation that we have is that we’re are in a Bull market, but there are cracks forming in the foundation – strictly from a technical-charting perspective. 
L
et’s take a look at the four major averages that I follow. I’ve formatted these charts below to give a generalized macro view of each of them.
I like to call the Russell 2000 a sort of leading indicator for the market. Of course, there really is no such thing, but it’s the best that I have found – and you will noticed immediately that there is a rather large divergence from the rest of the indices.
Also note the DOW is looking very strong, where the other indices 20 MA is about to or has crossed the 50 MA in a bearish move. Why the divergence? Some of the companies in the DOW are currently in strong Bull moves like AXP, HPQ, KO, MSFT, WMT, to name a few. Many others are not and are consolidating or pulling back slightly. I would guess that it has to do with how each company is weighted on the index.
Is this the big ‘crash’ that everyone is expecting? I suspect not, but it could be a correction similar to the June/July correction this year. Why do I think that? (The operative word here is ‘think’. If you regard this as advice, please read my Disclaimer page.) Here’s why:
Most chartist and analyst classify a trend as being able to connect two high and two lows to establish a trend line or channel. A trend reversal is, in the case of a Bull Market, two lower high and two lower lows.
In June, a trend reversal was about to be established, and then many got caught when it failed to established the second lower high and just blasted right by it. If you were Bearish for July expiration, you might have been hurt.
What to do? Hmmm…
Assuming we may be in a minor correction, I will be focusing on Iron Condors as my primary play for December expiration. I see two advantages to them in this market: 1) You collect premium from both sides so the 10% rules is cumulative. 2) Because you’re collecting two premiums, you can chose strikes further Out Of The Money (OTM) to reduce risk. The reason the premium is cumulative is that brokers do not margin both sides (Put and Call spread) of an Iron Condor – known as The Secret of the Iron Condor.
With that in mind, I opened 3 Iron Condors on Friday. I sold the Bear Calls first and I’ll leg in with the Bull Puts next week – hopefully the underlying price will be down a bit. I chose MOS, IWM and SPY. When you look at MOS you may ask yourself, “What the heck is he doing?” This is another case where the market is watching my every move. When I opened the trade, a little after 11 AM, the price was down from the previous close. Seconds after my transaction was complete, the price took off and rose over $2. See, they are watching me! Not to worry, thought, it’s way too early to sweat this one.
You’ll also probably notice I separated SPY and IWM by 2 strikes. The main reason is to cut down on commissions since I open, for example, 20 lots as opposed to 40 to hit my 5% allotment, thus cutting commissions in half. Another smaller reason is it stretches out my break-even a few more cents.
Details? See the In Play tab.
Thats it for today. This was really long and I hope you were able to stay awake.
Next: November Expiration Results.
- Jeff
