Feb option buyers have tentatively set the target price at 47.06.
Thursday, January 24, 2008
Tuesday, January 22, 2008
Panic Day!
On Wednesday I said the bottom was imminent. But there's a 5% difference between Friday afternoon and this morning. Always be patient and wait for the panic day. Lesson learnt there.
Monday, January 21, 2008
On this MLK Holiday, the lag of U.S. leadership
has sown world-wide panic and confusion. Major Asian indexes are down 5% and European indexes are down 7% last night.
U.S. retail investors are likely to be spooked by this world-wide panic into putting up massive sell orders Tuesday morning. This should cause major U.S. indexes to gap down significantly, which will draw in buyers and provide an opening for a recovery.
We've already said we'll close our Dec 1st shorts using Friday's closing prices, so we're not going to change from that. However, if you are still holding short positions, it may be wise to close some of those short positions at the open on Tuesday and maybe even open small long positions.
We are unambiguously in a bear market so you should always hold more short positions than long positions. If the market is overbought, go 100% short. If the market is oversold, like it is now, take profit on 50% of your shorts and dapple slightly in longs only.
The current S&P level is actually a triple support structure. Besides the two structures mentioned yesterday, the 1300 level is also a major resistance level back in May 2001.
Looking at the long term chart, S&P has a top of 1552 in May 2000 and another top of 1562 in October 2007. In between, there's a low of 794 in Sept 2002. If the SPX should go below 800 again, as very likely it will, then the U.S. market will enter into a long term double-top and will go very, very low indeed. (Another possibility, as Ming pointed out in the comment section, is for the effective buying power to go very low, i.e., huge inflation. But inflation always accompany ridiculously cheap stock market levels because bank interest rates will be high. Let's not forget Warren Buffet started out buying cheap stocks in those kind of times.)
The point is, you'll make money if you do opposite of what the market does. That's always easier said than done, but repeated often enough, it may become our instinct.
U.S. retail investors are likely to be spooked by this world-wide panic into putting up massive sell orders Tuesday morning. This should cause major U.S. indexes to gap down significantly, which will draw in buyers and provide an opening for a recovery.
We've already said we'll close our Dec 1st shorts using Friday's closing prices, so we're not going to change from that. However, if you are still holding short positions, it may be wise to close some of those short positions at the open on Tuesday and maybe even open small long positions.
We are unambiguously in a bear market so you should always hold more short positions than long positions. If the market is overbought, go 100% short. If the market is oversold, like it is now, take profit on 50% of your shorts and dapple slightly in longs only.
The current S&P level is actually a triple support structure. Besides the two structures mentioned yesterday, the 1300 level is also a major resistance level back in May 2001.
Looking at the long term chart, S&P has a top of 1552 in May 2000 and another top of 1562 in October 2007. In between, there's a low of 794 in Sept 2002. If the SPX should go below 800 again, as very likely it will, then the U.S. market will enter into a long term double-top and will go very, very low indeed. (Another possibility, as Ming pointed out in the comment section, is for the effective buying power to go very low, i.e., huge inflation. But inflation always accompany ridiculously cheap stock market levels because bank interest rates will be high. Let's not forget Warren Buffet started out buying cheap stocks in those kind of times.)
The point is, you'll make money if you do opposite of what the market does. That's always easier said than done, but repeated often enough, it may become our instinct.
Saturday, January 19, 2008
Closing Short Positions; Intermission Review
On Wednesday we posted that a short term bottom was imminent. By Thursday afternoon and Friday, we think that bottom has been reached.
We are therefore closing the hypothetical short positions we opened on this blog space on December 1st. Using Friday's market closing prices, let's survey our catch:
[Short Positions Open 12/1/2007 Close 1/18/2008]
If we are adventurous, we may even open small long positions on these same stocks today and hold them for 4-6 weeks to see if a small profit could be made. (But bearing in mind that we are in a bear market, that may not be a smart thing to do for real!)
This week the SPX (S&P500) was on two major support lines: the May 2006 top, which becomes a support on the way down, and the extension line of the Aug 2004, Apr 2005, Oct 2005 and Jun-July 2006 support levels. This dual support structure should be quite strong.
On the option front, even as the January QQQQ price target was dropping $3 over a course of 2.5 weeks (from $50 to $47), the March target was staying above $50 and was not budging at all. We are witnessing 1.5 million put contracts on the Q's for March, representing 150 million shares, when the Q's were 45 last week these contracts were worth half a billion dollars. Yet these contracts are still there -- no one is taking any profits. Apparently, these contracts are not speculative in nature, but are hedges for much larger stakes somewhere. Institutions holding large long positions do not like to sell in a down market, they would be buying at these levels to firm up the support and then sell to individuals when the market is moving back up.
From the peaks of last year, the Dow has dropped 18%, Nasdaq 22.3%, and S&P 19%. That's enough of a drop for the first leg of a bear market. Some say that maybe its not over because there hasn't been a panic day. But a panic day is not a requisite for the first leg -- there may yet be a panic day in next week's bottom building actions and it may even go below last week's low, but that doesn't mean the current support levels will not hold.
We expect the Q's to limp back to the $49 level over the next 6 weeks.
We are therefore closing the hypothetical short positions we opened on this blog space on December 1st. Using Friday's market closing prices, let's survey our catch:
[Short Positions Open 12/1/2007 Close 1/18/2008]
Stock Open Close Profit
QQQQ 51.31 45.35 13.1%
DIA 134.16 120.57 11.3%
SPY 148.66 132.06 12.6%
EEM 154.4 135.4 14.0%
IWS 143.7 125.53 14.5%
IWM 76.58 67.22 13.9%
GOOG 693.0 600.25 15.5%
If we are adventurous, we may even open small long positions on these same stocks today and hold them for 4-6 weeks to see if a small profit could be made. (But bearing in mind that we are in a bear market, that may not be a smart thing to do for real!)
This week the SPX (S&P500) was on two major support lines: the May 2006 top, which becomes a support on the way down, and the extension line of the Aug 2004, Apr 2005, Oct 2005 and Jun-July 2006 support levels. This dual support structure should be quite strong.
On the option front, even as the January QQQQ price target was dropping $3 over a course of 2.5 weeks (from $50 to $47), the March target was staying above $50 and was not budging at all. We are witnessing 1.5 million put contracts on the Q's for March, representing 150 million shares, when the Q's were 45 last week these contracts were worth half a billion dollars. Yet these contracts are still there -- no one is taking any profits. Apparently, these contracts are not speculative in nature, but are hedges for much larger stakes somewhere. Institutions holding large long positions do not like to sell in a down market, they would be buying at these levels to firm up the support and then sell to individuals when the market is moving back up.
From the peaks of last year, the Dow has dropped 18%, Nasdaq 22.3%, and S&P 19%. That's enough of a drop for the first leg of a bear market. Some say that maybe its not over because there hasn't been a panic day. But a panic day is not a requisite for the first leg -- there may yet be a panic day in next week's bottom building actions and it may even go below last week's low, but that doesn't mean the current support levels will not hold.
We expect the Q's to limp back to the $49 level over the next 6 weeks.
Today's Option Expiration Day
The Q's were closing below the pink cross.
Today's picture follows:
So far Feb's pink cross is way above the market action, but let's give it a few days to firm up.
You'll also notice I've added an oscillator at the top of the graph. That's for the day's market closing price relative to the center of the pink cross as of that day. My interpretation of the oscillator is that the bottom half means oversold while the top half means overbought.
Today's picture follows:
So far Feb's pink cross is way above the market action, but let's give it a few days to firm up.
You'll also notice I've added an oscillator at the top of the graph. That's for the day's market closing price relative to the center of the pink cross as of that day. My interpretation of the oscillator is that the bottom half means oversold while the top half means overbought.
Wednesday, January 16, 2008
The falling pink cross
The QQQQ Target price has fallen $2.4 over the last 2 weeks. This is amazing.
Using the pink cross as the basis for our oscillator, we can say that any price below the pink cross is an oversold, and any price point above the pink cross is an overbought. Based on this, we would call the next day or two as the current short term bottom.
Using the pink cross as the basis for our oscillator, we can say that any price below the pink cross is an oversold, and any price point above the pink cross is an overbought. Based on this, we would call the next day or two as the current short term bottom.
Friday, January 11, 2008
The Q's Max Pain Zone continues to move downward
the last couple of days, to 48.4 yesterday and 48.27 today, +/- 1.23.
Over the last 10 days, the MPP has gone down from near 50, a drop of more than $1.7. This means the option buyer's price expectations are continuously eroding.
Over the last 10 days, the MPP has gone down from near 50, a drop of more than $1.7. This means the option buyer's price expectations are continuously eroding.
Wednesday, January 9, 2008
QQQQ bounced up from 46.5,
about $1.3 below the pink cross as of yesterday.
The Max Pain Zone continues to move downward today, to 48.84 +/- 1.22.
The Max Pain Zone continues to move downward today, to 48.84 +/- 1.22.
Tuesday, January 8, 2008
Nasdaq action puts in South of the Pink Cross
area, even as the crosses themselves continue to migrate downward. Can we call this area the "oversold" area?
Monday, January 7, 2008
Friday, January 4, 2008
GOOG January Target
GOOG's Max Pain Zone for January Options is: 627.74 +/- 17.79.
QQQQ action catching up to pink cross area:
QQQQ action catching up to pink cross area:
Thursday, January 3, 2008
Tuesday, January 1, 2008
Max Pain Zone?
Looking at the graph on last night's blog, I was thinking perhaps instead of "Max Pain Point", we should think about "Max Paint Zone". The top of the graph was a bit flat and the price should be able to move a little bit to the left or right without too much of an impact.
But how much of an impact is "not too much"? We can only guess. What about $30 million? That sounded like chicken change to our option writers, right? Let's see how far can the QQQQ price deviate from the max pain point if we allow for $30m allowance one way or another.
The above graph is a recent QQQQ chart with the "Max Pain Zone" of the last and coming few months painted in. The horizontal line of the pink crosses refers to each month's max paint points, while the vertical line covers the max pain zone if we allow for $30m freedom.
For December, the price action was well within the range of the pink cross. For November, the price closed below the cross (I think the option writers made $70m less money that month). However, being able to see the cross way down there as early as late October should have been useful.
For January, the cross is also "way down there".
(BTW, I drew a thin cross for Feb., but because of the slight volume, the Feb cross should be taken with a grain of salt.)
But how much of an impact is "not too much"? We can only guess. What about $30 million? That sounded like chicken change to our option writers, right? Let's see how far can the QQQQ price deviate from the max pain point if we allow for $30m allowance one way or another.
The above graph is a recent QQQQ chart with the "Max Pain Zone" of the last and coming few months painted in. The horizontal line of the pink crosses refers to each month's max paint points, while the vertical line covers the max pain zone if we allow for $30m freedom.
For December, the price action was well within the range of the pink cross. For November, the price closed below the cross (I think the option writers made $70m less money that month). However, being able to see the cross way down there as early as late October should have been useful.
For January, the cross is also "way down there".
(BTW, I drew a thin cross for Feb., but because of the slight volume, the Feb cross should be taken with a grain of salt.)
January Max Pain Target has floated up
a little bit, to 49.97 today.
See the attached graph above: the blue dots are the actual plots of the amount of QQQQ put & call contracts that will be in the money at each hypothetical QQQQ closing price point on Jan 18, that is the amount of money the option writers will need to pay option buyers (each unit equals $100 million), based on today's open interest numbers.
The premise is that the institutions that sold those options would prefer to pay out as little as possible, so they have a preferred range for the QQQQ price to fall on at option expiration day. Since these institutions are amongst the most powerful market participants, they frequently get what they wish for.
The pink line is a plot of the following mathematical model:
y = -4.86 - 0.145 (x - 49.97) ^1.810
whereas:
a = 49.97 : the max-pain point, the price point that is least painful (most profitable) for option writers, and most painful for option buyers;
b = -4.86 : amount in the money at the max-pain point;
c = 0.145 : extra amount of pain when price move $1 in either direction, roughly correspond to amount of put and call contracts with strike near the max-pain point;
d = 1.810 : a measure of the degree of concentration of contracts around the max pain point; how fast will the pain grows exponentially for the option writers as price deviate from the max pain point.
The volume for Feb contracts are still light, however, for March contracts, there has been quite a few contracts on the put side. This gives a max pain number of 51.01 for March contracts -- however, because the call side volume is light, this number is quite tentative for now and subject to revision.
See the attached graph above: the blue dots are the actual plots of the amount of QQQQ put & call contracts that will be in the money at each hypothetical QQQQ closing price point on Jan 18, that is the amount of money the option writers will need to pay option buyers (each unit equals $100 million), based on today's open interest numbers.
The premise is that the institutions that sold those options would prefer to pay out as little as possible, so they have a preferred range for the QQQQ price to fall on at option expiration day. Since these institutions are amongst the most powerful market participants, they frequently get what they wish for.
The pink line is a plot of the following mathematical model:
y = -4.86 - 0.145 (x - 49.97) ^1.810
whereas:
a = 49.97 : the max-pain point, the price point that is least painful (most profitable) for option writers, and most painful for option buyers;
b = -4.86 : amount in the money at the max-pain point;
c = 0.145 : extra amount of pain when price move $1 in either direction, roughly correspond to amount of put and call contracts with strike near the max-pain point;
d = 1.810 : a measure of the degree of concentration of contracts around the max pain point; how fast will the pain grows exponentially for the option writers as price deviate from the max pain point.
The volume for Feb contracts are still light, however, for March contracts, there has been quite a few contracts on the put side. This gives a max pain number of 51.01 for March contracts -- however, because the call side volume is light, this number is quite tentative for now and subject to revision.
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