I have sort of a basic question that I can't seem to find an answer to. The SPX follows support and resistance very well. Why is this? It's not a stock that can be limit set to camp out at a S/R level like individual stocks...so how do SPX options move the S&P500 and make it follow support/resistance? I can't see how it would work the other way around. thanks......Craig
My non-technical answer is that lots of program and basket traders follow the markets closely and trade off the support and resistance lines. If the market moves above support, then many traders buy stocks that make up the index and this buying pushes the index higher. In general many traders who follow certain stocks use hte indexes as proxies to determine if the market is bullish or bearish and trade off the market support/resistance. I think it becomes a chicken and egg thing but both work off each other. For example if the market is near support, many traders might go long DELL, IBM, MSFT, GE, etc... I may be off here, but I think the institutions who trade the baskets and program trading work off of a lot of technical indicators and when they move, the rest jump on board to an extent and further enforce the moves. Or it could just be magic...
Coach, This is slightly off topic, but I noticed you use Fib retracements as part or your trading strategy. Can you give me/us a quick overview and then suggest where to go to learn more? I did a search on ET but didn't come up with much. Maybe it's my spelling... Thanks again.
Fib retracements are sort of after the fact analytical tools but I find them helpful to apply when the market has made large moves, such as the OCT to DEC move. The best quick explanation in book form if you can borrow it from someone or simply go to Borders or Barnes and Noble with a pen and paper and take notes is Muprhy's Technical Analysis of the Financial Markets. Long story short, is that the theory is that when the market makes a large move there will naturally be retracements. A mathematician (whose name by the way was not Fiboncacci) discoverd a math series and found this numerical pattern in nature using the number sequence 1,1,2,3,5,8,13,21,34, etc where each number is the sum of the previous two. If you take the % differences between the average numbers you will see that a number to the right is about 62% greater than the number to its left. I.e., 34 is ~62% greater than 21. And going the other way, right to left, the numbers decrease by ~38%. I.e. moving from 34 to 21 is a 38% decrease. Technical analysts applied these numerical patterns to trading and found or claimed that stock moves will retrace back in these same dimensions. In other words a move higher will retrace back 38%. If you look at the FIB sequence and move two places from right to left, the retracement is about 62%, in other words going from 34 to 13. Expanding it out, the theory also adds that large moves will retrace about 50% of its gain before moving higher again. So based on these patterns, the fib retracements claim that a move upwards or downwards will retrace and the retracement levels that are most likely based on Fib seuqences are 38% and 62% of the high or low and many people also use 50% as a significant level. Therefore on a large move, such as the OCT to DEC move in SPX, charting programs like Tradestation where I posted the charts, lets you add the FIB retracement lines to visualize potential retracement points. Of course this is very subjective and others add in other % retracement lines, but if you look at large price moves and add the fib retracements in, they tend to pan out more often than not. Therefore, they serve as good additional guidelines to look for retracement points and for support and resistance levels. Hope that helps a bit although I may have muddled the Fib definition....
Coach, How much of a pullback would make you want to move on your FEB PUT Spreads ? What would you target on a pullback of 10 points or so ...?
It is not so much the amount of the pullback, but whether the pullback allows me to get into the strikes I am interested in for a good credit. The 1150s or 1160s are too little to be worth but a nice drop would make them attractive. However I do not see such a large pullback coming and time starting to tick, I may have to look at higher strikes. Some that look nice are (with mid-point $$): 1180/1190 @ $0.45 1190/1195 @ $0.30 1190/1200 @ $0.55 If we dip below 1270 maybe I can grab one of these or perhaps just get in now. Will be watching to see what I want to do...
FYI, For those of you have an OptionsXpress account, you can apply FIB retracement lines on your charts.... using the drawing tools. It's a service provided by the Prophet.net people. Murray
I've been looking at the 1190/1180 Feb bull put as well. I placed an order (about 10 minutes ago) at 0.45 which was the mid with a b/a of -0.20 to 0.45. The SPX did not go down after I placed the order. Got filled at the mid within 5 minutes. Go figure?! (not that I'm complaining).