Here is the SPX weekly chart for the past 18 months. Now looking at the chart here is what i see. 1) SPX is clearly in a bull market, undergoing its small 2-3% correction every month or so and then having a 10% or so correction about every 5 months. you can clearly see the major corrections #1 and #2. We've had 5 months of narrow range with no major pull back. I believe we are due for one. 2) Notice the negative RSI divergence right before correction #2. It clearly was a sign of running out of steam. Couple that with the seasonality of the OCT market low occurence and you get a pretty clear sell signal. I believe that just like i said in my previous posts, we are in the same situation today. 3) A break below the red line would clearly indicate we are getting into a danger territory and with so many negative news that can come out over the next few weeks we can easily break that line. 4) The only positive that i see is the volume. It has been low to average at best. But if the volume picks up on our way down i'd be getting ready for SPX 1250 or perhaps 1230 over the next month or so. 5) Let's not forget that summer is around the corner and we are getting into the drifting lower season. I dont want to sound like its all doom and gloom but it's something to certainly keep in mind when opening high risk FOTM bull put spreads. I think the best thing to do when trding such strategy is trying to minimize your exposure during times when a major move is "very probable". Now no one can predict it but i think its better to miss an opportunity or two than to be in a high risk spread during a major market move that can wipe you out if you lose control of the hedge. It's just my opinion. EDIT: Sometimes i may sound like, I am trying to discourage people from using FOTM put spreads but thats not my intention.I hope u guys dont take it the wrong way. I think it's a great steady money maker, WHEN managed perfectly. I am just sharing some knowledge that will certainly assist you in your risk management and ensure survival over the long term.
Rally, another nice post. Looks like the MACD has also crossed. (I don't look at RSI so much, but heavily use the NewHighs/NewLows and Advance/Decline indicators and they are telling the same story about divergence.)
Yes, i forgot to mention that the MACD crossed in my post. Thanx for pointing that out. I dont follow the newhighs/newlows or advance/decline as i have found it easier when i consider a few indicators only. The more indicators, the more complicated it gets, for me anyway But, i recently read an article where it was explained in details how newhighs/newlows can be used in great success to call market tops. It talked about that historically, stocks make new highs before the indices do, and when the indices are making new highs, the stocks they are comprised of are falling off already. Having said that, if newhighs and the market breath indicators are turning then thats just another confirmation of the risk i discussed earlier.
Coach: I still don't see how futures provide an advantage if you've already missed the move down in a black swan event. The advantages of futures that I'm aware of are: 1) Generally tighter bid/asks 2) Better liquidity than options??? 3) Traded more hours during the day/night than options. Do you also expect that in a black swan event, the bid/ask will be tighter than for options? Thanks.
You really do not miss a Black Swan event unless you are away from your computer or not on your trading screen/listening to the news. Market crashes usually occur during trading hours and if the market is falling fast, the futures are a way to immediately hedge as best as you can. Even on a gap down, like Black Monday in October, the market still fell the most after the market opened. This is not a predictive hedge, this is an "Oh Shit!" hedge when the market starts falling on a catalyst and it is bad. If the market started tanking right now and news was flashing that US was launching missle strikes against Iran, I would miss the first drops but I would shrt futures as soon as I can until the dust settled. Even if the futures dropped and then pulled back to the sale price level, I would just get out but the moment I had it on would be my hedge in case it kept on falling further, allowing me to asses my spreads and get out if need be and use the futures profits to hedge. ES futures are highly liquid and the bid ask spreads are one tick apart and the liquidity keeps it there and you can get in and out easily due to high volume. Also they trade 24 hours practically. So you can get in them at anytime if you need to. If anyone is not comfortable or familiar with futures then I advise against using them naturally. But again, this is an emergency brake not a common hedging approach.
And you can trade them before S&P opens. This was the case after bombing in London, when ES futures were down -10 points at premarket.
First place to start is to go to www.cme.com and look for their Borchure on the E-mini Futures under Education or Resources andn read that to become familiar with the terms of the contracts and how they trade. They may also have a Brochure on how to use the E-mini futures to hedge a portfolio. This is the best place for a free intro to the E-minis.
I think Rally's right. There's no liquidity in the VIX. If MMs don't want to buy, there will be no value. I've been the bid quote for 3 days now, without a transaction. Only 2 contracts, but you would think they would fill just to get me off the board.