Technical Tuesday – Testing the 200 DMA’s

Up 500, down 500 – what volatility?

Wheee – what fun!

Up 500, down 500 – what volatility? Yesterday the Volatility Index (VIX) did hit 25 and that's great for us as we get good money for the options we like to sell. We're generally just amused when the market collapses as we have great hedges, like the one we posted in Thursday morning's PSW Report:

As an additional hedge, at the moment, I like for the STP:
Sell 4 WHR 2020 $125 puts for $12.50 ($5,000)
Buy 50 SQQQ May $16 calls for $3.90 ($19,500)
Sell 50 SQQQ May $20 calls for $2.20 ($11,000) That's net $3,500 on the $20,000 spread that's almost all in the money to start and the only way to lose is if the Nas goes up quite a bit from here which, with all these headwinds, doesn't seem too likely*.*

The WHR short puts are still $12.50 but the $1.70 spread hit $3 for a gain of $1.30 x 5,000 units for $6,500 (185%) gained in 2 trading days – you're welcome! Remember, I can only tell you what is likely to happen and how to make money trading it – the rest is up to you.

In our Live Member Chat Room we already cashed in the long calls ($4.50) and left the short calls which are covered by another hedge we already had. That pulled $22,500 off the table – more than the maximum we expected to make on the trade but now we have to deal with the short calls so we're hoping for a bounce in the Nasdaq as we test the 200-day moving averages.

  • The Dow finished the day at 23,644 but fell below the 200 dma at 23,423 during the day and, if we call that a fall from the 50-day moving average at 25,300, that's down 1,900 points and we'll call it 2,000 and look for 400-points just to make a weak bounce now, at 23,800 and 24,200 would be the minimum we'd need to see to believe the Dow may be making a proper move back up.
  • The S&P fell harder than the Dow, finishing the day below the 200 dma of 2,589 at 2,581 despite bounce from 2,552 into the close. Falling from 2,800 was 212 points so call those bounce lines 42 points to 2,640, which just so happens to be (Ta Da!) the same line we've been tracking for months on the S&P. In fact, here's the chart that's been predicting the future(s) for you all along:

Remember, the 5% Rule™ isn't TA – it's just math! We use a chart to illustrate the equations but we could care less about the squiggly lines other than to check our predictions. In this case, the updated S&P chart was from March 27th (last Tuesday), where I said:

As I said above, I'm more inclined to go short here because there is NOTHING that I'm seeing in the news or the data that justifies us moving to the more positive range (over the 20% line) which means we're more likely still on track to fall into the 10-20% range, where 2,640 is the top and 2,420 is the bottom. That's the range we predicted we'd end the year in and this year is just getting started but it seems to me there's still more money in shorts than in longs at this level.

That was in the context of the Futures ramping back to 2,680 that day and that 80-point drop back to 2,600 paid a very nice $4,000 per contract the next day and, in the Live Trading Webinar, we flipped to Silver Futures (/SI) longs that we cashed in yesterday for $1,850 per contract gains. Trading is fun!

  • The Nasdaq is the only index not to fail it's 200 dma, yet, and we'll watch it closely but, just because an index doesn't fall to your goal, doesn't mean you can't calculate it's bounce lines. From 7,170 to the 200 dma at 6,270 is a 900-point drop and 20% of 900 is 180 but we'll call it 200 and call the bottom 6,300 (since we didn't hit it yet) and that means we can look for 6,500 to be the weak bounce – which makes sense after yesterday's intra-day low of 6,326. Another 200 gives us the strong bounce at 6,500 and that's what we'll look for today and tomorow.
  • The NYSE fell from exactly the 50 dma at I'm going to call it 13,000 to the 200 dma at 12,300 and finished the day at 12,216 so the NYSE MUST get back over 12,300 to take any of today's bounces seriously. The 700-point drop calls for 150-point bounces and that's going to be 12,450 for the weak bounce and 12,600 for the strong and we'll need some good news to pull that off.
  • Russell tested the 200 dma at 1,488 in a fall all the way from 1,600 so we'll call it 1,500 and that's 1,00 with 20-point bounces on /TF to 1,520 and 1,540 though 1,512 is the 5% line – so that will be very significant today.

I don't think the simple absence of more negative news will be enough to turn the markets back up, we'll need some positive noises from data and earnings and today we have Auto Sales, which I don't see as a boost and tomorrow we'll see Factory Orders and ISM – not big market movers either. Thursday we get Trade Balance and that's it so it's all up to the Non-Farm Payrolls on Friday to get us over the hump.