So far, the recent pullback in the market is staying within the realm of a normal correction. The S&P 500 has fallen slightly below its 50-day moving average, as it did when setting two intermediate cycle lows back in 2012:
Friday was a quad-witching day with expirations of stock index futures, index options, stock options, and single stock futures. It happens four times a year, and higher volume is typical. Still, Friday's volume was at a level last seen back in mid-2011, when an intermediate cycle reversal set the left leg of a double bottom.
Friday's price action formed another possible reversal. While prices fell below Thursday's low, most of the action for the day was above Thursday's close:
On the weekly charts though, the S&P 500 is still extended from the 50-week moving average, and unlike mid-2011, the weekly Stochastics have only just formed a sell signal and have a ways to go before hitting the oversold area.
Investors buying certain index and sector ETFs may not have a lot to show for the last two years. The Amex Oil Index is back at the same level it was at in early 2011. XLK, the technology ETF, is back to early 2012 levels. QQQ, the ETF based on the NASDAQ-100 Index, is back to mid-2012 levels, although the broader NASDAQ Composite is still showing a gain from 2012 highs. Consumer, healthcare, and financial sectors have done well, but basic materials, often in indicator of overall economic health, hasn't been able to exceed 2011 highs.
Gains may be scarce over the next few months. Volatility has been creeping upwards. This can make many directional option strategies riskier.
I generally prefer using various option strategies for my short and intermediate term trading. However, I believe in running a trading business like any other business. If I owned a bakery, I would want to earn a profit on every cake I sold. I wouldn't want to make a good profit on some, accept losses on others, hoping to average out with a decent profit at the end of the year. That's not how you run a business, and that's not how I want to trade.
This is the type of environment where stock-only and covered call trades, on the highest quality stocks, may produce the most reliable results. If the markets resume their upward trek, covered calls can regularly hit the strike prices of the short calls and produce several percent returns month after month. If the recent market pullback turns into a larger decline, the lowering of the cost basis on the stocks from covered call trades can provide a buffer against losses, while short trades can provide good returns.
Earnings season starts in a couple of weeks. Pre-announcements may be used to get the bad news out early. Once the actual earnings start coming out, we'll get a better feel for the likely direction of the economy and the markets.
Terex has fallen 22% since my identification of it as a good short in the June 5th newsletter. The straddle trade I also analyzed in that newsletter should have returned 77%. TEX is now at the bottom of its recent trading range, and with the bottom of the range corresponding to significant 2012 resistance which may now be support, this is a good time to exit any short positions.
Last minute change:
As I was editing this, I noticed the DJIA futures are down significantly, with the market due to open in less than five hours. If that's the way the market will open, Friday's action will not be a reversal. Hold on to your hats, and maybe some inverse index ETFs, and let's see how far this goes.
Of course, there's much more you need to know and many more stocks you can capitalize upon each and every day. To find out more, type in www.markettamer.com/seasonal-forecaster
By Gregg Harris, MarketTamer Chief Technical Strategist
Copyright (C) 2013 Stock & Options Training LLC
Unless indicated otherwise, at the time of this writing, the author has no positions in any of the above-mentioned securities.
Gregg Harris is the Chief Technical Strategist at MarketTamer.com with extensive experience in the financial sector.
Gregg started out as an Engineer and brings a rigorous thinking to his financial research. Gregg's passion for finance resulted in the creation of a real-time quote system and his work has been featured nationally in publications, such as the Investment Guide magazine.
As an avid researcher, Gregg concentrates on leveraging what institutional and big money players are doing to move the market and create seasonal trend patterns. Using custom research tools, Gregg identifies stocks that are optimal for stock and options traders to exploit these trends and find the tailwinds that can propel stocks to levels that are hidden to the average trader.
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