Welcome to Sequester Friday

The S&P 500 is right back to where it started on Monday morning. It bounced nicely off its 50-day moving average. This could be a cyclical bottom, a classic reversal that makes a good entry point for bullish bets.

Not so fast. The two rebound days, Tuesday and Wednesday, were on below-average volume. Yesterday's candlestick is what's called a ‘Gravestone Doji', and where it formed, after two days up, can mean “that's it for now”. The fact it occurred on high volume, and the high formed a lower high than eight days ago, doesn't paint a good picture for the near term.

But let's give the market a day or two more, time to try on its new ‘sequester' suit, to walk around in front of the mirror and get a feel for how it looks.

In the meantime, TLT, the ETF representing longer term bonds, has been regularly cycling up and down. It may have just formed another short-term high.

If I wanted to play a move down from a likely short-term high, shorting a $120 stock (ETF in this case) does not interest me.

Since previous drops off short-term cycle highs happen rather quickly, a near term in-the-money put may work as a lower-cost surrogate for shorting the stock. If I wanted the same exposure as shorting 100 shares of TLT, a March 124 Put could do it. There are 14 days left in March options. That should be enough time.

A March 124 Put's cost is currently about 5.85, and it has just $.10 of time value in it. It has a delta of 94. So if I was convinced TLT had set a short-term high, and wanted to play a pullback to at least 116 within the next two weeks, I could use a March 124 Put to make perhaps 20% or more on the move.

Let's look at the numbers:

1 March 124 Put bought at 5.85 = $585 at risk.
TLT drops from 118.50 to 116 within next two weeks = 2.5 points
Theoretical profit = 2.5 points * .94 delta * $100 = $235.00
Subtracting time value in case most of it evaporates = $235.00 – ($.10 * 100) = $225.00
Potential reward = $225 / $585 = 38.5%

TLT could fool me and continue moving upwards. A close above Monday's high of 119.35 would start to convince me I was wrong. The whole number 120 may act as a resistance level. So maybe 120.20 would make a good stop-loss. With a current delta of 94, that means a move from 118.50 to 120.20 would be 1.7 points, times the delta of .94 means a possible loss of $160 in that case. If all time value eroded, the loss would be $170.

The Reward-to-Risk ratio is $225 / $170, or 1.32. The normal ratio to aim for is 2 or 3 to 1. That's hard to achieve in option trades on an ETF like TLT.

Is there any other factors in favor of a downward move in TLT, to give such a bearish bet more ‘tailwinds'?

For a 2 week or less trade, it's hard to make any kind of case with seasonals or fundamentals. But if I was going to consider a longer-term bet against TLT, there are arguments for both.

Although there are only 10 years of history, over the next 5 weeks, TLT has lost an average 2.1%, with losses in 9 out of the 10 years:

Fundamentally, bonds may be near their peak. This is the best article I've seen describing how the reward-to-risk level on bonds makes them a poor bet for the upside:

The Bond Bubble

If money keeps moving from bonds into stocks, regular downside bets on TLT may work well.

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, Market Tamer 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.

Related Posts


MarketTamer is not an investment advisor and is not registered with the U.S. Securities and Exchange Commission or the Financial Industry Regulatory Authority. Further, owners, employees, agents or representatives of MarketTamer are not acting as investment advisors and might not be registered with the U.S. Securities and Exchange Commission or the Financial Industry Regulatory.

This company makes no representations or warranties concerning the products, practices or procedures of any company or entity mentioned or recommended in this email, and makes no representations or warranties concerning said company or entity’s compliance with applicable laws and regulations, including, but not limited to, regulations promulgated by the SEC or the CFTC. The sender of this email may receive a portion of the proceeds from the sale of any products or services offered by a company or entity mentioned or recommended in this email. The recipient of this email assumes responsibility for conducting its own due diligence on the aforementioned company or entity and assumes full responsibility, and releases the sender from liability, for any purchase or order made from any company or entity mentioned or recommended in this email.

The content on any of MarketTamer websites, products or communication is for educational purposes only. Nothing in its products, services, or communications shall be construed as a solicitation and/or recommendation to buy or sell a security. Trading stocks, options and other securities involves risk. The risk of loss in trading securities can be substantial. The risk involved with trading stocks, options and other securities is not suitable for all investors. Prior to buying or selling an option, an investor must evaluate his/her own personal financial situation and consider all relevant risk factors. See: Characteristics and Risks of Standardized Options. The www.MarketTamer.com educational training program and software services are provided to improve financial understanding.

The information presented in this site is not intended to be used as the sole basis of any investment decisions, nor should it be construed as advice designed to meet the investment needs of any particular investor. Nothing in our research constitutes legal, accounting or tax advice or individually tailored investment advice. Our research is prepared for general circulation and has been prepared without regard to the individual financial circumstances and objectives of persons who receive or obtain access to it. Our research is based on sources that we believe to be reliable. However, we do not make any representation or warranty, expressed or implied, as to the accuracy of our research, the completeness, or correctness or make any guarantee or other promise as to any results that may be obtained from using our research. To the maximum extent permitted by law, neither we, any of our affiliates, nor any other person, shall have any liability whatsoever to any person for any loss or expense, whether direct, indirect, consequential, incidental or otherwise, arising from or relating in any way to any use of or reliance on our research or the information contained therein. Some discussions contain forward looking statements which are based on current expectations and differences can be expected. All of our research, including the estimates, opinions and information contained therein, reflects our judgment as of the publication or other dissemination date of the research and is subject to change without notice. Further, we expressly disclaim any responsibility to update such research. Investing involves substantial risk. Past performance is not a guarantee of future results, and a loss of original capital may occur. No one receiving or accessing our research should make any investment decision without first consulting his or her own personal financial advisor and conducting his or her own research and due diligence, including carefully reviewing any applicable prospectuses, press releases, reports and other public filings of the issuer of any securities being considered. None of the information presented should be construed as an offer to sell or buy any particular security. As always, use your best judgment when investing.