Weekends are for resetting our biases.
In that spirit, here are some reasons the market may be short-term oversold – reasons to take a hard look at any short positions you have come Monday morning:
1. 2-day RSI levels: Dow at 0.090, SPX at 0.81, RUT at 0.90; NDX is the only index with RSI room to fall, at 9.61. But that (relatively) higher number is really just due to continued tech leadership. Some members were asking last week why we use the 2-day RSI rather than the traditional 14-day setting. The reason is that the 2-day gives you a more dynamic reading, and makes it into more of a leading (rather than lagging) indicator. In short: the 2-day is good for giving contrarian signals (overbought/oversold), while the 14-day is good for giving momentum confirmation signals.
2. VIX mean reversion – the CBOE Volatility Index tracks the volatility of options on the SPX, for those of you living under a rock. Like anything else in the universe, it tends to revert to the mean, and at the current reading of 22.96, it is well above its 10, 50, and 200 day moving averages. (And its 2-day RSI is at 96.10, if you care.)
3. Earnings – Lots of big names reporting next week, including AAPL, MRK, T, AMZN, BA, DOW, COP, BIDU (full list). Some decent earnings news will boost markets, and at least so far we have little reason to expect any sort of disastrous quarter.
Sell Your Fear to Somebody Else
For some of our newer readers/members, days like Friday trigger inevitable reactions like, “This is scary, I’m outta here!” and “Can iron condors really work in such a crazy market environment?” The answer to such fears is that environments like this are the best time to trade iron condors. As we’ve noted before, the whole point of our strategy is to grab volatility while we can, and that means being calm when everyone else is fearful. Sure, you can panic along with the crowd, and stampede your way into mediocre or sub-par returns, or you can learn to sell fear when everyone else is scrambling to buy it.
Historically, the implied volatility of an underlying index is almost always higher than its actual volatility over a given period. That means that selling volatility (fear) when others are buying it has generated statistically significant superior returns. So get your emotions out of the way and let the mathematics work its magic.
[tags] Dow, SPX, RUT, NDX, VIX, volatility, options trading, options, iron condors, markets, strategy, earnings, fear[/tags]