Condor Options

Is this a test?

After plunging through the critical 804–818 support zone on Tuesday and continuing to drift down Wednesday and Thursday, the S&P 500 Index dove to within a couple points of its November 21st closing low (752.43) on Friday before reversing to erase the entire day’s loss and then settling back down to close off only slightly more than one percent for the day. The market is short-term oversold, and possible buy signals (note the word possible) are emerging on the 60-minute chart. If we were to stop here, it might be tempting to see this as a successful test of support at the prior major low—but the bigger picture is not so encouraging.

As we can see above (click to enlarge), we have a very tenuous-looking buy signal in the stochastic, an unconfirmed positive divergence in the MACD, and the barest hint of an RSI breakout above the two-week downtrend line. What’s clear, however, is that SPX has yet to reach its November 21st intraday low (the thick black line at 740) and that the apparent change in short-term momentum is still weak, at best. You’ve heard it from us before, but it never hurts to be reminded: the market can keep going down, sometimes very rapidly, during oversold periods.

If we were to get a rally, we’d expect it to be short-lived unless and until the daily and weekly charts show signs of improvement. Daily momentum is still negative for SPX, and even more so for the Nasdaq, despite its relative strength since the beginning of the year. The Dow broke below its November intraday low on Friday, and the afternoon recovery was not sufficient to close back above it.

Getting back to the broader S&P, we now have a big barrier of resistance to work through before even considering that the scales might be tipping in favor of the bulls in a sustainable way. The first major hurdle is the 804–818 zone (that is, after we get through the 20-hour and 50-hour moving averages). Next there’s last Tuesday’s big opening gap, and then the prior week’s reaction high around 840. The 850-858 resistance zone we’ve been watching since mid-January has become less relevant after two breakouts above it that fell right back through with no sign of support whatsoever, but we’re still keeping an eye on the 852 level as potential minor resistance.

On the other hand, we’re not ready to turn all gloom and doom yet either. The November lows haven’t been decisively broken, and indecision could lead to another period of range-bound trading between the 740 area and 800 or 820. And, as we noted Friday, our Calendar Options underlyings are chosen, in part, for their tendency to hold up better than the broad market…which brings us to our open positions:

IBM March/April Double-Diagonal

IBM closed the week above its 50-day moving average and is still more than $5.50 above our lower adjustment point for this trade (the one-week standard deviation for IBM, based on implied volatility when we opened the position, is $5.00)—although if we get a day or two closing under the 50-day, it might justify tweaking the position a little by rolling the call spread down a strike. In terms of profit, we lost a little bit of ground with the week’s decline in IBM’s price, but we still have an unrealized gain of 4.1%.

PG March/April Double-Diagonal

As with the IBM trade, we opened our PG position with a bearish bias, which again has worked to our benefit. Even though the stock has lost 2.8% since we got in, our double-diagonal was up $0.08 at Friday’s close, for a paper gain of 1.8% in two days—and PG is still above our lower adjustment point by almost 1½ times the one-week standard deviation (based on IV at the time of our opening trade).