Attitrade
The good people at TradeKing have given me an hour to share a short presentation entitled “The Three P’s of Trading Psychology.” The webinar will be held Tuesday, August 24th at 5pm ET. You can click on the logo below to be taken to the registration page.
In part 1 I discussed the ranges of the $SPX which gives me an idea of what to expect for the coming option cycle. In the opex chart that I used in that analysis I’m only able to see the completed cycles so I need to move to a more traditional price chart for the current month. So far the August low has been 1056.88 and the high has been 1129.24. I like to start with a weekly candle to get an overall idea of trend and levels of support/resistance.
In the weekly chart above I can see some further out support and resistance levels (turquoise) that I use as reference points. I prefer to use the body of the candle rather than the actual wick as both buyers and sellers agreed on that closing price. These levels are the first step in technical analysis and where I’d like to see a confluence of other levels if possible. The dashed lines on the chart are the option cycle pivots that show both the August and September levels. The first thing I notice with the pivots is that they’ve come in quite a bit which suggests the SPX traded in a narrow range for August.
The gray dashed line is the pivot which shows the September pivot at 1088.50. To the upside (in red) are R1, R2 and R3 at 1120.12, 1160.86 and 1233.22 respectively. On the downside are S1, S2 and S3 at 1047.76, 1016.14 and 943.78 respectively. The support level that is sticking out for me is the 987.46 which is below S2 by nearly 30 points.
The other main indicator I like to look at is the commodity channel index (CCI) which is currently near a -31 reading. I always look to the left to see how the SPX (or any instrument) reacted at an “overbought” or “oversold” level. These levels are +- 100 points away from the mid-point and represented by a red or green line. The recent action in the CCI agrees/confirms the pivots coming in which is also indicative of the recent price action.
So far my analysis is suggesting that September is expected to be a narrow range month. If I take the range between the R2 and S2 levels I get a 144 point range. This range falls within the historical price action for September that were pointed out in part 1. Things are beginning to take shape but I want to look at multiple timeframes here to make sure I’m well informed.
In the daily chart above I can see that the CCI is bouncing as the SPX itself if basing just above the August pivot. I also notice that a recent uptrend has been broken (green line) and it appears to be a solid break as evidenced by the size of the candle. This suggest a few things to me; namely that there were quite a few stops under that uptrend support as well as some sell to open orders for a new short position. In other words it suggests an area of sentiment for the future.
One other level I notice is the prior resistance at 1171.67 as outlined in white. This level is about 11 points above the R2 level of the opex pivots pointed out on the weekly charts. I also make note of the near-term support level where the downtrend ended and the uptrend began (1022.58) and the fact that it isn’t quite beyond S2. However, the 987.48 level from the weekly chart is beyond S2 by nearly 30 points and that is worth noting. These two levels (1171.67 and 987.48) will be a great starting point for me when I delve into the chains which I’ll discuss in part 3.
Over a series of posts this week I’m going to share some of the process I go through each option cycle to discover where I should be selling $SPX premium. The chart below is where I begin. Each candle represents a complete option cycle and thus I have a range. I start by looking at the last 6 option cycles and the range that they produced.
This simple exercise allows me to know the range the market has experienced most recently. If I take a simple average of the ranges I come up with 96.94. This average takes into account an earnings season and several instances of economic reports like Non-farm payrolls, Consumer Price Index, numerous housing related numbers, etc. I then attempt to recollect any unexpected events that may have occurred. April had a large range and I’d like to know why so this would be “homework” that I’d want to accomplish before moving any further.
In the chart above, the yellow triangles represent prior September option cycles and the range for that period. Starting with the most recent cycle they are:
Obviously the 415 range sticks out and that was the financial crash which involved unprecedented events. Events such as the financial crash can’t be accounted for before I sell premium but I’ll discuss in a future post how to hedge/adjust a position for such events. Other than that one instance, September appears to be a rather “mild” cycle over the last decade. I do notice that the further back in time the larger the ranges were and that’s worth noting. In looking at the chart I can see that the overall market was in a downtrend. That little piece of information can sway my analysis so more on it in a later post.
Next I’ll take the average of the range for this period (10 years) and I get a 122.52. If I take out September 2008 (415 range) I’d get an average of 89.95 and a pretty good idea of an expected range for the September 2010 cycle. I’ll use this information as I move to assessing technical levels in the price action which I’ll cover in the next post.
That was an ugly week! Option expiration next week and who knows what’s in store other than some manipulation in certain names. Preferably I’d like to see a quick move lower towards the first part of the week to leg into my September spreads. Earnings are all but done until next quarter and the PPI on Tuesday and Philly Fed on Thursday are the big economic reports next week. Have a great weekend!
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The market is bleeding, so I’m selling!
There is no feeling quite like that of success in trading. To take the time to perform analysis on a name, establish a trading plan and then profit from your hard work is an awesome feeling. 
Putting a string of winning trades together like that is priceless. However, the chance of overconfidence or believing that you can only win can become an issue (especially if you are new to trading).
I’ve written about overconfidence before and there’s plenty of research out there regarding the topic. I wanted to touch on one other reason why overconfidence has a tendency to lead to over-trading. In a word, control.
The more people participate in a task, the greater their feeling of being in control. What better example is there than the active markets we all participate in on a daily basis? The technology boom over the last decade allows me to sit in my home office and trade any asset class I want. Instant news, inexpensive streaming data, discount brokers, all products of the technology boom over the last decade and all contribute to the illusion of knowledge and control.
Research suggests that we have a deeply rooted desire to master our domain, to strive for perfection. In fact, the very thought of not being able to control what goes in our environment is distasteful. This is especially true when the environment consists of skill and chance, like the markets. Hard to believe that one might find control issues in the markets, I know.
The question to ask yourself is whether or not you are indeed “in control” or can your success be attributed to some other factor (perhaps even a small portion). Find out! Summer is a great time to reflect on your prior trades, conduct research, and prepare for the Fall when trading volume picks back up. I can’t imagine going into the markets in September without a thorough review of my trading thus far and a method to approach the remainder of the year.
