Tuesday, November 10, 2009

09/11: Markets shoot higher on dovish G20 comments

Markets maintained their moon-shot trajectory on Monday, with the DJIA vaulting to a 13-month high (10,227 to close; 10,249 intra-day) and the broad-stroke S&P500 appreciating 2.2 percent to close at 1093. That value -- only seven points shy of 1100 -- was likewise the intra-day high, while the day's low stood at 1072. Investors were cheered by a gathering of G20 finance ministers, at which market-soothing, dovish rhetoric proliferated. A 10-day'er of the Standard and Poors Five Hundred follows:

Although I am too pressed for time at present to provide a thorough explanation, notice the two indicators below the MACD: the Relative Strength Index (RSI) and, below, the so-called Slow Stochastic. Both are indicators used for timing entry and exit points and both, like the components of the MACD, are oscillators, meaning that they hug a mean of zero. Applying RSI and Slow Stochastic to the 10-day of the markets, both signal a significantly overbought condition, and the Slow Stochastic further hints that a turnaround might be imminent.

Which leads me, swiftly, to my own trades. I'm pleased to report that the C calls, purchased on Friday 11/6 and off-loaded during Monday's session, have been proven as an exceedingly prescient move. In fact, the trade merits the happy descriptor of most profitable in my career, in percentage return terms: 45.83 percent (earned overnight, no less) before commission and capital gains taxes. Now dear reader: I underscore this outcome because, after many losses along the path of my trading education, I feel I've earned this win. Also, I have clearly not risked thousands upon thousands of dollars on an exceedingly speculative options trade and, as such, 45 percent of a modest investment is not very much money. And, as a final point, for every impressive advance there often lurks an equally-menacing monetary setback.

And so today's trade (11/10; I write this report during my morning coffee injection, or so it sometimes appears to be, given its inviolable regularity and the extortionate margins reaped by its supplier: Buckies, in this case) shall begin in the next hour. I took a position in the last seconds of Monday's trade in Vix calls, which is a bet on market volatility, i.e. a pullback. Given the RSI and Slow Stochastic data I referenced above, the bet seems well-founded. But it's an old (and exceedingly wise) Wall Street adage that the rational investor can expect the market to remain irrational for longer than she can remain solvent. I do hope I haven't jumped into the risk aversion trade prematurely.

So far, so good though. I'm exceedingly pleased with yesterday's trade -- did I mention that I entered and exited the C calls at the respective trough and peak of price action? ;) -- but I'm mindful that a mountain of further work remains. As for today, stock index futures are pointing to a modestly lower open, good news for my Vix calls.

Good luck; ad astra!

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