S&P 500 Index Futures (/ES) are the back bone of the market.  Therefore it is always a good idea to keep a close eye on them.  Here’s our current break down.

1. A recent Triple Top @ 1460 (gray ovals) with a height of 40 points indicated a downside move to 1380 (red rectangle) after support @ 1420 broke. 
2. The Triple Top measured move came to fruition, taking /ES to 200 day Simple Moving Average, aka SMA, support (green line) coupled with one year uptrend support (purple line).
3. Continued sell side pressure caused a break of both SMA and uptrend support, resulting in a swift three day sell off to 1340 before /ES caught a bid.
4. /ES quickly bounced back above 200 day SMA, similar to early June (orange oval).

Our conclusion after noting these technical items is “cautiously bullish” on /ES. The reason we are cautious is because unlike the first break of SMA support (orange oval), this break was coupled with an uptrend support break. That should not be discounted, regardless of the fact there were only three consecutive closes below the uptrend support line. 

We are in wait & see mode, and prefer range bound strategies like wide Jan13 Short Strangles for the time being.

Let us know if you have anything to add!

To quote one of our favorite characters, we’ve asked SPY to “continue to perform admirably” and it’s done exactly that. Today’s drop to $136 keeps the S&P 500 Index well inside it’s 10-point range we established in late June, when we sold an August 10-point Iron Condor. SPY is now at the bottom end of an upward trending channel, and has evidenced particularly volatile movement in the past two weeks. After failing to touch $141, or even $140, it’s possible that the bullish run is over, and we’re going to see a post-earnings season consolidation in a tighter range. We’re watching $136 pretty closely, as a push farther below that will likely invalidate our smaller channel and push support down to $134, or even $130. We’re also watching the VIX - up almost 25% today - as as indicator of the market’s expectation for a sustainment of this volatility increase. If anything, expect a pullback in VIX levels tomorrow, which could also mean a rise in SPY. 

SPY resumed last week’s upward climb today, and is now on the upper end of our previously-defined range and upward-trending channel. We’re getting to the point where we may adjust to a bearish bias - the $140-$142 level looks like a possible stalling point, and the natural place where buyers may chicken out. We’ll be looking closely at some bearish call spreads and other strategies this week, as we wait and see if this rally can be sustained. 

Implied Volatility is a term that many traders use, but few understand completely. Most traders know that almost any implied volatility number you see is for an annual move, but couldn’t explain how or why it’s quoted that way. We’ll explain briefly here, and tell you why it matters during earnings season. 

An implied volatility number for a given month of options on a security tells you the annualized expected move for that security during the time until expiration. So, the SPY August options with 32 days to expiration have 17-or-so percent implied volatility, and this tells us that SPY should move about 5% up or down - around $7 in either direction by expiration. 

If we look at September options with 67 days to expiration and a 19% implied volatility, there is an expected move of roughly 8%, or $11 in either direction. 

That’s a much larger range in September than in August, but even though it’s about twice as many days to expiration, the expected move is only about one-and-a-half times as large. This is due to the nature of implied volatility - expected movement over time. 

As you can see in the included image, a range of prices expands as time passes, but at a slowing rate. So the difference in expected move between options 10 and 20 days until expiration will be quite large, but the difference between options with 300 and 310 days to expiration would be quite small. 

Keep this in mind when trading at earnings. Even though you see a similar implied volatility number for weekly options and those far out one-year options, recognize that the expected move in the stock (the same for both options, as they are on the same underlying) is substantially higher when compared to the price of the options (the short-term weeklies will be MUCH cheaper than annual options, obviously). 

Bottom Line: Pay attention to implied volatility - the expected movement before expiration has everything to do with price, and understanding this relationship can help you identify trading opportunities. If you want to subscribe to our Earnings Trade Alerts, click here! 

click image to enlarge

There is a Head & Shoulders pattern in the works on S&P 500 emini futures (/ES).  Note the three grey ovals representing the left shoulder, head, and right shoulder.  The up sloping purple line represents the neckline support of this pattern, which is being tested as we speak.  The blue rectangle measures the move from the top of the head to the neckline directly below, then we duplicate that move assuming a neckline break some time this week to show the measured move if this formation comes to fruition.  In the end, the green oval indicates a measures move in the 1275-1290 range, which takes it back to previous resistance turned support as well as the 200 day simple moving average support. 

Makes a lot of sense, and we intend to position bearish if the neckline support breaks in the coming days.

(click image to enlarge)

Let’s start with S&P Futures (/ES) since they are the main benchmark for the broad market.  This is one of the most liquid financial instruments on the entire planet, and gives us the most crystal clear perspective of the market.

Bullish Points: A symmetrical triangle recently formed (yellow lines). A couple weeks ago /ES broke symmetrical triangle resistance(gray oval), which is bullish.  This break coincided with a break of 200 day simple moving average resistance.  The 200 day SMA is very relevant in /ES, and this double break is very bullish for /ES during the first quarter of 2012.

Bearish Points: 1300 (red line) is a major price point in /ES.  It is both psychological, and has proven reactions in the past year. At the moment 1300 is acting as resistance and /ES is right at it.  This is likely to result in a short term retracement to symmetrical triangle resistance turned support, at which point a bullish entry make a lot of sense. 

A short term short position makes sense here.  Upside risk is 15 (1303 stop), downside potential is 40 (1250).  That translates to 2.6:1 reward to risk, meaning the pot odds favor short term downside. 

This can be played via a short position in the future or instruments like SPY & SSO.  We prefer bearish options strategies in SPY here, and may even consider a moderately neutral strategy.

$ES_F $SPY: S&P Futures have been trading in a range between 1100 - 1200 since early August.  This range took place after a quick drop, creating what we have noted as a possible bear flag.  Today’s move below 1100 could be an early bear flag confirmation, in which case we will begin exiting all bullish positions and entering bearish ones.  We need to see one more close below 1100 before we will act.  If this bear flag comes to fruition, our target for the S&P emini is 850!

$ES_F: The price action remains volatile, but we are still trading in the 1100-1200 range in the S&P.  One thing we noticed today was the failure for the recent upside move to make it all the way to range resistance. Tuesdays high was 1190.  Previous range resistance tests have been as low as 1200 and as high as 1229.75.  This doesn’t mean anything major just yet as the pull back after Tuesday’s 1190 print may be a breather prior to another upside move to the 1200-1225 level, but if it that ends up being the high on this upside range move we may be in for a range support break soon.  We’ve seen this many times…a lower high is made on an attempt to test range resistance which ultimately results in a bearish consolidation breakout.  If S&P futures do in face break range support at 1100, we could be in for another 100 to 250 points to the downside.  Too early to tell of course, but certainly noteworthy price action.

We have talked about the range in the VIX quite a bit lately.  There is an equally interesting range in SPY that we have not talked about, but goes hand in hand with the VIX range.

As the VIX approaches resistance at 44, SPY approaches support at 112.  Yesterday this relatioship took place.  Today we are getting a small bounce off SPY’s 112 range support but nothing too significant.  There aren’t many Bulls comfortable enough to hold through the weekend out there. 

Until the range in SPY breaks, there are trades to be made.  At these levels, we like the Oct 112/111 Bull Put Spread.  If it pops to the 121 price area, we like the 122/123 Bear Call Spread.  Over and over until the range breaks. 

If this test of 112 range support fails, things are likely to get ugly.  We will exit all bullish positions and start leaning on the bearish side of the scale.  That said, we have to play this range until we see a support or resistance break.