This past week we witnessed life return to the Dow Jones Industrials after some had started claiming it was an index near death.  The one catch to the bulls’ party is that after such a great rally over only a few days we’re right back to the 200 day moving average (dma) where the Dow once again hit resistance.  At the same time the 20 dma is about to cross under the 50 dma.  That’s typically a bearish indicator, but since the index is now above both averages some of the sting may be removed.  We’ll see.

The trend lines are somewhat mixed.  The main trading channel I see, roughly between 9,750 and 10,700, is still intact and could continue to provide support and resistance for a while still.  After such a quick run up over the past few sessions a small retreat wouldn’t be shocking off of the 200 dma and that would give time for the descending trend line of lower highs that started in April and then hit again in early August to act as resistance again in September.  I also drew a thin horizontal line at 10,500.  It’s been broken more than a few times, but has acted as support and resistance a few times too and deserves to be watched, but maybe not banking on it.  INDU didn’t go quite as low into its trading channel on this dip as some of the previous ones.  I drew the beginning of a new trend line of higher lows that started at the beginning of July and went through that recent low.  It’s possible the index could be caged in between these two trend lines of higher lows and lower highs until they come close to converging.  I don’t put as much weight in that idea as the proven wider trading channel, but will keep an eye on it since it could be the start of something bigger.

The Williams %R indicator lurched out of the oversold area last week.  I typically think that’s a sign of better days ahead and typically regret it when I don’t jump in after the indicator gives the green light, but we’re already up roughly 5% in just a few days and all of the head winds I mentioned above keep me cautious.  My ears will perk up if Monday, Tuesday and Wednesday all see the INDU close above its 200 dma and will be ready to go more bullish if we break out above the trading channel above 10,700.  Until that happens it’s like watching the waves at a beach.  They keep looking menacing until they get close and then they fizzle out, retreat and start over again after regrouping.  Eventually the tide will come in.

My account continues to have lower volatility than the markets in general due to my use of options and my (small) diversification into bonds.  August pulled me ahead of the S&P 500 by a little bit more than previous months which is always a good feeling, but a big broad market rally could move me back to even quickly.  With only four months remaining a lot can change, but I prefer being in the lead rather than working on a comeback in the final third of the year.  I still don’t want to take too many chances as I think this market is teetering still.  At the same time I want to stay as with somewhat of a close beta to the major indices, of course with the lead going to me.  I’ve made it a full year now with a realized gain each month, but my paper losses on INTC, ITRI, MSFT, GES, JPM and UCO will have to be taken at some point, assuming I don’t ride them back to a profit (not including premiums).

If all of my naked puts were assigned and my covered calls expired worthless I’d be around 132% invested.  That would put $30,421.89 on margin for me in my IB account.  I don’t see that as a big risk with some of my naked puts still fairly far out of the money, but then again a lot can happen in two and a half weeks before September options expiration.

These are my returns according to Quicken through 8/31/10:

My 1 year return: +1.62%
Year to date (YTD): -3.04%
Annualized returns since 4/8/07 (my blog’s beginning): -10.29%
Deposits for month: $2,000 on August 6th, 2010

According to Morningstar, here’s how I compare to the major indices through 8/31/10:

Dow Jones Return: 1 year +8.39%, YTD -2.11%
S&P 500 Return: 1 year +4.91%, YTD -4.62%
NASDAQ Composite Return: 1 year +9.01%, YTD -5.42%
Russell 2000: 1 year +6.60%, YTD -2.97%
S&P Midcap 400: 1 year +4.91%, YTD +0.24%

The VIX ended the month at 26.05 and the VXN ended at 27.45.  Both are up from last month showing the increase in fear and downward movement in the markets.  At some point I expect a little bit more of a slide lower for volatility.  We might see a pop before that if the August payroll numbers aren’t good, but as long as companies continue to make decent profits with fewer employees any selloff should be somewhat mild and possibly short lived which would return the VIX to the lower 20s fairly quickly.

The first thing I noticed when I looked at the S&P 500 chart this week was that even after what felt like a painful slide lower, it’s still trading within the same trading channel that it’s been in for months.  A lot of bears out there will scream for the reasoning that it’s going for a double dip now and although they could be correct, the chart doesn’t say give up yet.  Until this trading channel breaks, there’s no reason to abandon ship completely yet.  Lightening up when resistance hits on the upper limits (around 1,130) and reloading when support is found on the lower limits (around 1,040)  is still the game that works.  At some point that will stop being a winning strategy, but nobody can say with certainty when.

For the nearer term we could see another 30 points to the downside which is less than 3% from Friday’s closing levels unless we retest the lower low (around 1,010) from July instead of the May and June lows again.  Going back down to test the July intraday lows would equal more than 5% to the downside from here.  I drew two trend lines using lower highs and lower lows from the past few weeks.  These lines are set to converge before either of the previous lows is reached.  If we stick with the line of lower lows we’ll get there eventually, but will have broken the quick pace of decline from the past two weeks.  If the trend line of lower lows breaks it could possibly be the sign of a minor capitulation as the rate of descent speeds up quicker than the past three weeks has allowed.

Longer term, it still comes back to the index is trading below its 200 day moving average and most of us view that as a bearish indicator worth respecting.  Throw in the fact that the 50 day moving average and the 10 day both acted as resistance and the bears have the edge still.  The longer the index stays below its moving average the quicker said moving average will decline giving lower resistance and a lower bar to hurdle when its time to reach for new highs.  Williams %R has moved back to oversold for the 14 day period, but not yet for the 28 day period.  While it’s still on the decline with room to move lower I give the edge to the bears on this indicator too.  By the time the S&P 500 makes it down to test its previous lows from the past few months %R should be ready to indicate higher days are to come.  Until then, there’s no reason to jump the gun and buy in again too soon.

Two weeks ago I questioned if the DJIA chart had just swung its third strike and was heading lower.  We’re only about 160 points below that mark now, but we are below it with a scared group of investors looking for exits.  Now the DJIA has fallen below its 200 day moving average (dma) even deeper too.  The 50 dma held support on Friday, but only after breaking intraday on Thursday before recovering.  Failing at the 200 dma was a pretty big technical event for the index, but we did have multiple warnings it was coming. 

Along with the break of the 200 dma came the break of the trend line of higher lows that started with this recent rally at the beginning of July.  Breaking this trend line opens the door to an even deeper fall still, as if the 200 dma break wasn’t enough.  I drew two other somewhat horizontal lines in the chart below to highlight potential speed bumps the Dow could face.  The first line is only about 215 points below the current Dow level.  The next is not quite all of the way down to the July 1st intraday low, but could’ve been.  I went with the more popular low from the past few months instead though.

Possibly more bearish than any of the trend lines and moving averages is the break of Williams %R below overbought on the 14, 28 and 56 day indicators.  Such a breakdown doesn’t come often and now that we’ve seen a couple of confirmation days after it the warning bells have certainly rung now.  Volume came up above average on Wednesday and Thursday on distribution (down) days which helps to pain the bearish picture.  All of this together makes the lowest horizontal line look like it could be the most likely expected line of support in the near term with the DJIA giving up another 5%+ before it finds any solid footing.  A fall that low would put the DJIA about 6% below its 200 dma which could help to limit its downside from there.  The only potential line of hope could come from the 50 dma.  As mentioned above it broke intraday on Thursday, but recovered.  If it can continue to hold now, even after the warning shot, the Dow will have a good chance to move higher.

A couple of weeks ago I stated the SPX looked range bound.  Check out the chart I posted then and notice where the SPX topped out this week, even before the jobs data did its damage on the index.  I drew the line within two or three points of the top.  If I had tilted the line a little (as I did in today’s chart) based on the May 7th intraday high as a starting point I would’ve had the top dead on.  Enough bragging about that, I was due for another good call and that line might not have much longer to last based on the way the S&P recovered Friday afternoon.

The July jobs report looked like it would completely ruin the day for the bulls as the SPX came crumbling down beneath its 200 day moving average in the morning, but the bulls weren’t so quick to quit as they found footing and pushed the index back above the 200 day moving average before the close, cutting its losses by more than 2/3.  We might have been due for this retreat based on resistance, but that doesn’t mean it’s going to last.  What’s going to be most interesting to watch is the trend line of higher lows that started back on July 1st.  For five weeks that line has been solid support as the S&P moved higher.  Now that resistance at the top of the trading range proved intact still and the 200 day moving average broke intraday, the trend line will have a true test.  If it holds support (as it did on Friday) and keeps the index back above its 200 day moving average we could see this rally still has legs.  That’s a tall order though after the five week rally we’ve already put in the books.

We’re right at the turning point for either a move lower or breaking out of this aging trading channel.  I actually started writing this post mid-day on Friday and had to erase most of it because I had started to dismiss the rally’s chances of lasting.  Now I’m starting to think there’s another trading channel that has emerged.  I drew two trend lines, one I mentioned above as the trend line of higher lows.  Another is the trend line of higher highs that started as higher lows back in May.  This trading channel has a slight enough slope to it that it could be one that sticks around for a while.  It’s broad enough to allow for a good 3-4% mini-correction every now and then too.  We won’t have to wait long to have our answer though.  The first two trend lines I talked about are converging soon.

Volume on both positive and negative days has been weak.  Maybe that’s just an end of the summer condition as vacations wind down, but it doesn’t help point an arrow in the right direction when we’re looking for some foreshadowing.  Possibly one of the best technical indicators to foreshadow what’s to come is Williams %R and it’s still not giving into the bears.  I even included the 56 day time period along with the usual 14 and 28.  All three still show the rally is in good form.  Reacting when all three of these periods broke above the oversold area would’ve been the ideal time to buy in and could’ve given you a nearly 10% gain in just two months.  Waiting out this current sideways action to see which way %R suggests the market’s going to move could be keep to planning your next large trades.

After finishing June with a combined balance of $102,037.08 and adding $3,000 after the first week of the July I’m pretty happy with my gains.  That gave me a paper gain of $7,085.42 for the month which is in line with what the S&P 500 did for the month and I am taking less risk with less volatility.  It’s not all about what I could do in one month though, I still need to finish the year better than the Dow Jones and the S&P 500 to be completely satisfied.  I’m barely ahead of the Dow for the year, but beating the S&P by a couple of percentage points so far.  That can all change within a couple of days, but I’ll take what I can get for now.  With five months to go in the year, there’s lots of time for big changes still. 

I had a realized gain of $2,539.88 in July, but I’m still holding onto some positions where I’m sitting on a paper loss.  Eventually those will have to hit my books and I’ll break my streak for the past 11 months of having a realized gain every single month.  I took a realized loss of $125.64 in August 2009.  Although, I might have enough premiums in those impending months when I finally take my losses to outweigh any realized losses on the underlying stocks.  That’s not my goal as much as making the right trade for the time is.  Either way, I shouldn’t even face this until September when my covered calls on my “losers” are due to expire.

I’d be 129.15% invested if every naked put was assigned and every covered call wasn’t.  In other words, I’d be almost $30,000 on margin if the markets tanked.  Then again, if the markets suddenly fell my VXX positions wouldn’t be assigned and I’d have $10,800 less on margin.  Also, some of these positions (SPY Sept 101, EEM Sept 36, NDAQ Sept 17) are fairly far out of the money still and appear to have a low probability of being assigned.

These are my returns according to Quicken through 7/30/10:

My 1 year return: +7.94%
Year to date (YTD): +1.99%
Annualized returns since 4/8/07 (my blog’s beginning): -8.63%
Deposits for month: $3,000 on July 8th, 2010

According to Morningstar, here’s how I compare to the major indices through 7/30/10:

Dow Jones Return: 1 year +17.50%, YTD +1.87%
S&P 500 Return: 1 year +13.92%, YTD -0.11%
NASDAQ Composite Return: 1 year +13.63%, YTD -0.64%
Russell 2000: 1 year +18.20%, YTD +4.79%
S&P Midcap 400: 1 year +22.96%, YTD +5.45%

The VIX ended the month at 23.50 and the VXN ended at 24.52.  Both of these volatility trackers are down substantially from last month, but not to levels that would be considered historically low.  It shows that some fear is subsiding, but not to complacent levels yet.  Volatility could continue to drift lower for the rest of the summer, but I expect another tick higher by September if not October.

The Dow Jones was stopped once again at the top of its trading channel (strike one).  The index made a solid attempt to climb above its 100 day moving average (dma) after cresting its 200 dma, but couldn’t get a full day above the 100 day line before retreating (strike two).  That lead to an intraday break of the 200 dma again, twice (strike three?).  Although the index hasn’t closed below its 200 dma for the past six days those intraday breaks can be a hint of what’s to come. 

The 50 day moving average is around 275 points lower and could be an area of support for the DJIA.  The 50 dma has brief support and resistance in the past six months, but the trading channel might have too much of a pull to the downside to let the moving average have much influence.  While waiting to see if the 50 dma pulls out some power there’s a short trend line worth watching.  It’s only been around since the beginning of July, but for now it’s the best trend line for the bulls I could find.

Another somewhat bullish indicator comes from Williams %R.  It’s not that %R is calling for a bull run; it’s just not calling us to the exits just yet.  The same might be said for volume.  As I’ve pointed out during this rally already, volume has been low.  The good news for the bulls is that it stayed low during the past few days that moved lower.  July has been a great month by any measure, the best month in a year, but is it time to take a breather now?

The S&P 500 had another strong week this week continuing its rally since the lows on July 1st.  I couldn’t find a trend line (higher highs/lows or lower highs/lows) that looked like it’s still holding true, so I included a chart that allowed more moving averages to see if we can gain some guidance from these indicators.  I did include some horizontal lines that show some of the trading channel tops and bottoms.  The trading channels, the moving averages and Williams %R might be plenty to go on for now.

I noted recently that while a few technical indicators I watch were conflicted Williams %R still told a bullish story.  The same holds true this week although it might be getting long in the tooth soon.  For now it hasn’t given the sell signal though.  If you need a sell signal, the horizontal line I drew just above Friday’s close might be one for you.  Aside from an overshoot in June this line has been a pretty good ceiling over the broad index’s activity.  If we see another overshoot the upside might be limited to another 30 points.  That’d be another 2.7% which wouldn’t upset a lot of us, but where to then?  The 100 day moving average (dma) is just below that mark and could provide some resistance and that’s IF the 200 dma breaks finally.  Since May we’ve only seen one day where the SPX stayed above its 200 day moving average for the entire session.  That’s a powerful line and it won’t fall easily. 

The 200 dma is only about 10 points higher than Friday’s close which leaves very little upside potential for those who base buy and sell decisions on this moving target.  Once SPX gets back above the 200 dma (it will happen one day) and gets a couple of confirmation days to follow it we should see a solid rally with legs.  Some foreshadowing might be found in the other moving averages.  We saw a bullish crossover with the 10 dma moving above the 20 dma just over a week ago.  Friday showed the 10 dma moving above the 50 dma too.  Will the 200 dma put a damper on such momentum building?  This is going to be a very interesting week.  Stay close to your keyboard in case it snaps in either direction.

This past week proved the trading channel is still in charge with resistance just below 10,500 and that the 200 day moving average (dma) won’t roll over too easily.  My DJIA chart from two weeks ago was almost dead on.  I said I expected a bounce, but that it would hit resistance after about 500-700 points.  We saw the DJIA go just above that, but then it raced back into my range quickly the past couple of days.  The upper trend line I drew two weeks ago actually broke to new highs, so I’ve drawn a different one with a less steep slope this week.  I used two blue horizontal lines to show the majority of the trading channel, although the index has had a few outlying days that get pulled in quickly from either side.

As I mentioned, the 200 dma almost broke, but we didn’t see a full day above the line before the Dow fell 2.5% on Friday.  That inability to clear the bar made it easier for the bears to regain control.  The question always comes back to whether or not this dip will go much further.  The trading channel says there’s plenty of room between the horizontal blue lines and also in the declining trend lines of lower highs and lower lows.  The moving averages are mixed.  While the 200 dma didn’t work, the 10 and 20 dma lines are about to form a bullish crossover, unless the DJIA falls in multiple triple digit days this week which would possibly hold the 1o dma back from its ascent.

Williams %R hasn’t rolled over yet either.  The 14 day indicator shows the DJIA is still overbought and could stay for a while and the 28 day indicator shows it hasn’t even reached the overbought level yet.  This leaves room for some flattening still, but keep an eye on the 14 day indicator to see if it gives in soon.  For such a large drop on an options expiration Friday the volume was actually below average by a hair.  That takes some oomph out of the bears march.  I still see this as a volatile market for weeks, if not months, to come.  That said, the downside still seems limited to me and think for a longer term investor you could be looking at a good entry point not far from these levels.  Using naked put options for an entry point out of the money (lower than the current trading prices) could create some good gains over time.