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.

Finally, this morning BND fell to start the day (now actually below its trading channel and very close to touching its 50 day moving average) and I bought 25 shares of BND at $81.97 and paid $2,058.24 with commissions.  Even though I missed the dividend earlier this week I still did better by waiting for BND to pull back some from its run up seen since I entered my limit order.  This was a small buy, but I’m not trying to get rich off of this side of my investments.  This is supposed to be the more stable side.  The bond bubble could bust and I wouldn’t be hurt too much from such a small position, but it still moves me into a slightly better diversified allocation. 

My next few deposits might be geared back to my Interactive Brokers (equities portion) account and then I’ll drop some more towards TD Ameritrade again later.  I’m slowly working my way up to a 15% position in bonds.  I’m up to 12% so far.  Once I get to 15% I might I plan to let that sit for a little while and then might start inching my way towards 20%.  Depending on how much my account is worth at that time I might be content to leave it at a 20% allocation for a while.

I was very tempted to sell new naked puts on VXX this morning too as it fell below $20.00.  It’s touching the bottom of its trend line of lower lows and was within $1.50 of its low from the first half of this year where I expect support again.  I decided against adding any more yet since I’m already so heavily invested in the single position and although the premiums are so inviting, the chance of a further decline from here isn’t worth the added risk if volatility continues to fall.  At some point I’ll add more, but maybe not until I sell covered calls on the shares I appear to be destined to buy at the next options expiration.

In April VXX went as low as $17.84 intraday before recovering.  I don’t see any time it has closed below $18 yet, but I assume that eventually it will, but doubt it’ll stay down too long.  Even if/when it gets down into the $17-18 range again, the shares that I might buy at $20 won’t be very deep in the money and I still think I’ll be able to sell $20 strike covered calls all day long for a good return. 

For example, as I’m writing this post VXX is trading at $23.00.  The October $28 strike calls are showing a $0.75/0.85 bid/ask.  I’m assuming a limit order at $0.80 would hit pretty easily.  Based on a cost per share of $22.21 (after premiums are deducted and commissions are added on) that would give me a 3.5% return in a little over seven weeks before expiration.  Even if I had longer until expiration and repeated this once every two months, six times per year that would annualize out to a 21% return using a strike that’s $5.00 out of the money and doesn’t include any potential gains in the underlying shares that are possible too.

My current exposure to VXX is worth $16,600 (3 Sept 20 puts + 3 Oct 20 puts + 200 shares trading at $23.00), not including premiums received.  My account balance with Interactive Brokers is down to $96,000.  That makes VXX worth a touch over 17% of my account.  I like it a lot, but I’m not willing to go any heavier into it yet.  Once I’ve had a good year of trading it I might go as much as 20-25% of my account, but that’s still pushing it for something that isn’t guaranteed.  If it works, I look great.  If it doesn’t I’m an idiot for putting so many eggs in one basket.

Heads up, I won’t be posting an index chart this weekend.  My brother is getting married and I’ll be with family and friends all weekend.

While ITRI was trading at $56.84 I sold one October $60 covered call for $2.15 and received $213.99 after commissions.  If these shares are called away I’ll take a big realized loss on the shares, even when accounting for the premiums I’ve taken in.  I didn’t want to completely exit the position yet because I still believe in ITRI longer term and taking in $200+ on $5,684 backing it is a nice return on its own, assuming ITRI doesn’t keep falling.

While AVAV was trading at $23.00 I sold two October $22.50 covered calls for $1.70 each and received $338.57 after commissions.  AVAV is below where I started and I have a paper profit on it already, but think the risk is somewhat low that I’ll take a loss by stretching this position out for another couple of months.  Taking in $1.70 while $0.50 in the money is basically the same as taking in a $1.20 premium at the money, but with a higher probability the option will be assigned.  $120 on $2,250 is also a good return in eight weeks which is why I decided to keep it in my portfolio for now.  I sold in the money to increase my chances for a profit and hopefully to exit the position in October and free up some more cash. 

While CSX was trading at $48.84, more than a dollar off its high of the morning, I sold two October $50 covered calls for $1.90 each and received $379.07 after commissions.  I really debated holding off on these options because CSX is at the bottom of its trading channel and I won’t be surprised to see it pop back into the low to mid $50s before too long.  I decided to go ahead and take some early profits in the form of covered calls based on my concern that I could be wrong and this correction could go deeper than I expect.  If CSX does rise to the occasion and make it back above $50, I’ll still end the series of trades with a profit, even after buying my shares at $52.50.

I’ve yet to pull the trigger on MSFT, INTC, CVS, JPM and MS.  The latter two I’ll probably sell another strangle on this week.  The first three all seem to have room to move much higher in the near term and I’m trying to be patient.  I was close to selling covered calls on CVS because the premiums aren’t too bad, but it kept climbing and I didn’t want to get in its way.  Now I’ll have to hope that wasn’t a one day event, but the start of something longer term.  I have little doubt I’ll end my series of trades on CVS with a profit, but don’t want to just give it away.  That said, I’m close to being in the mood to wipe the slate clean with my losing positions and starting with a new batch to work higher.

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.

• VXX, two August 24 Puts – I’ll be assigned 200 shares of VXX on Monday morning.  Instead of trying to roll these puts I sold covered calls on the shares I’m about to be assigned.  While VXX was trading at $23.07 I sold two September 24 covered calls at $1.25 and received $248.97 after commissions.
• AVAV, two August 25 calls – AVAV stayed below my covered calls strike and I’ll be holding onto my shares.  I plan to sell covered calls at the $22.50 strike on Monday or Tuesday.  I’d like to see a little bounce first, but won’t wait too long.
• CVS, two August 33 puts and 100 shares assigned as of this morning from my third option – I might just dump these shares for a loss.  I was expecting $28.40 to hold and it didn’t.  It looks oversold and due for a bounce, but I’m not sure I have the patience.  If the premiums were better I might extend my stay with it.  That might be what I do once the October contracts are posted next week.
• JPM, one August 37 put and one August 42 covered call – This strangle went well for me.  JPM went as high as $41.70 on August 2nd, but retreated all of the way down to $36.81 (in the money) today before finishing around $37.15.  I might write another strangle, but at lower strikes next week.
• CSX, two August 52.50 puts – I’ll be assigned 200 shares of CSX on Monday morning and might wait a few days before selling covered calls on it since it appears to be close to the bottom of its trading range.
• ITRI, one Aug 75 covered call – ITRI has fallen more than $10 in less than three weeks.  Therefore I’ll be holding onto my 100 shares and writing another covered call.  I’m still debating at what strike I should sell.  I like ITRI long term, but am starting to think I might have time to take in some more premiums at lower strikes before it rallies again.  I’ll decide next week.

I have a lot of options expiring in September, so any other new options I write in the coming weeks will probably be for October so I can continue to spread out my risk into different expiries.

After checking the chart I also looked at Ford Equity Research’s Valuation Bands to see how AVAV was looking from a value perspective.  The Ford information is from August 13th and already since then AVAV has gained almost a dollar.  The big take away from the second chart is that AVAV is at the bottom of its valuation band.  Couple that with the fact that AVAV has a forward P/E lower than its trailing P/E and it looks inviting to just stay long. 

My average cost per share is down to $22.17 including all of the premiums I’ve taken in so far.  If I want to increase my chances for a profit and exit I should sell $22.50 covered calls, but if I want to go for a much bigger gain I should aim for the $25.00 strike covered calls.  I’d like to go with the October expiration calls, but they aren’t posted yet, so I can’t get a jump on the game.  The premiums for the September calls make the $25 strike options not worth the trade, but the $22.50 aren’t so bad.  I’d take a $2.50 loss on the shares, but my average cost would come down low enough to let me exit with about a $2.00 profit per share. 

I started with AVAV four months ago with naked puts.  If I sell my shares in October (that’d be six months total) from $22.50 covered calls I will have made better than a 9% gain in 6 months (aka 18% annualized).  That’s hard to resist pocketing that gain on a stock that I made a mistake on based on it being lower priced now than when I started with it.  If AVAV continues to slide then I will have made the right move by lowering my cost per share even further.  Now that I’ve written all of this I seem to have made up my mind.  I just need to wait for the October option contracts to post. 

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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.