The tech heavy index is starting to show some strength again after coming down off its highs of the year.  The key reversal of the down trend came when $COMP hit the trend line of higher lows.  The same trend line that started a few months ago as resistance and then acted as support for the following few months came back into play this week and held the index up.  This was welcome news for the bulls to see after the index broke below another, longer trend line of higher lows last week.  Now this broken line of support could be the new line of resistance as the $COMP fights its way higher.

The 100 day moving average (not shown) is moving higher and is close to 5% below the current price near the 2,000 mark in case this trend line falters soon.  The moving averages in play right now are the 10, 20 and 50 day.  They are somewhat hard to see since I took this chart out for six months to capture the trend lines.  The 10 day moving average was the first to break and then became the first one to have the index pull back above it close to the same time the 50 day was passed again.  Friday morning the $COMP opened on the 10 day moving average, held support and moved higher to close above the 10 and 50 day averages.  The point of resistance for Friday came from the 20 day moving average.  It broke before the $COMP really dropped hard a couple of weeks ago and is once again a hurdle we need to see the NASDAQ deal with before having room to run.

Along with the trend line of higher lows offering support and the moving averages appearing to be close to opening the door for a run higher, the Williams %R indicator is giving a bullish signal too.  I’ve circled a few of the past instances when %R has shown the same move out of the oversold area.  You can see each one marked the beginning of a new rally.  Not every rally had strong legs, but for the past six months each point has marked a new near term low.  That’s what it appears we’re seeing now.  Watch on Monday to see if the NASDAQ Composite Index can climb above its 20 day moving average and if it does we should see more than a few ticks higher in the days to come.  If it doesn’t, stay nimble.

After seeing the rally last the entire day yesterday and my order never hitting I decided to wait for the oil inventory numbers to be released this morning to decide on my next move.  When oil popped higher I canceled my first order and entered a new one.  By this time UCO was up by more than $1.25 from where I could’ve gotten in yesterday.  While UCO was trading at $14.26 I sold four UCO December 13 naked puts (UCOXF) for $0.85 each and received $327.00 after commissions.  I admit I chased the trade more today and should’ve waited for UCO to come off its highs some.  It’s been a couple of hours since my limit order hit and now I see I could’ve done better by a dime. 

With UCO bouncing higher so much in the past 24 hours and my strike ending up a dollar higher than I originally planned, I decided to only sell four puts instead of six.  I thought it wiser to leave more room to add to my position if oil comes down again before expiration which is fairly likely with over six weeks remaining before December expiry.  I thought about selling the November options, but figured I could use the higher premiums offered four weeks later and expect volatility to continue to be high.  I finally decided on the $13 strike for two reasons.  I wanted the higher premium and thought I could afford the risk with less than $5,000 on the line.  Also, if the recent price history for UCO is any reflection of how future prices might play out, the $13.00 area looks like a good point of support.  The premium gives me a cushion below that and if UCO drops below $12.00 again, I’ll probably sell an options straddle on it to potentially add to my position at a lower price while taking in premiums on both sides.

I’m around 70% invested.  That means I have close to $26,500 that isn’t spoken for if all of my options are assigned at their strikes and I dump my bonds at their current prices.  My plan when I started to get more heavily invested was to let this fairly diversified portfolio be my standard and if it sinks I treat it with a more passive stance and don’t chase it with covered calls, much.  I’m basing that on my belief that the downside risk isn’t huge right now.  We could get another 5-10% to the downside from here, but if I don’t panic I’ll be able to ride it back up when the time comes.  In addition, when I believe another short term low is in I still have room to add larger positions to this account.  Since I went with three ETFs that attempt to double the daily performance of their respective indexes I am now running at close to a beta of 1.0 in my account when compared to the S&P 500.  That was good when the markets were going up, but now – not so much.  At some point (hopefully soon) I’ll start to sell new naked puts, but don’t plan to take the option assignments on all, if any, of the ones that fall below their strikes.  I want to avoid going on margin in this fickle market, but plan to open myself up to more risk again as the market works some kinks out of its system.  We all knew a down month was due.  The question yet to be answered is if it’s the start of a double dip or just a healthy correction.  I’m leaning towards the latter.

My returns when compared against the major indexes are mixed.  I’m ahead of the Dow by a little, below the S&P by about the same amount and trailing the rest.  My conservative approach for most of the year appears to be costing me my ”win” against most of the indexes, but that was a conscience decision I made based on how tenuous my job was for half of the year.  Here’s exactly how I compare to the major indexes. 

My 1 year return: 7.31%
Year to date (YTD): 15.82%
Annualized return since 4/8/07 (my blog’s beginning): -15.33%
Deposits for month: None for October

According to Morningstar, here’s how the major indexes have done over the past year and the current year to date (YTD):

Dow Jones Return: +7.71% 1 year,  +13.65% YTD
NASDAQ Composite Return: +18.84% 1 year, +29.68% YTD
Russell 2000: +6.46% 1 year, +14.12% YTD
S&P 500 Return: +9.80% 1 year, +17.05% YTD
S&P Midcap 400: +18.18% 1 year, +24.23% YTD

The VIX ended the month at 30.69 and the VXN ended at 29.81.  Both are up substantially from their lows a couple of weeks ago.  Selling options gets to be worth more at these levels, but one has to wonder if all the risk is priced in yet.  With volatility higher recently, options’ prices are higher.  Since I plan to take option assignments on what I have short right now that doesn’t bother me.  Actually, I see it as a benefit for any new options I plan to sell.  The next three weeks leading up to November options expiration will be interesting for sure.

Depending on the line you draw, it could be that the rally (aka ”Dream” according to some) has ended with both short and long term trend lines of higher lows breaking on Friday.  The questions that remain are how much of today’s price action was related to end of the month clean-up for the mutual funds and other large players and was this an overshoot of panic that won’t last.  A break like I’ve highlighted in the chart below can be a big signal that a rally’s legs are tired.  The first clue came on Wednesday when the S&P 500 closed below its 50 day moving average for the first time in months.  Thursday opened up below that same moving average too, but we quickly recovered to get some of us to think we escaped the end with only a few scratches and bruises.  Even as the markets opened on Friday there seemed to be hope that we’d stay above the 50 day moving average, but that hope was soon crushed. 

In my SPX chart a few weeks ago I pointed out that the index hit resistance at its upper trend line of higher lows.  As you can see in the chart below the lower trend lines of higher lows were starting to get close to the upper trend line.  Eventually one side had to break.  I expected/hoped to see the lines get a little closer before the break came, but you can see that the lower lines gave in first.  The only line I could come up with that might offer support close to Friday’s close is the intraday low from October 2nd of 1,019.95.  That’s also within a rounding error of the high from August 7th of 1,018.00.  I wouldn’t be surprised to come within five points of that line before turning back up.

If not a straight line to help the SPX turn, it could be down to the 100 day moving average that’s crossing the 1,000 mark.  If the SPX heads below the 100 day moving average, the 200 day moving average could come into play another 8-9% lower.  I don’t really expect the S&P 500 to go back down there too soon, but it has to be noted as a possibility.  Even last week on my Dow Jones chart I noted the pull of the 200 day moving average wouldn’t let the index get too far ahead of itself.  This week showed that to be true with a vengeance with the DJIA and the SPX.

Williams %R is already at the -100 area of oversold on the 14 day indicator, just as it was on Wednesday before rebounding.  It’s rare for it to stay that low for long, but can stay oversold for much longer periods while the markets shake out the excess bulls floating around.  I’d be more optimistic about it, but the 28 day indicator hasn’t gotten there yet.  I’d prefer to see both time periods have a few days in the oversold area before considering this a solid near-term bottom for the markets.  That’s the indicator I’ll be watching though.  As SPX moves out of oversold, for at least two days in a row (preferably three) I’ll turn bullish again.  For now, I’m more neutral for the short term and won’t be shocked to see some sideways trading for a few weeks, possibly with the trend line of higher lows becoming a new trend line for resistance.

I’m still not quite 73% invested (based on what I’ll pay if all of my options are assigned at their strikes divided by my account balance), although my use of double the daily price change ETFs is hurting me.  I have almost $1,100 left in time value for my options which will cushion further declines a little and will aid in boosting my account if we flatten out.  The big hope is that we get a bounce back up, at least half way to the prices of a couple of last week.  If that happens I’ll be helped greatly by my $3,250 in intrinsic value left in my options.  UWM is my only option that’s still sitting out-of-the-money and I am thrilled I didn’t roll it higher when I considered it at the end of last week.

Since I’m not in jeopardy of going on margin with my current positions I plan to remain as patient as possible during this correction with what I have.  I briefly thought about selling some naked calls today on some of my positions, but don’t want to risk losing in a snap back up.  The data hitting the wires lately is certainly less bullish, sometimes on the edge of bearish, but I’ve started to move to the side of the camp that believes better times are not so far away again.  This dip in the market was overdue and certainly needed if it’s going to move any higher and for now I have to hope it’s only a small correction and not a full on double dip.

(Unrelated – I noticed I’m only five subscribers away from hitting the round 300 mark if anyone wants to push me over the top, please subscribe to my Full RSS feed or my email updates.)

Little did I remember that limit order I left in place.  While QLD was trading at $52.61 I sold two QLD November 50 naked puts (QLHWX) for $1.35 each and received $258.50 after commissions.  I left the order in place so I wouldn’t have to keep watching it and insure I’d get in on a little dip.  We still don’t know if this is a little dip or just the beginning of a larger correction though.  That’s always the trick and once I saw QLD fail to break above its previous intraday high I might have waited on my order.  I like that I still have more than 7% to the downside protection before I’m sitting on a potential loss on the trade.  With QLD being a double the daily return play on the NASDAQ 100 I have to think of it as only 3.5% downside cushion.

I’m more heavily invested as of this trade than I have been in many months.  If all of my short options were assigned I’d be 71% invested based on my assigned cost of the underlying stocks.  If I count the few double ETFs I have in my portfolio as twice their value I’d be a little over 100% invested.  I like to look at it both ways.  The former is reality – it’s what I have to have to avoid going on margin.  The latter is more of a beta comparison of how my portfolio should move if everything was assigned.  At least for the next four weeks I have more than $1,650 worth of time value to erode away.  This helps plus some of my options are still out of the money which keeps my overall beta less than one.  If my underlying stocks would flatten out or go up I stand to gain around 2+% over the next four weeks.  If they only go down more than 2.5-3% as a group I’ll stay flat.

The DJIA was due for a little pull back from its highs after it touched its upper trend line of higher highs on Monday.  The result was that we got another down week after the previous two up weeks.  I see a couple of different trend lines of higher lows to use.  The lower one starts at the March lows and uses the July low as a point of reference.  The other line ignores the July low and (aside from that single pesky month) seems to be more a better indicator of the current trend.  The lower trend line is currently around the mid-9,200s.  Hitting the second trend line soon would move the DJIA close to the mid 9,600 range.  Eventually a technician might figure the index would come down to touch one or both of these trend lines.  The question is how long it takes to get there.  That’s an important question to consider.  If it takes a while, the DJIA could just trade sideways in a consolidation period while the trend lines catch up.  If it’s going to be done quickly, the DJIA would have to drop roughly 4.5% to 8.5% from its intraday high of the year.  Based on the run we’ve already had, I think a dip like that could be very healthy for the markets overall.

I left the 20, 50 and 200 day moving averages (dma) on the chart to show a wide range of potential.  The 20 dma has shown decent support recently, although it can break without too much follow through.  It’s still holding for now.  The 50 dma doesn’t break as easily.  It held during the October low by each day’s closing price although it did “bend” intraday.  The last time it broke was in July and then the DJIA stayed below it for the following few weeks as it fell further before regrouping and going on a big run.  The 200 dma is always worth watching.  The farther the index moves from the 200 dma, the harder it is to expect much bigger moves higher.  As has been proven this month, being 150 points away doesn’t mean the index can’t move higher, but rapid increases shouldn’t be expected.  The 200 dma has started to inch higher as the lower prices from 201 trading days ago are replaced by the higher prices of today.  That gives some hope that any reversion to the mean doesn’t take the DJIA below 9,000 on a good correction.

The simple mistake I made again, as I did with my SSO naked puts a couple of days ago, was to try to eke out a few extra dollars on each trade and it cost me missed premiums.  I reduced my limit order on both as they started to rally from the afternoon lows and while EEM was trading at $41.06 I sold three EEM November 40 naked puts (EEMWN) for $0.90 each and received $257.75 after commissions.  I stopped chasing QLD (2x QQQQ ETF) and left my limit order to hit another day on a dip another day.  I might come back to it tomorrow and consider a different strike or lower premium, but I’ve done all the chasing I want to do for today.

Last month I sold EEM naked puts in the money expecting EEM to rise after touching its trend line of higher lows.  Today EEM wasn’t all the way down to its trend line, so I sold out of the money puts to give myself a little more cushion.  I didn’t wait for it to get there because EEM is in the middle of its trading channel and could go in either direction from here, but I think the downside is limited.  When I originally placed my limit order EEM was trading just below its 10 day moving average (it has since moved back above it), but had its 20 and 50 day averages just below $40.00 and close to $38.00 respectfully.  Add in the trend line of higher lows that’s moving up close to $39.00 and I expect support to be somewhere close by if EEM drops some from its current levels.

Unrelated – I updated my Current Portfolio page yesterday and will try to be better about updating it at least monthly, if not twice per month.

For SSO I’d have to go with a 10% drop for that to work for me since it’s a 2x ETF.  I found the $36 strike came close to meeting my goal as it would allow for an ~8% pull back in SSO for me to break even.  By this point the markets were open and SSO was down, so I decided to watch for a little bit to see how the first half hour traded.  The dip didn’t last long and I entered my order at $1.25, just five cents above the bid.  Instead of bouncing around and my order hitting SSO started to charge higher.  I reevaluated and decided that since I was only about 30% invested so far, I needed to get in with something, even if it wasn’t ideal for what I originally planned.  While SSO was trading at $37.08 I sold three SSO November 36 naked puts (SOJWJ) for $1.10 each and received $317.75 after commissions.

SSO has climbed some more since I made the trade, but I can’t help but being annoyed that I missed out on $30 by trying to make an extra $15.  Sometimes patience works and other times it doesn’t.  We have four and half weeks before I’ll know if this was the right move for sure.  I hate chasing trades, but sitting on the sidelines watching profits pass by can be even more annoying.  This pulls me up to ~44% invested or if you count my two 2x ETF trades as double the underlying value I’m closer to 65% invested now. 

Depending on how my current holdings play out the next few days I plan to continue building my positions each day or two.  I’m eyeing QLD now.  BA dropped like I said I thought it would, but I can’t bring myself to trade on it again yet.  The downside risk is probably reasonable, but I just haven’t gotten there yet.