Traders Edge Blog

Do These Jeans Make My…

A week ago we said it was test time as the broad indices had been basing for a challenge of their 2012 highs. Well, tis fair to say the bulls passed and have been on a bit of a binge since, making short work of that challenge and moving quickly to five-year highs. They are now parked at or close to huge technical and psychological levels – 1,500 for the SPX and 14K for the INDU.

The SPX has managed to trade above 1,500 both Thursday and Friday. A close above it is obviously what the bulls are hoping to achieve today…or very soon. Failure to do so and the pucker-factor is gonna come into play. The bull’s-eye upside from the current level is the record high up at 1,576. That nearly intersects with the upper resistance line of the recovery channel formed off the breakdown low of 2009.

Meanwhile, the action in the INDU has been much the same. Early activity Friday saw the index trade within just over 100 points of the 14K mark.

The immediate issue now is whether both indices can overtake those key levels and make them baseline support for a real assault on the record highs. They will surely face stiff resistance from the short side betting this is a blow off move…which could well prove to be the reality.

Hmmmmmmm… Both sides believe they have the other just where they want them – a quandary, to be sure. Much like the big BUTT issue, as in you’re not sure whether these tight skinny-jeans make you look 20 years younger or they highlight the toll taken on your backside by both gravity and age. Both sides want to believe it will prove to be the former…butt…one side is surely foolin themselves and may well soil those jeans when the reality sets in…

Self delusion and soiled jeans notwithstanding, this is thin air territory and things get frothy and real screwy in these situations. Aggressive shorts and thin air are highly combustible and can create sharp reversals…but if there’s real resolve on the buy side – watch out! Those short-side bets can turn into the very fuel needed for an irrationally exuberant parabolic upside break…the likes of which our former Fed Pres Greenspan warned about time-and-again during the height of the Y2K Internet craze.

One other point worth noting is the fact this activity is occurring at a time when market darling AAPL is being whooped up on out at the woodshed. With such a backdrop, traders are left to ponder whether the “As AAPL goes so goes the market” maxim still holds true. It would appear we are going to find out soon. What is clear is the fact one side or the other may soon be in need of some new jeans…Yeeikes

We shall see…


Ask the Crew:
Crew members tackle questions submitted by readers each month

Q: Karson recently posted (that) he was happy to hear about several folks who made a profit on the AAPL trade by “legging out.” What does this mean and how do you do it?

A: Legging out means they closed on part of the position at a time. So when AAPL got to a low, they closed the put side at a high price and then when AAPL got to a high, they closed the call side of the trade. This way they were able to get top dollar for each piece of the trade. (The people I was referring to used the indicators to help them make the right decisions.)

Q: Curious about your recommendation on the limit price (or going with market) for long butterflies. I have found that there is quite a big spread between bid and ask. When buying or selling these butterflies, where should we set the limit price between the bid-ask spread to strike a balance between ensuring the trade executes and maximizing profits?

A: I usually put a limit order in at a slightly worse price then the mid-point. It usually takes about 5-10 minutes to fill my position, but a little patience usually pays off.

Q: Regarding ‘Collars’ on the selling call side, how do you determine the strike and the month? Could you do this on weeklies?

A: You could certainly do this on the weeklies. I usually like to get 4-6 chances to sell premium. So on the weeklies I will go about 6 weeks out to buy my put and sell calls each week up to then.