10/27 market analysis

10/27

Finally this market begins to pull back from the almost nonstop rally up from the march lows. I put the positions on when the markets were at all time highs since March.

After two bad months of trades, I'm beginning to regain back some confidence. These past few days the markets have been experiencing some distribution on huge volume.

As of today, I don't have a single position open. I've closed all my positions. Right now I'm going to wait for the market to show its hand. The RUT has breached the 50 period moving average. The SPX,QQQQ, and Dow hasn't. I will wait to see if the 50 SMA holds. If it does I will enter some vertical put spreads to get bullish. If the 50SMA fails to hold, I will get short. As I posted on an earlier post, I will wait for the William percent R to help me determine the market direction. Right now the RUT is getting close to the -80 level, which signifies a bearish trends. The signals have not yet confirmed, so I will stay patient and wait for the signal.

After I closed my positions I was tempted to get back into more positions. A problem with me is that I try to be in the market all the time. It is alright not be in the market at all times. When I am out of the market, I will stay out of trouble. Earlier in the year I made some decent profits, but had all of it wiped out because I was in positions when the market was rallying without a two sided market. In these two months (July and August), I had all my year's profits wiped out. There are two explanations for this. First, I entered in fewer contracts at the beginning of the year (when volatility was much higher). It is reasonable and rationale that I can ratchet out the contract size when Vol is much higher. Later around June to now (October) the VIX and option vol began to contract to much lower levels (relative to the financial crisis when the VIX was from 40-89) around the 20s. The RVX (RUT volatility index is in the mid 20s). From July to August, I decided to increase my contract sizes believing that with lower levels of volatility my risk exposure would not be as great from wide fluctuations. What happened from June to the present (october) was that the market was trading mostly up and without any sustain downward movement.

With my latest positions, I increased my contract sizes. Luckily I was correct and able to recoup back gains. So I review the returns on the right, they can be misleading without knowing the number of contacts at each period.