BigTrends

Terrible timing for bad news hitting the market today with the announcement of fraud charges being filed against Goldman Sachs.  The market was just starting to appear safe to many investors with a weekly close above 1200 on the SPX clearly in sight.  People were being told that investing in stocks was acceptable again, and they were beginning to believe those words and then BAM...

Then the SEC drops the bombshell this morning, and rightfully so, that Goldman Sachs deceived investors when creating and selling CDOs. 

Once again, the contrarian investor could have been tipped off by the most common sell signal: The major cover story for a business magazine.  In this case, BusinessWeek in their April 12th issue printed a cover story about how Goldman Executives claim that they didn't sell America short.  People had questioned the validity of Goldman's profits while the other banks were hemorrhaging money, but few could put a finger on any true wrong doing.

The news of this civil lawsuit will linger over the weekend, and most expect that the reaction to this news Monday morning from markets around the world will not look good.  Continue to watch the VIX 15 minute chart as your clue to if or when the selling stops.  This VIX rally is similar to what we saw in late January, where swift selling pressure took the markets down for a few days before the bull trend kicked back into gear.  The follow through on Monday will be the key to determining where this market is headed over the coming weeks.

Finally, from an options perspective, the Goldman Sachs (GS) trade today is a very interesting one, because of the fact that this news hit on expiration Friday.  Many people were short Goldman puts, in particular the the April 160s and 165s.  It's not clear whether they were naked short these options or if they had some protection, but regardless, they sold them with the expectation that they would expire worthless today.  The news obviously turned this trade upside-down, so don't be surprised if GS gets pinned at the close today around an options strike of 155 or 160.

For those of you that receive our nightly Trader's Edge Report you know the importance of sentiment in the market place--investor sentiment can help you determine when the so called fear and greed on Wall Street is primed for reversal.  In my trading Iconsistently use four different sentiment tracking charts, (1) CBOE Volatility Index, (2) CBOE Equity Put/Call Ratio, (3) RYDEX Ratio, and (4) ISE Call/Put Ratio.  Each has it's own unique system to highlight market reversals (covered each night in Trader's Edge), but they all employ a similar contrarian strategy.

The reason I bring this up today, is based on the current sell-off in equities--as it stands right now, it's the strongest two day sell-off since last summer.  As of now the CBOE Equity Put/Call Ratio is at extremes again - we measure extremes based on Bollinger Bands and as of now we are clearly outside the upper band.  This means the Put/Call Ratio is very high relative to the past 20 days or that FEAR has reached an inflection point.  The CBOE Equity Put/Call Ratio simply looks at the number of equity puts (bearish) traded compared to calls (bullish) traded, it's falls lower as market participants become more bullish and vice-a-versa climbs higher as participants become more bearish.  

Market reversals tend to occur when fear and greed saturate the markets.  In today's case we are seeing an extreme amount of puts traded, so much that it is unhealthy for the current trend.  Take a look at the graphic below to see recent patterns with the Equity Put/Call Ratio and the S&P500.

CBOE Equity Put/Call Ratio

Our good friend, Mark Wolfinger, author of The Rookie's Guide to Options recently posted Q&A on the infamous topic of, what order type is best for options traders.  Great insight from Mark, as usual...

Question: How much of a better price can I expect to get with limit orders? I just started trading US options, but am based in Australia. I generally don't watch the market - and work off yesterday's closing bid/ask prices.
NK

Answer: I assume that you enter a limit order based on what you noted the night before.  If you enter 'market orders' please don't do that.

When trading options, entering such an order is an invitation to receive a terrible fill, and there is little chance that you will get a fair price.

Entering a market order at the opening is much worse.  It's difficult to imagine being so desperate to get a fill that you are willing to enter a market order at the opening of trading.

If you want to trade the opening, limit orders are mandatory.

'Yesterday's closing bid/ask prices' are almost always bad.  By that I mean they no longer represent the true market the following morning.  Why?

Looks like the markets are under pressure again on Monday - will it be another low risk entry?

Did you see in the last 10/15 minutes of the normal trading day, they moved the SPY down from about 87.50 to right around 87?  Well guess what, there was fairly heavy April SPY Open Interest at the 87 strike.  It was basically the 2nd highest level of open interest near current levels (85 being higher). 

In a recent coaching course students discussed the value of following options volume.   It was a great discussion and with examples of high volume (smart money) being both correct and incorrect.  Here's a great article that shows the true value of following options volume-it may not be the best action plan for your portfolio...

With the VIX imploding a bit again today, looks like we are setting up for a 35 to 40 range on the VIX, with 30 being the lowest I can see it approaching.

The CBOE Volatility Index closed around 40.39 today, continuing its recent 40 to 45 range.  The interesting thing is that the VIX dropped despite the major indices being down over 2% today, which is unusual.  Some of this may have to do with low volume over the past 3 trading days and the market being closed Friday for a holiday.  But it also possibly indicates that the Market Makers may want to bring the VIX down below 40 (possibly to a new 35 to 40) range, as we approach the summer months.

Yesterday's SPX close gave us a very nice confirmed bullish Percent R re-test on the Daily Chart. It also had a successful test of key middle levels on the Hourly Chart. If you are using charting software, we utilize different inputs, levels, techniques on our Percent R analysis than are the defaults on most programs -- BigTrends founder Price Headley and others in our firm have developed methods for smoothing out and utilizing Williams Percent R that are not really being used by anyone else that I'm aware of. And the nice thing about this indicator is that it can often be a "leading indicator" as opposed to a lagging one, which is basically the "Holy Grail" of most technical analysis.

Quick thought: 850 coming on SPX, will 900 be tested soon or do we pull back into a range?