The market continues to hover around near-term highs, while in a short-term overbought state. Moreover, the 200-day moving average is acting as an area of strong overhead resistance and we have a large gap that has yet to close from August 10. When combined with a VIX that is hitting a strong area of support, well, it looks like we could see a bit of weakness ahead, at least over the short term.
As esteemed analyst Jason Goepfert pointed out this week, we have to remember “the S&P 500 has more assets benchmarked against than any other global index. And the 200-day moving average is the most consistently used indicator among those who look at price charts,” especially for longer-term trends.
Cabot Options Institute – Quant Trader Issue: August 19, 2022
The market continues to hover around near-term highs, while in a short-term overbought state. Moreover, the 200-day moving average is acting as an area of strong overhead resistance and we have a large gap that has yet to close from August 10. When combined with a VIX that is hitting a strong area of support, well, it looks like we could see a bit of weakness ahead, at least over the short term.
As esteemed analyst Jason Goepfert pointed out this week, we have to remember “the S&P 500 has more assets benchmarked against than any other global index. And the 200-day moving average is the most consistently used indicator among those who look at price charts,” especially for longer-term trends.
And for the first time in several months, “the S&P approached its 200-day average on Monday, and so far, it has failed to pop above it. This also happened in 2001 and 2008. Gulp.”
He also goes on to state, “While the S&P index neared its 200-day moving average, fewer than half of its members’ stocks have climbed above theirs. A hallmark of a healthy index is when 60% or more of the constituent stocks trade above their 200-day moving averages; we still haven’t seen that.”
If we see a move lower and a closure of the gap, all directional bets are off again, and the tug-of-war begins anew. All of this being said, the bulls have been relentless as of late, but volume has been noticeably low, which is often a troubling sign as it shows a lack of conviction. But again, we can’t ignore the power of the bull. One thing is certain: I’ll be paying close attention to the 200-day line in the coming days. Expiration can cause some wild swings, but once it passes (next week) my guess is that we will begin to see a clearer directional picture as Wall Street comes back from summer vacation and the volume pushes back to normal levels (hopefully).
Regardless of the price action, we need to add some bullish exposure to balance out our deltas in the portfolio. I spoke about this in great detail in our subscriber-exclusive webinar on Wednesday, with an in-depth discussion on my approach to managing deltas.
My hope is/was that we would see at least a short-term reprieve, particularly given the short-term overbought state in the major indices, but the bulls haven’t given us an opportunity just yet. If we do see a reprieve over the coming days, expect to see a few alerts. If not, well, we may be forced to add some bullish exposure anyway as we don’t want our deltas to lean too far to the bearish side of things.
Current Portfolio
| Open Trades | |||||||
| Open Date | Ticker | Strategy | Trade | Open Price | Current Price | Current Probability | Delta |
| 8/1/2022 | SPY | Bear Call | September 16, 2022 439/444 | $0.70 | $1.27 | 74.31% | -6 |
| 8/11/2022 | DIA | Bear Call | September 23, 2022 350/355 | $0.75 | $1.21 | 74.51% | -11 |
| 8/11/2022 | IWM | Iron Condor | September 23, 2022 220/215 - 173/168 | $0.77 | $0.64 | 89.77% - 89.66% | -3 |
| Closed Trades | |||||||
| Open Date | Closed Date | Ticker | Strategy | Trade | Open Price | Closing Price | Return |
| 6/2/2022 | 6/13/2022 | SPY | Bear Call Spread | July 15, 2022 440/445 | $0.70 | $0.05 | 14.94% |
| 6/8/2022 | 6/17/2022 | XOP | Bear Call Spread | July 15, 2022 190/195 | $0.70 | $0.04 | 15.21% |
| 6/22/2022 | 7/13/2022 | SPY | Bear Call Spread | July 29, 2022 405/410 | $0.75 | $0.35 | 8.70% |
| 6/30/2022 | 7/25/2022 | IWM | Iron Condor | August 19, 2022 195/200 - 145/140 | $0.70 | $0.34 | 7.76% |
| 7/8/2022 | 7/28/2022 | GLD | Bull Put Spread | August 19, 2022 155/150 | $0.60 | $0.16 | 9.65% |
| 7/14/2022 | 8/11/2022 | SPY | Iron Condor | August 19, 2022 417/412 - 335/330 | $0.70 | $4.10 | -68.00% |
Volatility Talk
Since the gap higher in the S&P 500, the VIX has managed to hold the 19-20 area for over a week, even though the major market index has continued to push higher. The VIX is one of the more reliable mean-reversion entities within the market and given everything I mentioned above, I would not be surprised to see volatility make an appearance over the next week or so. As it stands, volatility is still at heightened levels historically so there are still plenty of opportunities out there, especially if you look at specific sectors.
Weekly High Probability Mean Reversion Indicator
Below is my watch list of ETFs and stocks with the most liquid options headed into the week of August 22, 2022.
Here are the various levels I use to determine if an ETF is in an oversold or overbought state.
| Very Overbought | greater than or equal to 80.1 |
| Overbought | 60.1 to 80.0 |
| Neutral | 40.1 to 60 |
| Oversold | 20.1 to 40.0 |
| Very Oversold | less than or equal to 20.0 |
Each week I also include the current implied volatility (IV) and IV Rank. I look for an IV rank above 40, preferably higher.
ETF Watch List- Trade Ideas
| Ticker Symbol | IV | IV Rank | HPMR Oversold - Overbought | |
| ARK Innovation ETF | ARKK | 55.860.3 | 40.2 | 71.2 |
| ProShares Bitcoin ETF | BITO | 79.2 | 20.5 | 48.9 |
| SPDR Dow Jones | DIA | 17.8 | 11.3 | 59.7 |
| iShares MSCI Emerging Markets | EEM | 20 | 11.7 | 75.5 |
| iShares MSCI EAFE | EFA | 22 | 20.5 | 88 |
| iShares MSCI Mexico ETF | EWW | 24.3 | 12.6 | 55.1 |
| iShares MSCI Brazil | EWZ | 36.6 | 34.9 | 69.9 |
| iShares China Large-Cap | FXI | 28.7 | 8.7 | 72.7 |
| VanEck Gold Miners | GDX | 41.6 | 53.6 | 65.8 |
| SPDR Gold | GLD | 15.5 | 5.6 | 65.1 |
| iShares High-Yield | HYG | 14.9 | 38.4 | 61.7 |
| iShares Russell 2000 | IWM | 25.8 | 31.1 | 49.6 |
| SPDR Regional Bank | KRE | 36.3 | 6.8 | 33.2 |
| VanEck Oil Services | OIH | 48.9 | 20 | 72.1 |
| Invesco Nasdaq 100 | QQQ | 26.8 | 39.5 | 75.3 |
| iShares Silver Trust | SLV | 28.7 | 17.4 | 67.7 |
| VanEck Semiconductor | SMH | 35.7 | 36.8 | 51.5 |
| SPDR S&P 500 | SPY | 20.7 | 27.7 | 82.2 |
| iShares 20+ Treasury Bond | TLT | 20.4 | 37.7 | 51.8 |
| United States Oil Fund | USO | 50.7 | 31 | 71.4 |
| ProShares Ultra VIX Short | UVXY | 108.4 | 13.2 | 35.1 |
| CBOE Market Volatility Index | VIX | 86.7 | 6.2 | 65.1 |
| Barclays S&P 500 VIX ETN | VXX | 74.1 | 15.9 | 65.2 |
| SPDR Biotech | XLB | 22.7 | 27 | 49.6 |
| SPDR Energy Select | XLE | 36.6 | 28.7 | 31.5 |
| SPDR Financials | XLF | 22.9 | 12.8 | 34 |
| SPDR Utilities | XLU | 20.8 | 24.9 | 73.7 |
| SPDR S&P Oil & Gas Explorer | XOP | 47.5 | 19.5 | 77.6 |
| SPDR Retail | XRT | 41.4 | 47.8 | 63.8 |
Stock Watch List- Trade Ideas
| Ticker Symbol | IV | IV Rank | HPMR Oversold - Overbought | |
| Apple | AAPL | 28.1 | 14.6 | 81 |
| Bank of America | BAC | 30.8 | 15.8 | 71.2 |
| Bristol-Myers Squibb | BMY | 25.6 | 24.3 | 48.9 |
| Citigroup | C | 30.4 | 11.9 | 59.7 |
| Caterpillar | CAT | 31.4 | 18.4 | 69.2 |
| Comcast | CMCSA | 30.7 | 20.5 | 39.6 |
| Costco | COST | 25.5 | 18.3 | 75.5 |
| Cisco Systems | CSCO | 34.7 | 11.7 | 88 |
| Chevron | CVX | 33.1 | 34.7 | 62.4 |
| Disney | DIS | 31.5 | 14.5 | 75.7 |
| Duke Energy | DUK | 19.6 | 0.8 | 72.7 |
| Fedex | FDX | 32.3 | 21.8 | 55.9 |
| Gilead Sciences | GILD | 24.4 | 7.3 | 65.1 |
| General Motors | GM | 41.1 | 24.5 | 61.7 |
| Intel | INTC | 34.6 | 32.2 | 49.6 |
| Johnson & Johnson | JNJ | 20.2 | 22.3 | 33.2 |
| JP Morgan | JPM | 28.1 | 20.6 | 64.4 |
| Coca-Cola | KO | 20 | 19.4 | 72.1 |
| Altria Group | MO | 28.6 | 31.9 | 75.2 |
| Merck | MRK | 24.2 | 23.8 | 67.8 |
| Morgan Stanley | MS | 27.6 | 4 | 82.2 |
| Microsoft | MSFT | 25.9 | 13.1 | 63.4 |
| NextEra Energy | NEE | 26.6 | 27.6 | 73.1 |
| Nvidia | NVDA | 54.6 | 29.7 | 57.4 |
| Pfizer | PFE | 28.6 | 21.8 | 35.1 |
| PayPal | PYPL | 46.3 | 30.4 | 65.1 |
| Starbucks | SBUX | 33.6 | 39.1 | 65.2 |
| AT&T | T | 24.9 | 20 | 49.6 |
| Verizon | VZ | 25.4 | 36 | 31.6 |
| Walgreens Boots Alliance | WBA | 27 | 30.5 | 34 |
| Wells Fargo | WFC | 30.7 | 1.1 | 73.7 |
| Walmart | WMT | 22 | 20.5 | 77.6 |
| Exxon Mobil | XOM | 36 | 33.8 | 63.8 |
Weekly Trade Discussion: Open Positions
Iron Condor: IWM September 23, 2022, 220/215 calls – 173/168 puts
Original trade published on 8-11-2022 (click to see original alert)
Background: At the time of the trade, IWM was trading for 197.66. We sold the September 23, 2022, IWM 220/215 – 173/168 iron condor spread for $0.77 with an 88.09% (upside) to 88.06% (downside) probability of success. The probability of touch was 24.01% (upside) to 23.41% (downside). The expected range was 186 to 209.
IWM is currently trading for 198.92 and our iron condor spread is worth $0.62. Our probability of success stands at 89.20% on the call side and 90.78% on the put side. As it stands, we are in good shape. If we can stay around this area over the next two weeks, we should be able to take off our iron condor for a nice profit.
Call Side:
Put Side:
Bear Call: SPY September 16, 2022, 439/444 calls
Original trade published on 8-1-2022 (click to see original alert)
Background: With SPY reaching a short-term overbought reading and pushing even deeper into overbought territory, I decided to add a bear call spread in SPY. SPY was trading for 412.41 at the time and we were able to sell a September 16, 2022, 439/444 bear call spread for $0.70. The probability of success at the time of the trade was 85.63% and the probability of touch was 28.98%.
Current Thoughts: SPY is currently trading for 427.89 and our iron condor spread is worth $1.35. Our probability of success stands at 72.62% and our probability of touch is 55.03%. Our position looks good at the moment, but a push lower would certainly give us some breathing room because another significant push higher and we will need to adjust our position. If we decide to adjust, I will most likely roll to higher strikes and further out in time. The 200-day moving average continues to act as a strong area of overhead support so we will be watching that area closely.
Call Side:
Bear Call: DIA September 23, 2022, 350/355 calls
Original trade published on 8-11-2022 (click to see original alert)
Background: With DIA reaching a short-term overbought reading and pushing even deeper into overbought territory after both the CPI and PPI were announced, I decided to add a bear call spread in DIA. DIA was trading for 335.06 at the time and we were able to sell a September 23, 2022, 350/355 bear call spread for $0.75. The probability of success at the time of the trade was 82.67% and the probability of touch was 34.22%.
Current Thoughts: DIA is currently trading for 340.48 and our iron condor spread is worth $1.23. Our probability of success stands at 73.77% and our probability of touch is 51.78%. Like our SPY bear call spread, our DIA position looks good at the moment, but a push lower would certainly give us some breathing room because another significant push higher and we will need to adjust our position. If we decide to adjust, I will most likely roll to higher strikes and further out in time.
Call Side:
The next Cabot Options Institute – Quant Trader issue will be published on August 26, 2022.
About the Analyst
Andy Crowder
Andy Crowder is a professional options trader, researcher and Chief Analyst of Cabot Options Institute. Formerly with Oppenheimer & Co. in New York, Andy has leveraged his investment experience to develop his statistically based options trading strategy which applies probability theory to option valuations in order to execute risk-controlled trades. This proprietary strategy has been refined through two decades of research and real-world experience and has been featured in the Wall Street Journal, Seeking Alpha, and numerous other financial publications. Andy has helped thousands of option traders learn and implement his meticulous rules-driven options trading strategies through highly attended conferences, one-on-one coaching, webinars, and his work as a financial columnist. He currently resides in Bolton Valley, Vermont and when he’s not trading, teaching and writing about options, he enjoys spending time with his wife and two daughters, backcountry skiing, biking, running and enjoying all things outdoors.