“The edge of chaos is a transition space between order and disorder that is supposed to exist within a wide variety of systems. This transition zone is a region of limited instability that generates a constant dynamic interaction between the ‘order and disorder’. – Complexity laboratories
Grinding markets can be difficult and financial times for active traders. But there are ways to manage these periods. On the one hand, by incorporating option strategies into trading routines, investors can hedge their bets and generate revenue. On the other hand, it is important to know that eventually a sideways upward or downward trend will be triggered, thus creating opportunities for trading on the long or short side.
However, options traders may have an advantage in the coming weeks, due to uncertainty about the Fed’s next move on interest rates and QE, as well as the repercussions generated by these actions for at MELA, the complex adaptive system made up of markets (M), the economy (E), people’s financial decisions (L), and algae (A). In fact, this uncertainty is related to the main advantages of options strategies: risk management through hedging opportunities and the ability to trade markets with less capital exposure than is necessary for individual stocks or ETFs.
With that in mind, this is where we are when we start the month of August. The main indexes die laterally with a slight upward bias. The breadth of the market is definitely missing, although it is not collapsing completely. And the options market is tilting slightly to the bullish side. In other words, everyone expects something bullish to happen while expecting to be on the right side in any way that things break down.
And, as it has been for the past eighteen months, most of what happens in the financial market will develop based on what the Federal Reserve says and does. Also, with the economy showing signs of both inflation and such a report on box office employment along with a drop in consumer confidence, everything the Fed does will likely be amplified by algae.
In other words, aside from earnings reports and the general state of affairs in Washington, everything the Fed says about its future plans Jackson Hole Wyoming evening by the end of August it will probably shape what the actions do the rest of 2021.
However, from a business standpoint, it makes sense to slightly reduce exposure and hedge yourself through revenue-generating option strategies at this time. I recommend checking out which strategies work best when fishing the bottom in stock sectors outperformed in my latest version Your Five Diary video.
Patience and choices can be worth it in the housing / wood complex
For the past few weeks, I’ve been writing about the interconnected housing and timber sectors. Of course, neither sector is particularly attractive. But until proven otherwise, they both have one big factor on their side: the fact that the supply-demand equation leans favorably toward them.
This is because, despite home sales data suggesting that there is a housing upside, supply is still declining in demand and home sales are likely to pick up, especially when houses are selling within days of appearing on the list. And this is the macro recipe for a bullish market. Certainly, cost is an issue, as many potential home buyers have a price currently off the market. And if the Fed raises rates, that will make things harder.
Think supply and demand
Still, as long as mortgage rates remain close to historic lows and there is no widespread economic problem, such as inflation being completely out of control or the labor market falling apart as in March 2020, there is no major change in the desires of many to move outside the cities or to new states. And this means that, in the worst case, demand for housing will remain stable, but will most likely increase.
As a result, it makes sense to closely monitor the actions of home builders (XHB) and consider being patient with the actions, except for a clear breakdown of prices. At the same time, by applying well-selected option strategies, investors can manage price and time risk, as described at the end of this section.
So, as I said last week, XHB has been consolidating and flirting with a breakup. Support remains in the $ 72 zone, with a resistance of $ 76. A step above $ 76 could bring the shares to $ 80 in a short period of time. Meanwhile, LPX continues in a basic pattern, with resistance close to $ 60.
Meanwhile, it seems that LPX is reaching a point where short sellers need to be covered, as cumulative distribution (ADI) is down (sign of active short sellers) and equilibrium volume (OBV) is rising, a sign that buys them down as the number of shorts begins to decline.
If this pattern stays in place, it will mean that they will increase the chances that LPX may increase over the next few weeks, except for a total market crash.
Also, the tiebreaker vote on whether the timber-building complex can produce a change strong enough to make me go bullish is what happens in the bond market, where the performance of the U.S. 10-year note (TNX ) seems to be still testing its own significant resistance to the 200-day moving average.
And while bond yields rose relative to the new number of jobs better than expected posted on 6/08/21, while yields are testing the 200-day moving average near 1 p.m. , 3%, the real test will come if TNX approaches the likely true decision point, the yield band of 2-2.1%.
So what is a good way to manage wood and housing stocks in today’s market? A write-buying strategy (selling covered call options) may make sense. This is because if XHB and LPX continue to consolidate price patterns, you can charge a premium to wait for it to explode. If the stock explodes, you can always buy the option again and go up the uptrend. And if your stopover occurs, you can close the position. In other words, you can be charged for being patient while managing your trade using clearly defined output parameters; which is not available to investors who do not trade options.
Of course, this strategy requires management, which is why a FREE trial subscription to Joe Duarte in the Money It may be worth considering Options.com. (Click here for more information.)
I have stocks and I have open option positions in LPX and XHB right now.
SPY options maintain a slightly bullish stance
Last week, in this space, I noticed that option players were becoming a little more bullish. Well, that general tilt seems to have stayed in place, as the purchase of call options increased towards the 6/6/21 maturity and ended until Monday’s daily maturity. Call volumes rose in the 442-443 area, close to the closing price of SPY, suggesting that traders are still betting on a slow rise in stock prices.
In conclusion, options remain more bullish than bearish and bullish sentiment appears to be rising, slowly for sure, but still rising.
For the most up-to-date information on options trading, see Trading options for mannequins, with its fourth edition published on August 17, 2021 – Book your copy now!
The width of the market maintains the upward trend with the highest SPX of all time
The New York Stock Exchange’s (NYAD) early decline line showed some improvement last week as it closed above the 50-day moving average, while its RSI topped 50 simultaneously. This combination, at least for now, denies what had been a potential sell signal.
Thus, again, the market gets the advantage of doubt. But it remains a somewhat soft benefit, as the longer the unconfirmed maximum indices, the more likely it is to decrease.
The S&P 500 (SPX) and Nasdaq 100 (NDX) held up pretty well, with SPX a new high and NDX not far behind.
So for now, the upward trend in the market, albeit a little softened, remains in place.
Good news! I created my NYAD Complexity Chaos chart (which appears in my paper YD5 videos) and some other favorite audiences. You can find them here.
A Money Options
Joe Duarte is a former money manager, active trader and independently recognized stock market analyst since 1987. He is the author of eight investment books, including bestsellers. Trading options for mannequins, classified as TOP Book Options for 2018 by Benzinga.com and is now in its third edition, as well The book While investing in the 20s and 30s and six more business books.
The book While investing in the 20s and 30s is available and Amazon i Barnes and Noble. It has also been recommended as Washington Post Color of Money Book of the Month.
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