Interstate Approaching?

  • Posted by
  • on October 1st, 2011

“There are many ships on the bottom of the ocean.  I’m quite certain they all had chart rooms”  Jeff Cooper via The Kirk Report

A quick post inspired by this week’s market action, and my 6 year old son.  To me, we’re days away from ending the 9 weeks we’ve spent touching 1180 in $SPX.  This week didn’t feel any less volatile, but the range compressed as the low and high were inside the prior week for the first time since May 13.

So what insight came from hearing question number 864 from Dylan into a 650 mile drive?  Perusing the map, he wondered why we weren’t taking another route since it looked straighter than the one we were on.  And there lied the answer to navigating this wild market…trend vs. range.  We would never plan a trip without comparing the width of a road on a map, knowing one indicates interstate and another indicates a country road.  Yet we often look at a chart and fail to incorporate whether the feedback loop works as an expansionary factor or a contractionary one.

Since hitting widespread lows on August 9, we’ve been in contraction mode.  On a number of occasions(now included), it has felt like we were finally going to bust the range and find a sustainable trend.  But alas, we’ve been traveling a winding road with red lights every 20 miles or so.  As much as I’m hesitant to declare “highway ahead”, take a look at the following graphic:

Forget the levels and possible divergences…just look at the smoothness of the range.  From wild moves to top and bottom, in the past 8 sessions we’ve settled into an area bounded on the upside by narrow breadth.  So the volatility of breadth has settled into more of a “cruise control” zone.  It in no way says we’ll stay there, but it indicates potential acceptance of this weakness after weeks of fighting it off.

I will stick with the 1180 as magnet approach that has kept me from chasing strength & weakness, but my positioning has changed from capturing time(theta) to capturing price(delta).  I now have October debit spreads on both the put and call sides, as I believe the move out of this range has the potential to be massive and the range will be broken this week or next.  We’ve been conditioned to trade this range from the fringes, just in time for a break and extension.  Let’s not forget to note if the road adds an HOV lane.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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