The market has been moving up from its late-November lows, as I foretold in previous posts. In retrospect, I was too conservative. And I am usually not that conservative. In fact, I usually get in once the market touches the bottom of its range on volume and starts to move back up - into stocks doing the same.

However, the market had broken out of its primary range in late October and tested the 50-day average. This made me want a little more confirmation that the market was in fact climbing back into that range. Too conservative.

Entering trades on Friday, November 6th would have been much smarter. And I would be in great profit. I put on several trades last week, and closed two today. I legged in to all three, meaning I intended to write calls higher, but closed instead. Here are the results:

11/9 - Bought Smith Int. (SII) @ 29.37, closed today 30.89, 700 shares
Profit: 1.52 (5.2%) $1,064

11/10 - Bought Caterpillar (CAT) @ 58.55, closed today 60.81, 400 shares
Profit: 2.26 (3.8%) $904

11/10 - Bought Philip Morris (PM) @ 49.66, , 500 shares, trade still open. Will close this week when profit sweetens up.

Had I written calls, the premium would have been negligible, and the profit much smaller due to buying back the calls. And so close to expiration, OTM calls are really losing time value - so every day the stock stutters is more loss of time value.

My trading-with-the-market approach works pretty well. It isn’t flawless, but when do covered calls make more sense than when the market is rising?

More on the market tomorrow.

The markets closed strongly today - well, not the inverse ETFs, chuckle. Today should be confirmation for even the most timid soul (me) that the market is in a new up leg after bouncing off support last week. Actually, today would have been a lovely time to enter covered call and naked put positions. For that matter, Friday would have been, also.

There always is this tension: get in when the market trend is the fattest (close to support), or get in with more confirmation once the rally back up into the trading range has “proven” itself. The former can yield more profits, the latter is somewhat more conservative.

I put on a trade in QQQQ again, both long stock and “other”. The CC trade was a purchase at 43.14; I would have liked to sell the NOV 46C, but the premium was pennies. So I legged in. I will either write calls at a higher level or simply close when an acceptable profit is presented. A 3% (raw) return suffices, but I will, ahem, accept more.

OTM is better, because the calls’ low delta makes an early close possible and very profitable. Getting a 5-10% raw return in doing so is not difficult. An ATM write works well and could be closed early, also, but the higher delta makes it tougher, and the return less. ITM should work well, too. Note that November expiration (21st) likely will come a little before the market and many stocks top out at the upper trend (range) line.

Great time for naked puts, too. Try to write a strike below the 20-MA, or if the stock is not above the 20-MA, below the 50-MA. Leave enough room that a typical (for the stock) wide-ranging day will not stop you out of the trade.

WHAT TO TRADE?

There are stocks that bottomed a little bit ahead of the market, with it and behind it. Those ahead of the market I will not touch, because I want a little more travel left in it. Here are some November trades that I like, all of which I would write either OTM or leg in:

SII Smith International - has broken back above the 50-MA, low premium, leg in
PM Philip Morris - has broken back above 20 and 50-MA, low premium, leg in
CAT Caterpillar - ATM 60, 2.8%, has broken back above 20 and 50-MA
BTU Peabody Energy - ITM 44, 2.9%, has broken back above 20 and 50-MA

There are others. Baker Hughes (BHI) just broke above the 50-MA today, well behind the market, and could also be a good trade in the next day or so. I found these by sorting for MADI, looking for stocks 00:00 or better, then doing a secondary sort for flat return.

These stocks came off our Global Select (Dividends) list, and none of these have earnings coming before expiration on November 21st.

I would set a stop, or mental stop, below the 50-day average - preferably below the lowest late-October close. We don’t want to be stopped out too soon on a wide-ranging day.

Good luck.

I hate making this post, but it must be done. After being up nearly 150 points today, the Dow Jones Industrial averages settled back for a close at 9802, just 30 points above yesterday. Other indices are looking as bad or worse: SPX, COMPX, NDX, RUT.

Chart 1 below of a few weeks of action on the S&P 500 illustrates my concern. Last Friday the market had a huge down day, the one marked on my chart as “engulfing candle?“.

Usually, a huge red candle like Friday’s after a several-weeks pullback signals a possible reversal in the opposite direction (North). But engulfing is as engulfing does. For that hoped-for reversal to happen, a series of rising white (positive candles) would be needed. The close of one of those white candles above the top of the engulfing candle would be the money candle! Note what happened at the August, September and November lows in the uptrend: engulfing candles followed by a series of up candles (the market went up):

Now, let’s turn attention to the three candles following Friday’s big red. Two advancing candles and then the long shadow. Today’s candle made a very long upper shadow than fell back to close almost at the day’s open, which indicates weakness. This could very likely be the “shooting star” pattern, which is bearish. These often show at the end of a move up. Is two white candles in a row enough of a move up to call this 3-candle pattern a shooting star?

We’ll soon know.

I don’t trade these candlestick patterns. I’m just trying to size what up is happening. I don’t know what’s next, anymore than you do, but price and volume are all we have.

Covered Calls and Naked Puts

Candlestick analysis is by no means foolproof. To paraphrase Ebeneezer Scrooge, they show us what may be, not what will be. But for now, unless and until we see more up candles and a close above Friday’s big red (which could also be a close above the 20-day moving average and back into the primary trend), there will be no entry signal for those who trade with the market.

Do not put on a covered call or naked put position now. Even if you are eyeing a stock that sneers at the market, its behavior could change if the market heads south.

Following up recent posts about the very real possibility that the market may be about to reverse to the upside, here is another Dow Jones Industrials chart from today, 11/3/09. Compare today’s green-circled price action to that of the retracement bottom in July:

A positive day today would have been lovely, but look at the resolution of the last touch of the major trend line, in July. Similar, wot?

So, another indecisive day… but notice that the DOW opened a just a couple points under yesterday’s positive close. And despite struggling all day, the market closed almost back at the open. Yesterday closed at 9,789, today’s open was 9,787 (I said a couple points) and today’s close was 9,771, almost 9,772. That’s 17 points off yesterday’s close. This little chart helps you see today’s bar better:

Covered Calls

If you are waiting, like me, to hammer some covered calls when the tide turns, the time is not quite yet. Keep watching. Remember, confirmation would be a close inside the primary trend, a little over 9900.

The market broke out of its primary trend last week and has declined to test both the 50-day moving average and lower (major) trend line. However, look at the last few reversals to the upside. You will notice that - except in late August, each time the market showed us a large red candle (down day), followed by an indeterminate candle, the market found support and headed north.

By “indeterminate” candle, I mean a small candle that indicated that neither the bulls nor bears had control. In late August, the candle was white, an up day, as it was TODAY. This could indicate that the market is finding support and ready to break back into its trend.

More evidence? Every time the CBOE Sentiment Indicator (VIX) has hit 30 or close to it, it has heralded an upside reversal. This happened in early July (33.05) and the beginnings of September (29.57) and October (29.56) The VIX today hit 30.70, its highest level since its July high.

Despite all the Aunt-Pitty-Pat handwringing on CNBC (remember, Aunt Pitty Pat collapsed and needed smelling salts in Gone with the Wind), it looks like the market could be about to recover back into its primary trading range.

Covered Calls

If this happens it will be a great time to write OTM calls, closing them early for a profit. How much profit? Well, how about 60% to 80% of the maximum possible profit if called out? Obviously, the stock should be reversing to the upside with the market.

For more information on this, please see our list help pages, particular on CallWriter’s proprietary indicators.

Our entry signal will be another white candle and a fall in the VIX to below the 27 level. At some point the market will make a serious retracement (see earlier posts), but if THIS IS NOT IT, then let’s make hay while the sun shines. Don’t jump the gun, though.

A number of CallWriter.com members are long Amazon (AMZN) and short November calls and are feeling a bit trapped due to the stock’s bottle-rocket takeoff. Obviously, we have to be prepared to sell the stock when covered calls are written, because these things happen. What these members are experiencing is the regret that arises from thinking about all the money being “left on the table.” But it frequently is not left on the table.

One member, short the NOV 90 Calls, wrote to ask how to handle this situation. For those of you living just a little too far back in the deep woods, AMZN announced great earnings a few days ago. The stock gapped nearly $18 on October 23rd to open at $111.05 from all the orders piling up before the open. It has since hit a high over $125 and has pulled back to about $120 as I write this. The chart is the final authority, though. Note on the chart below the huge gap on 10/23, then the meteoric rise after that. Note also the spiking and then disappearing volume, and the exploding MACD.

Amazon looks to me as though it has to come down.

1) Notice that it has made a huge gap up from the 20-day moving average, which it will likely pull back to fill.

2) The trading after the gap is classic witch hat, meaning sharply up on just a few (two, in this case) candles, back down the same way.

3) This event happened on earnings, and the euphoria will burn off once all the buyers are in, which may already have happened. AMZN was thought to be a hot buy below $90; is it still? This is not Apple we’re talking about.

This price action does not appear sustainable, and my money is on the witch hat.

Naked Puts

If you had a naked put on before the 10/23 gap, you should close it, if you have not already done so. This locks in about as much profit as the position can produce and frees your cash for other action. If you wrote a naked put after the gap, CLOSE it. Your situation is not going to improve from here on out if my assessment above is correct.

Covered Calls

If you react to the price move – say, by rolling up, buying calls or buying a vertical call spread, all bullish modifications – you increase your capital committed to the stock, especially by rolling up. Rolling from the 90 Calls to the 120 calls would add over $30 to trade basis. Adding more than a few percent to your cost basis is almost never a good idea, and it’s no better an idea to chase a price spike like this one.

Make any of these mods and you become a bettor, betting the stock rises further. All three mods, in order to work, require the stock to keep rising. If it falls you would be hurt; and hurt badly, if you have rolled up and increased cost basis. When a stock delivers this kind of shock to a covered call writer, it is better to wait and get your bearings.

If you don’t want to lose the stock as expiration approaches, you can always roll the calls out to the next month and see if time and tide cures the problem. I will be very surprised if AMZN holds where it is for very long.

Yesterday’s post early afternoon suggested that we are at a resistance level and that the market will pull back to test the lower trend line or even its 50-day average. Today I’m no more bullish. I offer into evidence the following:

1) Last Thursday, the INDU touched the upper trend line, followed by small congestion candles, after a nice run up. The market usually stalls at this point.

2) Yesterday was lousy, and yesterday’s open was almost the same as Monday’s close. If there was any strength there, it would have opened higher than Monday’s close.

3) The INDU opened low this morning, below yesterday’s close - and yesterday was a down day, too, remember. In fact, the market opened today below Monday’s close, also.

4) The market shot up briefly today to a higher level than yesterday, but intraday highs on a bad day like this only mark a high point in irony… what might have been.

5) In candlestick analysis (see the free chart school on Stockcharts.com for lessons on this), Monday’s white candle was important. In order to continue the trend, even briefly, the market needed to break above it and not below it. Although it doesn’t look much like much of a candidate for an engulfing candle, it’s all we had.

Okay, the little devil on my left shoulder whispers that the market could come back after just a couple of punk days. But the problem isn’t just yesterday and today, but the context. Look at the second week of August for an example of the market topping at the upper trend line and coming back - but that comeback lasted only two days.

Covered Calls

My thoughts for covered call writers in yesterday’s “futile” post still stands. If we are wrong to close positions now and the market rockets right on up, we’ll have taken a loss for nothing. If the market does pull back to support, we’ll feel kind of silly to ride it down.

We always want to trade WITH the market, because any other approach makes less sense. But because we are neither psychic nor in possession of tomorrow’s newspaper, the timing of trade entries and adjustments inevitably involves making educated guesses. You have to ask yourself: what are the odds favoring now?

We can’t always be right. We’ll misjudge weakness and have a stock collapse on us that we could have gotten out of. Or we underestimate strength and get out at a needless loss. These things WILL happen. But that just means our timing was off. Once we have a feel for direction after being wrong, we know when to ride the bronc again (with the market), and those can be some of the best profits.

As far as I’m concerned, the current market action is the rattler’s rattle.

Well, the old market is at resistance again. It made a nice run up after bouncing off the 50-day average. However, it hit the upper trend line on Thursday of last week and has been inching up the trend line hand-over-hand ever since. When this happens, it has tended to signal another down-leg in the trend. Here’s a daily chart from about 1:40p ET today:

The market could break higher, but the 10,000 mark is a choke point, and I expect another run down to test the bottom of the trend line.

Interestingly, the tech indices - Nasdaq 100 and Nasdaq Composite - are showing even less strength, after having shown more strength than the INDU and SPX since March.

Yes, the market could be making a head-fake preparatory to a fresh advance. But these crux points are not a good point to buy stock.

Covered Calls

This is not a time to be putting on covered call positions. The market has to break higher before justifying a long stock position. Advances and declines since March of this year have tended to be of short duration, just a few weeks. My approach this year has been to trade with the market, getting in at support points and writing OTM calls. Please don’t ever feel as though you just have to find a trade at any point in time. Like a sniper, pick your shots.

If the market does pull back, then wait until it finds SUPPORT at the lower trend line or 50-day average before putting on any more positions. Higher-than-normal volume on the INDU (and your stock) at the lower trend line will be a signal for a new advance.

If you have open positions, be prepared to close them if the market starts pulling back and get back into the stock when SUPPORT is found - let the market do the lifting.

We just had a CallWriter members’ trading lab conference last night and I talked (among other things) about how the market needs to break conclusively above 10,000 in order to keep the 2009 uptrend intact. Well, the DOW’s close at 10,015 today was a good start, because the even-thousand numbers are very important, whether the index is northbound or southbound.

In fact, the DOW closed just 10 points south of the day’s high today. Very nice, but we need to see more of this action. One close above resistance doth not a continuation make. The daily chart below indicates how the index stuttered at the 9,830 resistance level yesterday and Monday, then made a strong upmove for a close above resistance today.

The weekly chart below shows the strong 2009 trend since early March. It took about 3.5 months to get the June/July correction. At some point we can expect another correction of equal or greater magnitude, though the recent pullback should have bled off some steam. Notice also how the upper and lower trend lines are converging toward each other,

The same thing is of course happening with the SPX and NDX.

I intend to give the market a day or two - at least - of time to consolidate before writing any calls, since I like to write with the market. We may see some irrational exuberance now, but many don’t believe the DOW can stick above resistance. There may be a little more stuttering before the market moves up, assuming it can live in the above-10,000 stratosphere.

My plan upon confirmation of the break in resistance will be to pick strong stocks off CallWriter’s Global Select list that are following the market (or even stronger) and write OTM calls. This allows a very profitable close early - if the stock moves up as expected - due to the OTM call’s low delta.

After hitting a high of 9,437.71 very recently, the DOW has had two sell-off days, closing yesterday at 9,135.34, closing near the low of the day - not good. So far today the DOW’s low is the open, a good sign.

Is this where the market goes over the falls?

Hopefully not, but no one really knows. I think we all can agree that with 10% unemployment (which does not even include people who have stopped looking for work), the prospects for a bull market are not good. Nil, in fact. If this advance off the March bottom is not a new bull market, it is a bear rally and must fall back to earth. Of course, the market could just be looking for its 50-day average, but that is 8,773 on the DOW. Since March, the market has shown some strength, pulling back to the 20-day average repeatedly, which it did today.

Instead of worrying about whether this is the dropoff, the first thing is to close our short calls, which adds slightly to the trade debit. But only do this if the call value has fallen 50% or more - it must be economically worth the repurchase cost. If the market snaps back in the next week or so, we can sell more calls. Imagine that you write a call for $4 in premium, repurchase it for $1.85 on a stock pullback, then write it again for about $4. Now you have more than $6 in net premium, but the person who didn’t repurchase the calls on the pullback only got the original $4 in premium. That is a BIG difference in return. As I write this on Tuesday morning, it still is possible to advantageously repurchase calls on many stocks.

If it does not snap back, our decks are cleared for selling the stock. I am not a big believer in holding onto the falling stock. And rolling down when the market has pulled back to the 20-day average is just a guess as to what it might do next. With the market poised at the 20-day average, it is on a knife edge. If tomorrow is another down day, I would consider selling s stock falling with the market, looking for a chance to repurchase it lower.

My SuperPut protected covered call (calendar collar) strategy really shines in times like this. If the market doesn’t go off the cliff, we remain protected and continue selling calls profitably. If it does continue down, we can sell the stock and hold the puts, which will gain in value.