Tom’s Weekly Newsletter March 8 2023

Originally published via our newsletter previously. Subscribe for early access!

The Stock Market is Still Trying to Find a Support Level

What will the Stock Market look like after this Last month of the first quarter?

We will find out at the end of March.

January saw a nice bullish run only to see February end up taking back at least half the run up.

This week the markets are due to receive economic data on initial jobless claims and productivity data.

The futures are trading higher as of now large in part to the earnings report from salesforce inc. (CRM) which is currently trading higher by 15-16%.

CRM:

CRM is a member of the Dow Jones Industrial Average so that is again why the Dow futures are trading much higher after hours.

The month of February we’ve seen the markets gap higher or open up and try to fight higher on an intraday basis only to sell off by the end of the day.

The reason this is pointed out is to have you all be cautious in initiating a bullish trade based on an earnings report for a Dow component only as one needs to pay attention to price action and use their scans to help them decide which options strategy to employ and on what stock or ETF to employ it on.

Corners of the Market

SPY – SPDR S&P 500 

TLT – iShares 20+ Year Treasury Bond ETF

Instead of continuing to show the Peak Chart lines, the emphasis this week is the box trading range TLT is in, (the yellow-orange box shape on the chart.

TLT is nearing support, which is seen at the price level of 100.

The last time TLT tested 100 a Darknet B / Bullish signal kicked in and the ETF had a nice bullish run up to a prior high at or near 109.

TLT is not quite at 100, yet another B / Bullish Darknet signal has populated on the chart.

We love repeatable patterns, and we love to trade them.

There is no guarantee another bullish pattern will come our way, but if it does we’d appreciate it if TLT made a ruin to its previous highs/

FYI the blue square with the D in it is emphasizing the dividend.

UUP – Invesco DB US Dollar Index Bullish Fund

USO – United States Oil Fund, LP

The chart on USO for this past 120-trading day look back looks like it is in a consolidating symmetrical triangle pattern.

The price hasn’t gotten to the point where the triangle has come to a point just yet, but it may not need to do so before it breaks out or down.

The Darknet B / Bullish and R / Reiterated Bullish signals have populated and they are pretty close to the same price; enough to consider those two points having formed a double bottom support.

A bullish move would be for UUP to trade above the descending resistance line, hold a closing price above it for 2-3 days.

It would be even more ideal for it to even test the resistance as a new support and then start making its way higher.

GLD – SPDR Gold Shares

From the Desk of a CMT, Market Impact from 0DTE Options

No 0dte case study here but as I try to understand more about the impact from short-term and ultra-short-term options it’s interesting to hear about instances where very short-term implied volatilities (IV) can be higher than longer-term ones which may present opportunities for a calendar strategy. 

The first risk that comes to mind with strategies using such instruments is potential whipsaws in the underlying as option positions are established, hedged, and then unwound.

This makes paper trading and hypothetical trades via this platform a nice way to monitor such risks to see how a strategy behaves.

Let’s start with a scan using Options > Rankers > IVs and SVs Skews

Since I follow mining companies and this heavy civil equipment maker in my 9 – 5 world, I looked Newmont (NEM), Freeport McMoran (FCX), and Caterpillar (CAT) to check out option chains in the 7 – 10 days to expiration time frame as well as the 108-day time frame.

Note the 1-day median of ATM IV for these expirations are very close at 33.6 (7 – 30 day IV) versus 33.7 (> 90 day).

This contrasts with longer-term ATM IVs that tend to be a bit higher.

Consider running this or a similar scan on the S&P 500 Optionable Stocks.

Figure 4 provides a view of the put results for March 10 and June 16 with a higher IV for the March 10th expiration, so selling the Mar 10 42.5 put and buying the Jun 16 42.50 put would cost roughly $2 per contract (not a recommendation, just looking around).

The old school strategist in me is a touched relived by higher open interest in the Jun contracts. It seems I’m not ready to be crushed into petroleum quite yet.

Before viewing the IV skew charts, it makes sense to look at NEM’s price chart. 2 simple moving averages (SMAs), MACD, and Fibonacci levels are all included in Figure 5.

NEM hasn’t been in this territory for a little while and could certainly retest the 37.79 level. If you use 900 trading days for the chart, you’ll see there may still be some room to run on the downside. There was a recent cross of the shorter-term SMA below the longer-term one and MACD is weak.

I’m going to set up a calendar spread so we can review the back test results over time, but since it’s not a case study will not be identifying money and risk management considerations.

Let’s take a look at the formal skew charts for NEM (Options > Charts > Skew Chart).

IVs are along the vertical axis and strikes are along the horizontal axis.

The scales are a bit different so do note that when completing your own research. For the NEM puts we have IV slightly above the skew smile for Mar while Jun IV’s are slightly below. 

Since the trend is towards shorter-term expirations it seems reasonable to continue to observe them.

The time lapse between my scans and an article posting is not a lot of time unless you think of it in terms of the time remaining to expiration for an option that expires in 3 or 10 days.

We can, however, use some of Tom’s Tools to note some general behavior.

Regards, Clare White, CMT

Thank you, Clare!