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It was the excuse of last resort, but bulls conceded it was a retest of prior highs in the major averages, which ultimately panicked investors into forfeiting the bulk of Wednesday’s gains. Of course, one could point to some earnings road kill at Deere (DE) and the VIX hitting fresh seven month levels of satisfaction, umm lows, as being partly responsible.

Entering Thursday and beyond, all eyes will once more watch if the magnet level of S&P1400 can hold, if the Naz’ might right itself up off 2000 and if the hapless Dow can bully its way through 13,000. For the rest of us, well this corner at least, the concern remains with what’s working. And directionally speaking, the action has become more tenuous of late.

I’d like to believe a good deal of the waning consistency that I’m seeing is due to recent bullish intermediate props departed and fresh variables supporting a more bearish or neutral environment replacing them. Last week’s commentary went over that technical opinion. And realistically, not much has changed since then. Well that’s not entirely true, as venues like the S&P500 have given the bears a bit more of a “wedgie.”

Figure 1: S&P500 (SPY) Weekly Rising Wedge

Shown above, the weekly chart of the S&P500 is now in its eighth week of development. For those traders that emphasize Fibonacci, the duration coupled with testing of the 50% retracement are two of the reasons this corner remains cautious about the broader market. Personally, given the evidence I’d prefer to see some additional Fib-based testing before getting bulled up for any moves through our May highs. Currently, that translates into either a 38% to 50% retracement or at a minimum, another week of consolidation work before appreciating the idea of any lasting breakouts in the market.

What if we get neither? Given a more cautious stance and written about in other recent columns, my approach is to take fewer directional trades. And for those that are entered into, reducing the risk that same day with tighter risk and reward goals and / or the use of bullish calendars or verticals are stressed.

Figure 2: Baidu (BIDU) Implieds

Do you Baidu? Even in what I might consider ideal buying conditions for bullish delta positions, China-based internet search engine, Baidu (BIDU), is one place where the combination of high-priced shares and still fairly high underlying volatility make spreads a very real consideration. In truth, when looking above at historical implieds and then below at the current longer-term IV / SV relationship, traders can’t be faulted if they see the option prices as being mostly attractive for long vega strategies.

Figure 3: Baidu IV / SV  

However, the reality is that translated into dollar-terms, buying naked calls or puts is an expensive venture in Baidu. That of course is particularly true if we’re attempting to capture a weekly or monthly chart type move. For instance, the September 430 call, an option that’s roughly 20% out of the money, still fetches about 25.50. So, while I might also enjoy another view of Baidu, this time the weekly chart shown below: one truth I’m willing to “handle” is that a spread still needs to be figured out before I decide to Baidu anytime soon.

Figure 4: Baidu Weekly

Chris Tyler
Staff Writer & Options Strategist
Optionetics.com ~ Your Options Education Site
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The information offered here is based upon Christopher Tyler’s observations and strictly intended for educational purposes only, the use of which is the responsibility of the individual. 

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