Thursday, January 29, 2009

Smells like a trend change...


As someone who trades in options a lot, I am always interested at what the $VIX (volatility or "fear" index) is doing, as it can affect the value of options. I think the $VIX is changing direction here, which means the S&P 500 should be going down for a while. Here's a short-term 60 minute intraday chart:



When $VIX goes up, the value of put options often goes up even if the underlying stock is flat. I have been in KSS (Kohl's corp.) puts and have experienced this in the reverse, as the stock has been fairly flat to down since I bought the options and yet the options price has dropped a little (bummer...). It's not too late to get into these puts for this reason. Once the $VIX rallies, the option price will rise again and that will be a wind in the 'ol profit sails as KSS takes the anticipated dive.

I believe the NYSE composite ($NYA) has already broken down trough its trend line and is supportive of a short-term trend change in general stocks:



One more decent leg down to scare the last of the bulls, then I think that spring fever bull rally I have been waiting for is coming, which will carry almost all stocks to higher levels than seems possible given the horrible state of the underlying economy. Bear market rallies are legendary and offer great profit opportunity for traders. Those not in gold stocks (e.g., GDX ETF) or oil stocks (e.g., DIG ETF) who want to go long need to be patient but get ready to go long once the bottom is in, as it should be a barnburner of a rally.

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