Markets Hit January Levels – Options Jump

The techs have been the strongest index in the bounce off the March low and recaptured the January high back in May. The S&P 500 and small caps (RUT) followed in June and now the DOW has achieved the same in July. The DOW’s January high was 9088 and yesterday’s high was 9096; 8 points to spare. Now the big question of course is whether there’s more where that came from or if that was the last hurrah. I’m thinking there might be a little bit more to the rally but the rally has clearly gone too far too fast and that raises the risk level for the bulls now. We’ll have to see how the market deals with the disappointing earnings that came in after the bell and already sent the futures lower.

The break above the June 11th highs has many feeling bullish about the breakout. Not only have the major indexes now broken above their January highs but they also negated the H&S top that everyone with a charting program saw unfolding and then busted wide open. A negated pattern often moves quickly in the opposite direction and the more recognizable the pattern the more people trying to play it. The reversal from a pattern that fails can be swift and fast. The rally from the July 8th low certainly fits that category.

So the combination of technical factors on the charts is leading many to believe we’ll get another strong rally from here and they could certainly be correct. We all know the market moves more on emotion than logic. Therefore the upside from here must be respected no matter how illogical it may seem at the present moment. The rally from July 8th looks like it should be finishing soon both from a wave count perspective as well as thinking about a move that has stretched the rubber band to the upside.

In addition to all the new highs and breakouts, option premiums for volatility have increased in lock-step as well. As the markets make faster, more violent moves, options in both directions increase in value at the probability for a successful expiration increase. As option writers/sellers this works to our advantage. With increased premiums we are able to sell options much farther from the current market price – both reducing our risk while increasing our return. Sound counter-intuitive but it’s the dead truth.