Market Check: Expect Extra Volatility and Trade Accordingly

Schaeffer's Investment Research
  NOV 15, 2012 9:45 AM

Plus, a 15-minute chart of Apple, and the company's affect on the markets.


Another day, more weakness. Opposite to what we saw Tuesday, futures were significantly higher a few hours before the cash market open on Wednesday, yet that exuberance was quickly met with more responsive selling.  Markets waned significantly off those highs, and as of yesterday, sit near the lows of the day.  Small cap names lead us lower. There are some pockets of strength, mostly in the technology space.  Cisco (NASDAQ:CSCO) reported better-than-expected earnings this week, and the equity is up about 6% on the day (as of yesterday).  Its favorable numbers and outlook for the future are also having a positive effect on other networking names, with F5 Networks (NASAQ:FFIV), Aruba Networks (NASDAQ:ARUN), Juniper Networks (NYSE:JNPR), and Acme Packet (NASDAQ:APKT) up significantly on the day.

I discussed market breadth recently, and how it was a potential concern going forward. Yesterday was not much different, with decliners outpacing advancers at over a 3:1 clip.  Until this metric can improve, more downside is expected.


This stock has been a great vehicle for day traders this week, in that this volatile range has offered many opportunities on both the long and short side of the market.  Below is a 15-minute chart of AAPL going back to 11/8.  You’ll notice a symmetrical triangle pattern -- a series of lower highs and higher lows.  These patterns signal volatility compression and market indecision toward a stock or index.  Technical analysts will use the first “leg” of this pattern to determine the potential move made if and when it breaks.  In this case, the highs around 564 and the lows near 534 mean that the “measured move” of this triangle break should be about 30 points, or about 6% on the stock.  Volatility is mean-reverting in that periods of low volatility will oftentimes be met with volatility explosion on the other side. 

Looking at this chart and considering sentiment toward the market as a whole, I’d expect some extra volatility over the course of the next week or so.  AAPL has major implications for the entire market, and it appears that we’re nearing the tipping point for our next course of direction.  If this pattern holds into this afternoon, you may look to play AAPL 11/23( weekly) straddles to capitalize on this opportunity.

(Courtesy of eSignal)

What I'm Expecting

More frustration.  It appears that the 200-day moving average has broken today on the S&P 500 (INDEXSP:.INX), and we’ve traded below that for a few days now on the Nasdaq (INDEXNASDAQ:.IXIC) and Russell 2000 (INDEXRUSSELL:RUT) indexes.  The problem here is that there are a ton of potential support levels below where we are, so a straight move lower is very improbable.  The current environment is paradise for scalpers and day traders, but hell for swing traders like myself.  Focus on only your best setups and lower trade volumes until we get some resolution.

This article by Bryan Sapp was originally published on Schaeffer's Investment Research.

Below, find some more great content from Schaeffer's Investment Research:

Chart of the Day – Reader Request Edition: Schlumberger Limited (SLB)

Seagate Technology Bears Hope for an Extended Slide

Facebook Options Trade Fast and Furious 

Twitter: @schaeffers
No positions in stocks mentioned.