What a week, eh?

Long trades getting blown up all over the place. Luckily for us, we'd had a good run coming into last week with opportunities to take profits in a lot of our positions. That makes the exits and adjustments that have been forced upon us the last few days a bit more palatable. In both cases, the profits and losses were taken according to our plans as laid out when we entered into the trades in the first place. Weeks like this are a good reminder of why we put trade plans together up front to begin with. When markets start getting wacky, the last thing we want to be doing is scrambling in the wind, trying to keep our heads about us as we're struggling to assemble puzzle pieces on a board that won't stay still.

The good news is, rising volatility will likely offer us some good higher probability income trades in the coming days and weeks to hopefully more than make up for this week's reality check.

Is this 2008 all over again? 1987? 1929? I doubt it.

We're not seeing any stress in credit, which is where the real problems start. In fact, some stocks and sectors are going up while others are going down. We've seen relative strength in Energy, Utilities and Consumer Staples. Remember, the Dow Jones Industrial Average closed at a new all-time high just last week. It's easy to forget right?

So what's the problem? The problem is that we have failed breakouts in all of the major U.S. Indexes, and at the very least, it is going to take some time to resolve. The questions are: How long? and How low could we go?

The way I see it, we're either buying stocks at higher levels or we're buying them at lower ones. If this is just a shake out and we take off from here, that's fine. If we go lower, which is the higher probability, then it will take a series of positive divergences in breadth and momentum. All of the risk management levels we highlighted throughout September have been violated. That's life.

Here are the levels we have identified as the most important moving forward:

It's not just the U.S. that is breaking our important levels, stock market indexes all over the world are reacting to the volatility. Europe is flirting with dangerous areas but Brazil and Russia have bucked the trend, likely due to their exposure to Energy. Other countries like India and Tech based markets have been the ones coming off the most in the emerging group.

What else can we do with that money?

That's the question we always want to ask ourselves.

I get asked all the time, "Hey JC, I own this stock, it's down x amount and I'm not sure what to do?". Man if I had a bitcoin for every time I got asked that one.

To me the answer is very simple. If you woke up that morning and you could do anything you wanted with that money, anywhere in the world, with any asset class, is that stock what you would buy?

If the answer is no, then you know your answer. Go buy whatever you want to buy. Transaction costs are nothing these days, so the pennies on that are no excuse to sit in something costing you way more. 

Two weeks ago I laid out what it would take for us to start getting more defensive in this market and not just blindly buying any and all dips. The thesis was that if certain things happened, they would not be consistent with an environment where we want to be as aggressive, and a more neutral approach would be best. Some of these developments have taken place and the impact has been seen so far in October.

Let's take another look.

CSX has been good to us.

We've been bullish $CSX all year. And we had a successful options play this summer that recently came to a profitable conclusion. JC calls CSX "a beast!" I can't argue with that.

And low and behold, even as the overall market has hit a little bump in the road over the past week, $CSX just continues riding the rails, appearing to be in the final stages of completing a nice and tidy two-month base with eyes on a $91 price target and above.

With earnings on deck, the chairs are aligned for an opportunistic play to put elevated options volatility to work for us.

In this episode I am thrilled to have Mark Newton, Founder of Newton Advisors. Mark is one of those Technical Analysts that I have followed for many many years. His intermarket perspective and top/down approach is one of the best on The Street. He does great work on relative strength and ratio charts to really gauge the flow of money from one asset to another. His experience on both the Buy Side and Sell Side gives him a unique perspective and I've always found it helpful to pick his brain whenever I get the chance. In our conversation we discussed U.S. Stock market breadth, keeping an open mind to future outcomes, Interest Rates, Oil and Gold and how he approaches the market day in and day out. I really enjoyed recording this episode and I think you'll quickly see why. This was a good one!

From the desk of Tom Bruni @BruniCharting

For most of the year we've been talking about downside in Bonds and the potential effects that would have on Equities and Commodities. With rates extending their gains to start the fourth quarter, we're going to use this post to look at the structural trends in Commodities and determine which are best positioned to benefit if we start to see money rotate.

Stocks, Commodities, Currencies, this long post will cover all of them as we discuss market conditions heading into year end.

U.S. stocks gave everyone a little reminder last week that stocks don't always go straight up in Bull Markets. Significant gains will be seen in the drivers of every bull run, but not without pauses and pullbacks along the way. Overall, we're still bullish here, but more cautiously so and looking to minimize our risks on long plays as best we can.

If the markets are currently undergoing a pause that refreshes, then we expect the resumption to highs will be lead -- at least in part -- by semiconductors. With that in mind, we want to be buying dips amongst the leaders in this space and we have a great candidate lined up.

Gotta love it when the market hands us a little two-way action to remind everyone that stocks go both up and down. And more importantly, I get real excited when I start to see options premiums rise thanks to irrationally freaking out market participants. Is the top in? I don't know and neither do you (my gut says no), but there are plenty of people starting to buy protection in the options market to protect their positions. We'll happily take the other side of those insurance bets.

There are a lot of interesting developments working through the markets these days. Whether it's the relentless sector rotation underneath the surface or the divergences between small and large-cap stocks, there is no shortage of topics to discuss about the current environment. I have been in the camp that a breakdown in Bonds to new multi-year lows would likely be accompanied by a lower yen and higher stock and commodities prices. Through last week that strategy has worked really well.

Moving forward, however, how does this face-ripper in rates impact U.S. stocks? Is the relative strength in financials this week a positive sign for equities? Or are they just getting a sympathy bid because of rates? Are Semiconductors finally going to break out above their epic 2000 highs, which they've been flirting with all year? What about Gold and Crude Oil? How do they fit in?

This morning I was on the Benzinga Premarket Prep Show discussing what I felt are the most important topics in the markets right now. Here is the interview in full:

From time to time I like to review some of my Best Practices for my own benefit, but also for the benefit of readers of this blog, and for subscribers to All Star Options. So let's get right to it...

This past Friday marked an important monthly date in the regular cycle of options expirations. Friday marked the line in the sand where we crossed under 21 days until October expiration.

Why is 21 days until expiration important?

In short: because of theta and gamma.

For long premium positions, theta decay starts to become a major drag, and increasingly so with each passing day. For short premium positions, gamma has the potential to produce wild swings in your position equity. Neither of these scenarios are very appealing for obvious reasons.

Lets breakdown the risks and actions to take for a variety of common strategies.

There is a lot of noise being made this week about potential divergences in U.S. Stock markets. The one thing that gets lost in the shuffle is that just because asset A is rising and asset B is not keeping up, that asset A needs to correct and come down to meet asset B. Rarely does it get mentioned that asset B can just get some rotation and catch up to the relative strength that asset A is showing. In fact, during bull markets (which we're in, not sure if you heard) the latter is a perfectly normal occurrence.

Today we're going to take a look at a more macro correlation that I think we need to be watching. We're talking specifically about the long-term behavior patterns of the S&P500 in America and the DAX in Germany. Going back many decades, these two indexes really move in sync.

This is the video recording of the October 2018 Conference Call for Members of All Star Options

We were bullish on Microsoft all summer, and with $MSFT printing another new all-time high this week, our stance hasn't diminished in the least. The only thing that's changed is we've raised our price target. That tends to happen in bull markets.

In our October conference call for subscribers, we teased a bullish trade idea in $MSFT. And upon further reflection, I think I've come up with an even better probability play with an opportunity for better risk adjusted returns.

Small and mid-caps have been hit hard since late August, so rather than look for short opportunities after a large move, we're looking for potential counter-trend trades on the long side. Today's candidate is PTC India.

I have to give credit to our Intermarket Analysis work for a lot of our success over the years. This "Cross-Asset" perspective is incredibly valuable, particularly when it comes to identifying and staying with important trends. As a supplement to our Technical work in U.S. Stocks and Indexes, we incorporate a variety of Intermarket relationships to help us formulate a thesis. These include Bonds, Commodities and Currencies.

When it comes to safety, I don't care what people believe is a safe haven, I only care how the market reacts when it needs to go safe. When markets stressed and volatility rises, stocks fall in price and US Treasury Bonds and Japanese Yen reap the benefits.  When did Yen and Bonds get strong? Summer of 2015 just as the S&P500 was topping out. When did Yen and Bonds peak? When stocks got going several months before the 2016 elections. Both of these are near their 52-week lows, which makes perfect sense with Stocks at all-time highs.

So, the way I see it, we're most likely going to see Yen and Bond strength if stocks really sell off this quarter. The other side of that argument is that stocks are likely to do well in an environment...

The one thing we do know is that stocks are not in a downtrend. New all-time highs are consistent with a stock market environment where prices are rising. We saw new all-time monthly closing highs in most of the major U.S. Stock Indexes last week. The question is more about whether or not we're starting to see this trend change or deteriorate in any way. The short answer is no. We do not see enough evidence to support a bearish approach towards equities, quite the opposite in fact.

Here's what I'm seeing:

Mid and small-caps have been hit hard over the last month, so I wanted to do a quick update post on how we should be approaching these indexes over the short-term.

We've got 46 days until November expiration and it's always good to have some income trades on for every monthly expiration. It just makes good sense for somewhat diversifying our portfolio. We don't want to have only directional and/or long premium plays on. If the market goes sideways or falls somewhat from here, we need to have some cushion built in somewhere.

After reviewing all the most liquid ETFs we track, I've identified our best candidate based on relatively high implied volatility and range-bound trading action.

From the desk of Tom Bruni @BruniCharting

Earlier this month we did two Energy updates from the top-down, ultimately drilling into the best individual stock opportunities in both Canada and the US. I feel like there's been a lot of noise around Crude Oil and Energy in general because of OPEC, Trade Wars, and whatever else the media can come up with, so I just want to do a quick update on what we're seeing in Energy Commodities.