May Just Churn Even Higher

 | Jan 13, 2013 | 12:00 PM EST
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One thing I love about the beginning of the year is that we have another round of earnings season -- the time when companies show what they've got and we tend to see big price moves in both directions.

For myself, as an options trader, this period presents tremendous opportunities for gains both before and after earnings releases. In order to increase my odds of success, I will often use such varying options strategies as strangles, straddles and credit spreads. Playing off technical indicators, as well as money flows, momentum and sentiment, could put you on a plane of quick and powerful profits.

This past week saw earnings from such names as Alcoa (AA), Wells Fargo (WFC) and Monsanto (MON). Given the generally low market volatility of late, the expectations do not call for big moves --and so far we've been able to see results stand on their own, rather than witness shares being pushed around by broad-market sentiment. Of these three, Alcoa and Wells Fargo moved modestly on prior Street expectations, while Monsanto broke out of a range on nice volume expansion. The latter was behaving well into the report, and now it looks even better for a trade.

The next week is due to brings us a slew of reports from the banking, technology, industrials and consumer-staples sectors. Names of interest for this week include eBay (EBAY), Intel (INTC), JPMorgan Chase (JPM), Goldman Sachs (GS) and Citigroup (C). We'll also hear from Bank of America (BAC), American Express (AXP), Freeport McMoRan (FCX), General Electric (GE), Schlumberger (SLB) and Morgan Stanley (MS). Amid this array of expected releases, the indices are already overbought, and they're working off that condition -- so the next move could be higher.

What do I mean by "overbought," and why do I think the market could remain there? This simple concept addresses a persistent technical state that traps markets into a longer-lasting condition -- which is measured by the embedded stochastic oscillator. An oscillator is an indicator that tracks momentum or rate of change, and embedded stochastics go hand in hand with broad uptrends and downtrends.

S&P 500 -- Daily

According to Ira Epstein, in order for an uptrend to be established, a market must have a stochastic reading of above 80 for three consecutive sessions. Currently, embedded stochastics are reading at around 96, as you can see on the chart above. (A sub-20 reading for three days is required to establish a downtrend.)

As we all know, the market tends to make most people look wrong or foolish, so this condition may persist far longer than many expect.

Columnist Conversations

today is a good day to lighten the load and take some positions off the table. SOLD WB OCT 85 CALL AT 11 (i...
I reached out last week to my close friend Ken Shreve, who is a prominent writer for the IBD.  I asked Ke...
I reached out last week to my close friend Ken Shreve, who is a prominent writer for the IBD.  I asked Ke...
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