This is sort of the same thing that Ron commented on with the data tables presented a few pages back along with a266199 and the statistical info he posted
I've been away for a few days. Went to see The Smashing Pumpkins play at the St. Augustine Amphitheater and they sounded the same as the last time I saw them almost 20 years ago. They kicked a$$!!!
Anyway, I'm back home, it's Saturday night, 3 hours of the Big Bang Theory is on for which I have seen every episode at least two or three times, and I'm looking at data. At least that data pertains to the markets and why we are here so please only categorize me as a geek only about 75% of the time.
I downloaded the weekly data for the SP500 and dumped it into Excel to be able to see it in a different way. Some people can see trends looking at numbers, some people can see trends by looking at things visually. I'm a mixture of both and this chart is just a quick representation of the latter. I simply plotted the total weekly point change in the SP500 (SPX) and what the value of the RSI14 was for each weekly SPX point change total. Why the RSI? Because it is one of the few indicators I follow.
The x-axis(weekly date) is buried in the middle of the chart and is plotted at the zero line of the y-axis. I did not label this because it would be hard to see almost 500 labeled tick marks. The y-axis is the point change + or - for the weekly total (gain or loss) of the SPX along with the value of the weekly RSI14. The blue points are the SPX values and the red points are the data points for the RSI. You can clearly see the graphical line representation of the RSI here as it would be plotted on a chart.
There are a number of things that can be 'seen' on this chart:
These are all weekly changes in the SPX
1) Since 10/10/2003 the SPX has moved more than 100 points only 2 times
2) From 10/10/2003 until about early March 2007, about 99% of the time the SPX had a weekly change of less than 50 points
3) Since early March 2007 the volatility of the SPX has increased as can be seen by the larger weekly change (plots)
4) When the RSI shows a 'normal' oscillation from about 40 and above the range of the SPX has always been less than 100.
5) The red outlined boxes: When the RSI begins to gets below about 40 (the left side of each box) the volatility in the SPX increases also. We are now in a 'normal' oscillation with the RSI and although the range of the SPX is a little larger than the beginning of the chart, the range in the point values are smaller versus the areas of post oversold RSI territory. The world economy has changed somewhat versus what it was about 10 years ago so more volatility (larger weekly change) can be expected.
6) RSI looks like it wants to make another wave down = weakness ahead???
If someone can suggest another indicator that might be more representative of the strength or weakness of the SPX vs. the RSI let me know and I will plot it also.
I pulled this data from FreeStockCharts.com - Web's Best Streaming Realtime Stock Charts - Free and it is free. All the indexes are there and ETFs also. Unfortunately there is no futures data here but at least the index data is there that can be used for the futures indices. When we started talking about option credit spreads (iron condors anyone???) my brain kicked in. I'm considering stock option credit spreads also and this is a good source of data to dump into Excel to 'see'. If there are opportunities there aside from writing futures options uncovered that I still plan on doing, I want to be able to explore (and exploit) that opportunity....
There are a few episodes of The Big Bang Theory left for the evening...gotta go.
May the 4th be with you.
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I'm guessing that when the RSI begins to get oversold you start to see some panic in the markets and the fear button is pushed. Market uncertainty kicks in and the volatility rises. Fund managers must protect their client's assets and they sell also.
But price is always going to be the leading indicator in any market so that does have to 'move first'. I'm thinking when the RSI gets to the oversold levels those large fund managers start bailing. Technical and program trades elevate the selling. The 2007 to 2008 drop was hugely fundamental so price action was the only indicator.
Given the current trend the lagging indicators such as RSI can be looked at as timing entries.
Here's the current SPX with the RSI at 40. Look how it acts as support but when it is breached along with a support level the drop is more significant. What stands out in this chart is the decrease in volume with the rising price.....
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Clarification: I don't mean to imply that every fund manager and broker watches the RSI and when it gets to a certain level they do this or that. There are an infinite number of reasons that cause individuals to sell or buy.
What's the big deal with the SPX? I'm looking at this as an overall 'what is the market doing' so if I decide to write option credit spreads on stocks or indexes then the SPX will be the first 'indicator' that I look at to suggest overall market direction.
Opts, I f you are thinking about SPX credit spreads or Condors have you looked at the stuff doing the rounds from Doc Severson at Options MD.
He concentrates on two types of IC.
1/ HP (High Probability) IC which looks at 10 deltas on $2 SPY spreads. He shows an example in his videos of 166/168 call and a 146/144 put and looks for a 30c credit with a 170c risk, or 17.6% ROI. This gives a 200 pt (ES) price range.
but the one that intrigued me more was...
2/ The LP (Low Probability) IC which uses the SPX and looks for 30 deltas on a $5 spread. The example was a 1620/1625 call with a 1535/1530 put. So on a $5 spread he aims for $2.50 credit with a $2.50 max risk.
This makes it a 1:1 risk/reward with a 85 pt price range (in this case).
He considers this to be the Professionals IC. Why?
A Black Swan event would do much less damage than with the HP IC.
Would need to be actively managed, so you would not automatically be expecting it to go to expiry but be happy to close out early with whatever profit is available. As the strikes are closer to ATM and higher in value they lose that value quicker than with the HP IC.
I should add that I am not making any recommendations and have not bought his course. I just thought it interesting in light of previous discussions here.
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