Market Outlook After Last Week

Another week of whipsawing indices and this will definitely drive a lot of traders crazy, especially option sellers who might get caught up in positions they shouldn't be.

Now, these are actually the times when we should carefully rethink our strategy heading into the last quarter of this year and probably a very tough one to digest. That's why I've created a Word Document that will help me objectively evaluate what's going on and how I'm going to rebalance my portfolio every single week (setting limit orders and re-evaluating IV ranks, what underlyings to choose). Does it sound too active to be good?

In fact, when volatility is high, we just can't sit back and undergo market sentiment. We have to prepare ourselves for several scenarios and it's just a matter of taking profits quite early to reduce risk and avoid unsatisfactory results. Let your profits run and cut your losses short is an adage you shouldn't hang your hat on these days, because as empirical research has shown, holding your options to expiration doesn't produce much more profits in relation to the risk you're taking on.

But let's get straight into it: the technical picture as of today. It's getting worse than most of us could have feared with the third red week in a row. Last weekend, I stated that breaking through the resistance zone would impel indices and could have led to a new short-term uptrend and continuation of the long-term bull market. However, we actually didn't see a strong move and solid positive candle, in fact, the choppy markets were dragged down by weak industry PMI data and the escalating trade war.

First of all, let me state the obvious: the 2925-2946 zone hasn't been broken yet and that reminds of October and November last year when bearish sentiment was mounting. The RSI has broken through its uptrending bottom line and may induce further panic selling. If markets fail to rebound from August's lowest levels, there's more room for the S&P-500 to fall to 2790-2750. Last week, the 2900 level functioned as some kind of a magnet but failed to keep bulls in the race.

To be honest, the technical picture for European indices looks even uglier and panic selling is likely to pull European stocks down to levels of early January.

These kinds of markets are not ideal for conservative option selling, as we have to carefully manage and rebalance our portfolio every single week via limit orders. Nevertheless, there are always stocks out there that continue to maintain their stellar performance and are less correlated with the market. On top of that, due to elevated volatility, these securities also give higher premiums than we would expect them to offer during normal times. So, not only can we benefit from steadily rising share prices, there's also an opportunity to play out a decrease in implied volatility, which would make it a lot easier for us to reach our 50% max. profit (of the credit received).