Options Outlook for the week of September 15

Red Friday that capped a losing week across the board. In the video I make arguments that favor more likelihood of selling pressure than upward momentum. But the bottom line is that for the past two years, the bull thesis has been The Fed. Traders bought the markets because traders knew that QE was here and the Fed had the safety net on. Now, 1) The tapering is almost done which means that the QE is gone and 2) The "anti-QE" is imminent (aka Fed tightening). So this leaves markets searching for the next positive catalyst and they are not likely to find it. Yellen is not likely to create a new QE. At best, she delays her rate hike decision and that is only kicking the can and temporary in nature with limited effect.

Rates are back in focus. Friday markets tumbled as the ten year rate spiked over 3%. Conversely, bonds sold off. This week the TLT needed to hold 116 and it didn't and hence broke the uptrend (discussed in details in the video).

Small caps lagging in general as they have been unable to revisit their all time highs. Meanwhile, perma-bulls were calling for SPX 2100 already when bears had not yet conceded the 2000 line (open interest data). Small caps are important as they often are a better gauge of market sentiment.

Volumes: It's true that the SPY has been on a nice uptrend but it's been on diminishing volumes. This can be a sign of waning conviction in the bull thesis. This makes up for the fact that sell offs have been brief and shallow. Because the opposing argument would be that the pops have been ones of relief and on frothy volumes not strong conviction. Frothy highs tend to drop fast. So one of these sell offs will turn into something nasty. Meanwhile, there are trades to be made both bullish and bearish. Next Week & How To Trade It: Once again markets have to brace for a potentially turbulent week. We go into the weekend with negative momentum but markets have two days to breath. Three main events dominate next week: CPI, Yellen and Alibaba IPO: CPI: Inflation is key to timing of rate hikes. Yellen will be the effector of those hikes and markets will be parsing her choice of words. They want to see if the Fed is turning hawkish (bearish) or are they still steadfast with their loose policies until the end of time. Those two are more important than the IPO of BABA but BABA can be a spoiler. Likely outcomes: Four possible scenarios: High inflation and markets sell off. Then Yellen statement is positive. The net effect will be a meander. Low inflation and markets pop. Then Yellen statement is taken as bearish. The two will again cancel each other out and the net effect will also be a meander. Low inflation and markets pop. Then Yellen is perceived as bullish and we pop some more. The net effect will be a positive week. Last but definitely MOST disruptive: High inflation and markets drop. Then Yellen also delivers a bearish message then markets will have a freak out moment of decent size. How to trade: Ideally only nimble traders should trade turbulent weeks. The rest should use out weeks, so go out and up or out and down away from current time and price in the credit spreads. In scenario 1 & 2 selling premium outside of the meander range is best. Leaving proper buffer is of utmost importance. Humble premiums have 90% chance of success and least hassles. Scenario 3 is short-able as the pop will be yet another one of the relief nature. Relief that the worst didn't happen. Scenario 4 is all negative. CONCLUSION: Since all 3 scenarios condone selling risk above the range then that's the surest thing to do early in the week. Then one can add hedge if and when necessary. Meaning, add cautiously short positions for starter then manage them into the week. Some credit put spreads can be used to hedge where appropriate. Members will receive next week's levels before the open on Monday so to be ready for the trades. Special attention to: TSLA still is could be vulnerable to more downside.So I will continue picking on it via debit spreads. CMG is also looking especially vulnerable next week. More on these two in the video. Debit put spreads here should work. 258 could open trap door for price. (and don't tell anyone else but LinkedIn is also looking heavy). LESSONS of the last week that traders need to keep on their monitors: 1) Apple demonstrated to us how quickly markets can switch from bullish to panic selling in seconds. 2) Beware of consensus. When everyone is of the same opinion, take precautions.