Option Trading - Trading the Trends

The best trends rarely give you a chance to get in.  Especially in a fast-moving market.  Witness these past couple of weeks, when markets seemed to crack below support but then do some heavy lifting to get back above short term resistance.   The affects of these deep moves would make anyone queasy.  Yet, our focus has been on trends of individual stocks, because that is where the big money is moving.  The strong money flows have been evident in option trading volume, expanding stock volume and price breakouts.  There is no need to be scientific here trying to look for explanations and rationale.

With a buy the dip mentality one would think there were many opportunities after the few days of February.  From the highs in late January the markets corrected nearly 6% to reach a fully overbought level.  Further, sentiment soured quickly, as it has on the previous six drops.  The VIX spiked higher, polls leaned significantly bearish, McClellan Oscillators ridiculously oversold, money flows were negative and the put/call ratios were screaming over 100%, not to mention the 10 day moving average of the TRIN was at a bloated level (high TRIN is very oversold). 

Wasn't the talk at the end of 2013 that many were looking for a 4-6% correction to get on board?  Now the markets are right back up, the Nasdaq 100 at 14 yr highs and several names are overbought now.  Could you have come on board earlier?

All the ingredients for a strong snap back, if you believed it.  But there is a prevailing thought out there that at some point the market has to crash, because five years is far too long and nobody wants to be left holding the bag when the inevitable happens, right?  Or will it?  Lately, there have been some interesting chart comparisons by writers and bloggers to the 1929 series where an ensuing selloff wiped out nearly 90% of market value.  I suppose history does rhyme, but taken in context this comparison is truly a reach.   From a chart perspective, my good friend Jeff York (@mpgtrader) has a simple answer for 2014 - no, it's not even close.  Take a look at his chart here.  While I can see the point eyeballing the current chart with the 1929 version there are just too many differences besides the time frame to consider.  Fun to compare, but not something useful to trade.

We have to take our clues from past patterns and trends, until they no longer work.  Several charts demonstrated good relative strength during the market correction, and did an 'about face' turn higher when it was time to move back up.  Names like Netflix, Priceline, Tesla, Google, Apple and several others held in strong, kept their trends in place and even gave some chances to get in.   In the chat room, we were literally shouting out some option plays as screaming buys, and most of them worked.   However, if you weren't looking for it, you missed it.  Will you get another chance?  With an open mind and awareness you might be able to grab another great opportunity.