Well, that was fast.

Yesterday, we were looking for a spike in volatility and a quick decline in the broad stock market. And that’s what we got.

The market opened quietly enough. The S&P 500 was down just a couple of points in the early moments of trading. Then the selling pressure started to build.

The index broke below the support of Tuesday’s low of 2565. It broke below the support of its 9-day exponential moving average (EMA) at 2560. And, not halfway through the trading day, the S&P 500 hit a low of 2544 – down almost 1% on the day.

Meanwhile, the VIX spiked 18% to an intraday high of 13.20.

That was enough to satisfy the “one-day smackdown” scenario I wrote about yesterday. The question now is…

Is that it, or is there more selling to come?

That’s a hard question to answer. The problem is that the technical conditions on the intraday charts – like the 15- and 60-minute timeframes – were oversold enough at midday yesterday to say “that’s it.” But, by the end of the day, and after the S&P had recovered more than half of its earlier losses, the daily chart of the S&P still looks like it has plenty of room to fall.

Take a look…

The S&P 500 closed yesterday just barely below the support of its 9-day EMA. It may now be headed toward the next support level near the 50-day moving average (2503).

Also, key technical indicators like the MACD and RSI have just now rolled over from overbought conditions. And there’s a lot of room to fall before they even get close to oversold.

Based on this evidence, we can easily argue for more downside ahead over the coming sessions. But I can just as easily make a case for a short-term bounce higher too.

You see, the Volatility Index (VIX) has now closed above its upper Bollinger Band for three straight sessions. When it closes back inside the bands, it will generate a broad stock market buy signal.

We’ve had several of those VIX buy signals in 2017. Each one of them led to at least a short-term pop higher in the market.

Also, the McClellan Oscillator for the NYSE (NYMO) – a momentum indicator – closed yesterday below its lower Bollinger Band. This indicates an extended, oversold condition. And the few times that’s happened this year, the market rallied almost immediately thereafter.

So, the bottom line is… the market could go either way from here (duh). That’s not a remarkable, earth-shattering revelation. It merely indicates that we have conflicting indicators. And, in that situation, the odds are about even for a move in either direction.

That’s different from how things looked Monday – and even Friday afternoon. The conditions were significantly overbought and the odds overwhelmingly favored a short-term decline.

Today, the situation is not so clear-cut. So, I personally took profits on my small short position yesterday. Now I’m just waiting on the sidelines for another high-probability trade setup.

Best regards and good trading,

Jeff Clark

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Reader Mailbag

In today’s mailbag, Jeff answers several questions about recent Delta Report strategies and trades…

Morning Jeff, I really enjoyed your recent article on generating income selling covered calls. I'm going to dedicate some money to this strategy. Can you recommend several stocks today that would be good candidates for this LEAP and covered call trade? Thanks.

–  Harry

Jeff’s response: Hi Harry. I mentioned in the report that we probably wouldn’t use the LEAP covered call strategy much, if at all, in the Delta Report. We focus mostly on trading for profits rather than generating income. But, when there are exceptional opportunities, then I will certainly share them with you.

In the current market environment, there aren’t too many stocks with which I would use this strategy. Stock prices, for the most part, are just too extended to the upside and option premiums are too cheap.

There are exceptions, of course. But I’d prefer to see at least a modest pullback in the market – like to 2500 or so on the S&P – in order to get a better risk/reward setup on the LEAPs I would suggest purchasing.

Jeff, I took a 50% loss on ABT puts. Thank you. It hit target of 56.60. Your closing analysis didn't mean to hold it further.

–  John

Jeff’s response: Hi John. It’s unfortunate that you took a loss on the ABT earnings trade. Losses are a part of the trading game, but they’re never fun to take. So, I understand the sarcastic “Thank you” in your note.

But John… you did NOT follow my instructions on the trade.

As part of a late Friday afternoon update, I wrote, “the system still likes the trade. And, as long as ABT does not close above Wednesday's high of $56.60 then I like the setup for this trade too.”

Furthermore, early in the day on Monday, as the trade was going against us, I wrote…

”Abbot Labs (ABT) is currently trading above the $56.60 high from last Wednesday. If it holds this level into the close then the odds of an earnings-related reversal diminish. So, we'll look to close out the position by selling our ABT put options tomorrow. That's IF ABT closes above $56.60.

That should be pretty clear that we're only closing the trade if ABT closes above $56.60.

ABT fell back on Monday afternoon and closed the session at $56.08. We stayed in the trade and we are currently breaking even on the position.

Hello Jeff, I am your happy subscriber for about a year now. I have a question regarding the recently published LEAPS covered calls strategy.

I see that you use deep in-the-money options here, as I understand this is to minimize the time-decay effect, correct?

Also, please explain what to do if sold calls get executed. Do you liquidate the long position as well at this time? Thanks a lot and all the best to you.

–  Tomasz

Jeff’s response: That’s a great question, Tomasz. Yes, I suggest using deep-in-the-money LEAPs for this strategy. These options typically have less time premium, so the time decay of the option is minimal. We also want the LEAP to move up just as the stock would as the stock rallies. The deeper in-the-money the option, the more similar the movement is to the underlying stock.

If the short calls are executed – or are at risk of getting executed as you get close to expiration of the short option – then you simply sell your LEAP position at the same time, and close the entire position for a profit.

Editor's note: As always, if you have any questions about options strategies, or just a story or experience about option trading you’d like to share, send them right here.