In the current market environment of hair-trigger panic, it seems that many retail traders are "managing risk" simply by keeping an iron grip on their investing dollars. However, in my May 10 guest column for Barron's, I discussed another kind of risk altogether -- namely, the risk you take by using low-return strategies to play high-conviction trading ideas.

To read the article in its entirety -- and to find out how horse-racing wisdom can translate to Wall Street -- click here.

The following is a reprint of the market commentary from the May edition of the Option Advisor, published on April 26. Prices and the chart are as of the close on April 26. For more information or to subscribe to the Option Advisor, click here.

In my commentary last month in this space, I discussed what I described as the "feeding frenzy" in the open interest for the two major volatility-based option products -- the CBOE Market Volatility Index (VIX) and the iPath S&P 500 VIX Short-Term Futures ETN (VXX). My conclusion was that the manic trading in these volatility-based instruments -- despite relatively low market volatility and a slow, steady rally in the major stock indices -- was a symptom of fear-based investor behavior, and that, in contrast, market tops occur almost by definition when the sentiment environment is greed-based.

The S&P 500 Index (SPX) was trading at about 1,402 at that time, and it closed today at 1,399, resulting in essentially zero market movement over the past four weeks. In addition, the S&P closed today with a year-to-date gain of 11.3%, and all of the closing price action over this period has been compressed between +8% and +12% on a year-to-date basis.** Yet, despite this snooze-worthy market action, the VIX managed to soar from a low of about 14 at last month's press time to a peak of about 21, before settling at its current level near 16.

From my perspective, there is more than undue bearishness involved in this apparent dissonance between extremely well-contained U.S. stock price behavior and the tendency for option implied volatility levels to surge in hair-trigger fashion on minor pullbacks. Specifically, concerns (serious at times) about the economic situation in Europe as expressed through volatile European stock markets has been exerting a major pull on U.S. stock market volatility. And these European markets are -- right here and now -- at critical levels, the action around which may well determine the course of their behavior for the remainder of the year. And I believe the sentiment backdrop on the U.S. stock market is such that, should these European markets post even modest gains for the remainder of 2012, U.S. stocks could soar.

As of today's close, the Euro Stoxx 50 Index, for all its volatility, has been essentially flat in 2012 -- posting a year-to-date gain of about 0.4%. On the upside this year, with the exception of a 10-day period in mid-March, all Euro Stoxx rallies have been capped at a 10% gain on a closing basis. On the downside, Monday's bottom registered at -3% year-to-date, and prior to Monday's nadir the year-to-date low weighed in at -1.4% on Jan. 9. The punch line here is that the European markets have been very respectful of round-number levels, which renders encouraging (but by no means definitively bullish) the fact that we have now re-taken a positive year-to-date return.

The major reason, from my perspective, that stabilization and, better yet, a rally in the European markets could have such explosive potential for U.S. stocks emanates from the fact that we have been "importing" a level of fear and anxiety far out of line with the price action in our own market, and this in turn has engendered a huge degree of protective behavior by U.S. investors in terms of index put buying, hedged bets on a surge in volatility, and an ongoing flow of funds that strongly favors bonds over equities. To the extent stocks rally in Europe and investor confidence increases to the point that these fear-based activities diminish, the resulting "unwind" of this fear trade, which has created ongoing headwinds for U.S. stocks, could produce tailwinds of immense proportions.

**I consider 1,400 on the S&P, as well as a 10% year-to-date gain (or, for that matter, a 10% year-over-year gain), to be "round-number levels." While it may seem trite and simplistic, it is very important to pay attention to such levels in order to gauge the health of the market (or of a stock), as well as help project where the market is headed. For a discussion of the seriously underappreciated significance of round-number levels and how to bridge this gap in most investors' toolboxes, see my article entitled "Trading on the Level" from the summer 2011 issue of our SENTIMENT magazine.

The following is a reprint of the market commentary from the April edition of the Option Advisor, published on March 22. Prices and the chart are as of the close on March 22. For more information or to subscribe to the Option Advisor, click here.

My commentary for this month will focus on option activity for the volatility-based option products and for the silver exchange-traded fund, as well as on some brief technical takes on the Financial Select Sector SPDR Fund (XLF), Wal-Mart Stores (WMT), and the Euro Stoxx 50.

First, various measures of option open interest for the two major volatility-based option products have soared to record levels recently. Call open interest on the CBOE Volatility Index (VIX) reached an all-time high of 4.22 million contracts on March expiration day, while put open interest on the iPath S&P 500 VIX Short-Term Futures ETN (VXX) peaked at an all-time high of 1.17 million contracts at March expiration, and shows every indication it will achieve yet another record level by April expiration. (All option data in this commentary are courtesy of WhatsTrading.com.)

Activity in volatility-based options has traditionally been driven by periods of stock market weakness that contribute to a fear-based surge in the implied volatility of index options, with fears of a more extensive market decline (or, perhaps, "the big one" in the form of a market crash) further stoking the volume and the pricing of these volatility options.

But the current feeding frenzy in the VIX and VXX options is difficult to explain on all fronts, viz.

1. Realized volatility of the S&P 500 Index (SPX) this year has been extremely muted, with most measures of S&P historical volatility registering in single digits since February.
2. The stock market has been in a slow, steady rally in 2012, with the biggest short-term decline on a closing basis registering an anemic 2.25% from March 1 through March 6.

So why are these volatility-based options products -- designed basically as hedges against a disastrous market decline -- still front and center in terms of activity and interest? Most likely for the same fear-based reason 10-year bond yields plunged this year to levels last seen at the peak of the financial crisis in December 2008, and investors still feel a lot more comfortable holding tens of billions of their assets in the bond-laden Pimco Total Return Fund (which is barely in plus territory this year, and shows a three-year total return of 30%, compared to over 100% for the S&P) than investing in traditional equity funds.

And it would be inconsistent with stock market history and with the interplay between investor psychology and stock price levels for the market to be at or near a peak when such major components of investor behavior are fear-based rather than greed-based.

Second, the huge rally in the iShares Silver Trust (SLV) from early 2010 through April 2011 -- a period over which this asset roughly tripled in price -- was accompanied by:

1. Generally rising short interest.
2. Generally rising option implied volatility.
3. Generally rising call option open interest.

In marked contrast, the period since the April 2011 peak -- which, at its worst, saw this asset decline by nearly 50% -- has been accompanied by a major reversal of all three of these trends.

Call open interest in SLV peaked at May 2011 expiration at 3.4 million contracts. At March 2012 expiration, SLV calls registered just 1.9 million contracts, and currently total 1.7 million. The 30-day implied volatility for SLV options established twin peaks around 70% near the May 2011 price high and the September 2011 secondary price peak. SLV 30-day implied volatility subsequently plunged, and on March 19, bottomed (for now) at 29.5%, the lowest IV level since late 2010. On the short interest front, peaks were established in April and June 2011 at about 37 million shares. The current level of 25 million shares is well below the peak, though it is somewhat encouraging that it has recovered from the lows at 20 million.

The bottom line is that the huge 2010-2011 SLV rally was characterized by a "fever pitch" of short selling, call option accumulation and option IV levels. This fever has broken in spades, and, if past is prologue, then before committing to the long side in SLV traders should now be on the alert for indications that the bottom is firmly in place for each of these three indicators to potentially capture the potential for yet another feverish rally.

Finally, some quick technical takes:

1. Financial Select Sector SPDR (XLF) -- While there remain way too many analysts who have stuck to their bullish guns on the big banks, the fact that XLF has broken out above significant resistance at the round-number $15 level and at its 80-week moving average should give pause to those looking to short this ETF. Perhaps of key significance will be the ability (or inability) of Bank of America (BAC) to take out round number resistance at $10, as well as resistance at its 320-day moving average just below $10.
2. Wal-Mart Stores (WMT) -- While unfortunately on the list of just about every individual investor's favorite holdings, WMT has now spent a dozen years unsuccessfully attempting to take out resistance at the $60 level. Will 2012 be the charm? A disappointing March earnings report was certainly not helpful, and my choice would be to continue to play the retailing sector from the long side through the medium of the SPDR S&P Retail ETF (XRT), which has been blessed by a much smaller weighting in WMT shares than would be indicated by market capitalization.
3. The Euro Stoxx 50 closed today at 2,530, down from its very recent peak just above 2,600. The 2,500 level on this key index of the health of the European markets is hugely important and should be watched carefully, as should 2,557, which represents a 10% year-to-date gain.

The following is a reprint of the market commentary from the March edition of the Option Advisor, published on Feb. 23. Prices and the chart are as of the close on Feb. 23. For more information or to subscribe to the Option Advisor, click here.

Last month in this space, I discussed the significance of long-term moving averages, in particular the 40-month and the 320-month moving averages of the S&P 500 Index (SPX). And I drew bullish conclusions for the market, based in no small part on the action of the S&P relative to these long-term moving averages. I cited as support for the use of such moving averages an excerpt from my article, entitled "Trading on the Level," in the summer 2011 issue of our SENTIMENT magazine.

This month, I'm going to discuss the importance of levels that represent double a previous major low. As I stated in that same SENTIMENT article:

"Over the years, I've found that when a stock or a stock index doubles from a major low, the share price level associated with the double often becomes a 'speed bump' or a resistance area. This is likely because many holders of the security decide it is time to take some or all of their investment off the table because it has already doubled, which raises concerns that it could be vulnerable to a reversal of fortune. This phenomenon also plays to the natural (and self-defeating) tendency for investors to be more fearful of giving up profits on successful trades than of incurring additional losses on unsuccessful trades... A similar phenomenon can operate on 50% declines off a major peak."

An excellent example of the "double as speed bump" principle was the action of the S&P in 2011 around the 1,333 level, roughly double the intraday low of 666.79 at the March 6, 2009 market bottom. As the accompanying chart well illustrates, the S&P struggled mightily and frequently in 2011 at the 1,333 doubling level. Since first reaching 1,333 in mid-February 2011, the S&P crossed above and below this level on eight separate occasions, and closed within a point of 1,333 six times. But the final move by the S&P back below 1,333 in 2011 had an extremely ugly aftermath. The close at 1,331.96 on July 26, 2011 was followed by a 17% decline over the next two weeks, and set the stage for the choppy, volatile, and generally unpleasant market action over the next three months.

But something different has occurred this year, and it is a non-trivial aspect of the more bullish technical foundation that is being constructed for the market in 2012. After being stopped cold at a peak of 1,333.47 on January 26, the S&P proceeded to regroup and close at 1,344.90 on February 3. And over the subsequent 13 trading days, the S&P has traded no lower than 1,335.92, with today's close at 1,363.46 representing a new 2012 closing high.

Of course, an S&P close just 30 points (or less than 3%) above its erstwhile troublesome 1,333 doubling point is not enough of an "all clear" signal to definitively prove we will not soon have to deal with that level again. But the S&P's price action this year relative to 1,333 is another very encouraging sign, as is its price action around key long-term moving averages, and a sentiment backdrop that remains overly pessimistic.

Listed below are the doubling points for three stocks that have played out mostly as speed bumps so far this year. These may be worthy of your attention -- either as resistance levels to fade, or potential upside breakout fodder.

Finally, the price action of Apple (AAPL) has been an excellent model for how multiples beyond two can play out for a stock in a very strong uptrend. AAPL doubled very quickly from its 2008-2009 lows and moved on to triple these lows by April 2010. It then languished for about four months near this tripling point, before launching a new rally that propelled the stock to quadruple these lows by year-end 2010. This was followed by sideways action for the first half of 2011, until yet another push higher achieved the quintupling point from the 2008-2009 lows in July 2011 (near the $400 level). And -- once again -- there were six months of sideways activity until the mammoth 2012 rally began in earnest in mid-January.

The following is a reprint of the market commentary from the February edition of the Option Advisor, published on Jan 26. Prices and the chart are as of the close on Jan. 26. For more information or to subscribe to the Option Advisor, click here.

The accompanying monthly chart of the S&P 500 Index (SPX) since 1980 also displays 40-month and 320-month moving averages.

You might reasonably ask if we can glean any information of value about the health of the market and its upside potential from examining a 40-month moving average of the S&P, which encompasses more than three years of price action. Or, to push this envelope violently, is there any value to a 320-month moving average -- one of almost 27 years' duration? Or do such lengthy periods render moving averages so stale as to be irrelevant to the current environment?

The following excerpt from my article entitled "Trading on the Level" in the Summer 2011 issue of our SENTIMENT magazine discusses the effectiveness of longer-term moving averages as trading and timing tools:

"The 'standard issue' moving averages on a daily chart are the 50-day and 200-day moving averages. These are followed by just about every market technician and are frequently quoted in financial media articles discussing stock market action. As I discussed earlier, these are 'crowded' tools, and are best used as a reminder of what the crowd is looking at and not as tradable indicators. The crowded equivalent on the weekly chart of the 200-day moving average is the 40-week moving average... The advantage of creating moving averages longer than 40-weeks are two-fold -- they provide a smoother representation of price action (more signal and less noise) and they are on the radar of only a fraction of those who follow the standard issue variety and can thus be used as trading tools in addition to reference points."

Though 320 months is about 35 times the period encompassed by 40 weeks, let's take a look at the precision with which the S&P's 2008-2009 free-fall was contained at this multi-year level. The S&P's intra-month low in November 2008 at 741 was just 3% above its 320-month moving average at 717. In February 2009, the S&P's low (734) checked in at just 1.5% above the 320-month level (723). And at the absolute bottom of the market in March 2009, the S&P at its low of 666 was below its 320-month moving average reading of 725, but by month's end it had closed well above at 797 -- and the market's bear run, which had shaved almost 60% off the S&P from its October 2007 peak at 1,576, was over.

While the 320-month moving average of the S&P certainly defined a "level of interest" at this major market bottom, the 40-month moving average has been an effective tool at numerous other junctures. First, let's note the amazing fact that (other than for a period from mid-1981 to mid-1982) the S&P's 40-month moving average was not otherwise penetrated on a monthly closing basis from March 1979 to February 2001. Along the way, there were numerous tests and "close calls" -- including one during the infamous "crash" month of October 1987 -- but in the final analysis, the 40-month moving average defined the support levels time and again for a bull market over a span in excess of 20 years.

The break of the 40-month moving average in February 2001 was followed by a decline in the S&P of almost 40% over the next 20 months. But once the 40-month was re-taken on the rally in December 2003, the market never looked back at this level and ultimately rallied by over 40% into the October 2007 peak. And once again, the break of the 40-month moving average in June 2008 had very unhappy consequences -- this time, a 45% decline in less than a year.

But the good news for us right here and now is that the 40-month was re-taken in October 2010 and successfully re-tested over the course of August to October 2011. So is another big rally in the works -- perhaps of 40% or more -- that would take us beyond the all-time highs in 2007?

A strong clue may lie with yet another of the S&P's longer-term moving averages -- the 320-day. After languishing below this level for most of August to December 2011, the S&P re-took its 320-day moving average on December 29, 2011 and has not since looked back, thus far rallying by about 4%. When I combine the S&P's healthy relationship with its longer-term moving averages with what I see as a sentiment backdrop that's inordinately negative, the bullish case for the market becomes quite compelling indeed.