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« October 2015

IVolatility Trading Digest™ Blog

Volume 15 Issue 41
Oktoberfest & S&P 500 Index [Chart]

Oktoberfest & S&P 500 Index [Chart] - IVolatility Trading Digest™

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With Oktoberfest festivities now well underway, last week the bulls also celebrated a significant improvement in market sentiment detailed in our regular bi-weekly market review including three of the current “Foremost Five” that has recently become the “Foremost Five or Six.” Then we have an S&P 500 Index chart updating the trendline status along with some thoughts as to where it may go next.


Review NotesS&P 500 Index (SPX) 2014.89 closed the week up a whopping 63.53 points or +3.26% continuing the dramatic intraday reversal made October 2 after the nonfarm payroll report and apparently ending the bearish rising wedge pattern with its 1812.50 downside measuring objective detailed two weeks ago in Digest Issue 39 "Flash Crash Ready & SPDR S&P 500 [Chart]". After retesting the August 24 -25 flash crash lows, the rebound created a potential double bottom activated on a close above 2020.86 just 5.97 higher. In addition, the rebound renewed attention to any resistance from the previous upward sloping trendline USTL shown in the chart below.

CBOE Volatility Index® (VIX) 17.08, based on real-time prices of options on the S&P 500® Index, constructed to reflect investors' consensus view of future (30-day) expected stock market volatility, declined 3.76 last week closing below 20, the previous support level implying less concern about downside market risk.

The table below shows the VIX cash compared to the next two futures contracts as well as our calculation of Larry McMillan’s day-weighted average between the first and second months.




With 7 trading days until October expiration, the day weighting applied 28% to October and 72% to November as of Friday for a 7.27% premium shown above. Our alternative volume-weighted average between October and November regularly found in the Options Data Analysis section on our homepage was slightly lower at 6.91%.

While day-to-day VIX changes offer little forecasting insight following the VIX futures premium helps since it measures expectations of tactical professional traders and money managers using VIX futures and options for hedging long portfolio risk.

Premiums for normal term structures during uptrends are 10% to 20% while premiums above 20% are unsustainable suggesting a lack of enthusiasm for VIX hedging often occurring around market highs suggesting overbought conditions associated with pullbacks. Alternatively, premiums less than 10% suggest caution and negative premiums indicate oversold conditions. The volume-weighted premium turned negative on August 20 when the long uptrend from October 4, 2011 ended and remained negative until Monday October 5 turning positive with a .85% premium and remaining positive all week closing at 6.91% just short of the 10% green zone.

In the past when the premiums turned positive, it offered a buying opportunity suggesting the pullback was complete, however since the uptrend ended August 20 there was some concern it may no longer be a reliable buying signal but it certainly was last week.

VIX Options

With a current 30-day Historical Volatility of 122.03 and 126.96 using Parkinson’s range method, the table below shows the Implied Volatility (IV) of the at-the-money VIX calls and puts using the futures prices based upon Friday’s closing option mid prices along with their respective month’s futures prices, since the options are priced from the tradable futures.




Compared to the current range historical volatility of 126.96 both October and November at-the-money options are inexpensive relative to recent movement of the VIX futures.


All of the Implied Volatilities along with the Historical Volatilities and Greeks for the VIX options based upon the futures prices are on our Advanced Options page, found by clicking on the “market close” link shown near the top of the page.


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S&P 500 Index Potential Double Bottom

Without a lot of moving averages and other indicators that can make charts difficult to read, here is the updated chart showing the upward sloping from the October 4, 2011 low.




As mentioned above the rising wedge detailed two weeks ago in Digest Issue 39 "Flash Crash Ready & SPDR S&P 500 [Chart]" appears superseded by the successful retest of the August 24 flash crash low.

What we think we know:

The long-term uptrend from 2011 ended August 20 when SPX declined 43.88 to close at 2035.73. See the third arrow pointing to the left above. Checking the longer-term upward sloping trendline, USTL from the March 2009 bottom using semi-log scale, as technicians recommend for longer-term trends, shows it ended sooner on June 29 when SPX declined 43.85 to close at 2057.64, see the first arrow pointing the left. Applying the same log scale to the USTL from October 4, 2011 low shows the end was on July 7 as SPX advanced 12.58 to close at 2081.34, the second arrow pointing to the right.

The current upside momentum is likely to take SPX higher, perhaps enough higher to retest the 2100-2125 level. From a technical perspective, the September 17 high of 2020.86 is one remaining hurdle. Should SPX continue higher and close above 2020.86 it will activate the small double bottom pattern with an upside measuring objective up at 2172, but first it will need to close back above the USTL now about 2100 since once trendlines are broken, especially long-term trendlines, they become retracement resistance.

What we don’t know:

Was the August 24-25 decline just a correction or start of a longer-term bear market?

Will the rebound now underway become another sell the retracement opportunity and if so when? The apparent disconnect between fundamental stock values and a deteriorating economic outlook suggests the rebound is unlikely to continue beyond the previous May 20 high at 2134.71.

Foremost Five or Six

Upon realizing five was probably not enough, we expanded the category to six. Here they are in last week’s order of perceived importance.

United States Oil (USO)
Market Breadth
iShares Transportation Average (IYT)
US Dollar Index (DX)
ProShares UltraShort 20+ Year Treasury (TBT)
DBX ETF Trust - Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR)

Expanding on the top three:

United States Oil (USO) 15.99 as a proxy for WTI Crude Oil, advanced 1.22 or +8.26% for the week as the November WTI futures advanced 8.98% closing at 49.63.

While most commentary remains biased towards an oversupplied market scenario those with the most at stake and arguably the most knowledgably, continue covering short positions while increasing their long futures positions.

Updating the CFTC Commitment of Traders report for October 6 shows the "Managed Money" group continued covering short positions by an additional 4,694 contracts but of equal importance, they added 14,629 longs thereby increasing their net long position by another 19,323 contracts representing 6.82 % of the open interest up from 3.80% on August 18. Based upon the continuing action of the “Managed Money,” it appears 14 for USO and 45 basis cash and near futures is now a good support level. In addition, they now both have well defined upward sloping trendlines from the lows that will also provide support on a pull back. For details on the importance of the "Managed Money," see Digest Issue 37 "Waiting for the Fed & S&P 500 Index [Chart]".

Market Breadth The McClellan Oscillator Summation Index reported by McClellan Financial Publications, gained an incredible 1,199.04 points last week going from -437.64 to + 761.40. Had breadth not improved as the S&P 500 Index advanced, the divergence would have been striking, but breadth improved along with the index, meaning more stocks participated especially those in the oil & gas and material sectors – all good news for the bulls.

iShares Transportation Average (IYT) 148.36 up 6.88 points or +4.86% for the week forming a potential double bottom much like the SPX that will be activated on a close above the September 17 high of 149.86 only 1.50 points higher. However, there is concern since rising crude oil prices are usually detrimental to the transports it implies some market participants do not think crude oil will go much higher or improving global economic conditions will benefit them both.


strategyImproving China sentiment prompted short covering early last week by commodity bears that extended to equities starting a rotation into value stocks and sectors out of high multiple growth stocks that picked up momentum when minutes from the FOMC meeting were released apparently confirming the Federal Reserve is less likely to increase interest rates soon. By the end of the week, equities were said to be in “risk-on mode once again.

While the current upward momentum is likely to activate double bottoms in many stocks and ETFs with considerably higher upside measuring objectives, there is formidable trendline and previous high resistance to overcome. In meanwhile, as earnings reporting gets underway go with the flow using defined risk call spreads on stocks and ETFs with high options volume that partially hedges both time decay and implied volatility that will decline further as SPX advances. However, avoid new positions on stocks before their reporting date especially those with elevated implied volatility levels with the potential to make large moves in either direction. For a list see last week’s Digest Issue 40 "Volatility Kings™ 3Q 2105".


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While the advances made last week began with short covering they continued higher when minutes from the FOMC meeting seemed to confirm the Federal Reserve is less likely to increase interest rates soon and by the end of the week, equities were in “risk-on mode once again just as earnings reporting gets underway. The upward momentum is likely to continue until the major indexes reach resistance near former uptrend lines and previous highs.


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ActionActionable Options™

We now offer daily trading ideas from our RT Options Scanner before the close in the News section of our home page based upon active calls and puts with increasing implied volatility and volume.


For next week’s issue, we will fire up the rankers and scanners looking for new interesting trade ideas.


Finding Previous Issues and Our Reader Response Request

All previous issues of the Digest can be found by using the small calendar at the top right of the first page of any Digest Issue. Click on any underlined date to see the selected issue. Another source is the Table of Contents link found in the lower right side of the IVolatility Trading Digest section on the home page of our website.

As usual, we encourage you to let us know what you think about how we are doing and what you would like to see in future issues. Send us your questions or comments, or if you would like us to look at a specific stock, ETF or futures contract, let us know at or use the blog response at the bottom of the IVolatility Trading Digest™ page on the website. To receive the Digest by e-mail let us know at


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