« August 2017

IVolatility Trading Digest™ Blog

Volume 17 Issue 32
August Agony [Charts]

August Agony [Charts] - IVolatility Trading Digest™

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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This week the plan was to look for long trading ideas on the presumption the expected August decline would be a gradual affair as it pulled back toward the 50-day Moving Average.

However, "One does not plan and then try to make the circumstances fit those plans. One tries to make plans fit the circumstances." – George S. Patton, Jr.

There is more below including a look at market breadth and a transports update along with our Stock Sentiment Ranker results for the ETF group in case the current pull back is just another "Buy the Dip" affair, although many indicators flashing caution suggest there is still more downside ahead.

Review NotesS&P 500 Index (SPX) 2441.32 declined 35.31 points or -1.43% for the week after making another Key Reversal last Tuesday, the second in nine treading days. Key Reversals are minor trend change indicators forecasting a lower low the next day. Unlike the first one on July 27 that failed produce a lower low the next day, last Tuesday's followed the script. Now below the 50-day moving average at 2448.24 and the upward sloping trendline, USTL a test of support at 2400 seems likely.

VIXCBOE Volatility Index® (VIX) 15.51 jumped up 5.48 points or +54.64% for the week while the comparable IVolatility Implied Volatility Index mean, IVXM at 11.14 advanced 4.11 points or +58.46%. Here is the VIX chart for the last year.


And now the Implied Volatility chart for VIX options at 128 up from 78.57.


VIX Futures Premium

The chart below shows as our calculation of Larry McMillan’s day-weighted average between the first and second month futures contracts.


Now negative at -1.39%

With just 2 trading days until the August expiration, the day-weighted premium between August and September allocated 10% to August and 90% to September for a negative 1.39%, on the last Friday before August futures expire. Each of the previous drops into negative territory have been followed by equally quick advances as the VIX declines as the chart above shows.

The premium measures the amount that futures currently trade above or below the cash VIX, (contango or backwardation) until front month future converges with the VIX at expiration on Wednesday.

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breadthMarket Breadth as measured by our preferred gauge, the NYSE ratio adjusted Summation Index that factors out the number of issues traded, and reported by McClellan Financial Publications, declined 251.61 points for the week closing at 459.93 after closing below its 50- day moving average on Wednesday August 9.


When overlaid on the S&P 500 Index chart it suggests the current breadth deterioration shown by the black Summation Index line is more severe than the last three times SPX found support at the 50-day moving average.


transportationiShares Transportation Average (IYT) 165.40 divergence highlighted last week in Digest Issue 31 "Transports & Crude Oil [Charts]" did not fade away as expected suggesting a more cautious stance should be considered.

StrategyWhile "Buy the Dip" has been the right strategy since last November and mostly likely the right strategy once again, perhaps the trade plan should be modified from simply buying at the 50-day moving average to include provisions for improving market breadth along with an increasing VIX futures premium back above 10% as the VIX declines. In addition, watch as SPX approaches the wide support zone around 2400 that began in March as this seems like a logical turning point. While it may be Agony for the bulls there are still three weeks left in August. However, in preparation for the turn, Friday's ETF Stock Sentiment Ranker Results follow.

The Stock Sentiment Ranker was set to identify the top ten from the ETF database using My Favorites, our handy complimentary utility program. The criteria was stock prices greater than 5 with market capitalizations greater than 1 billion with options volume greater than 2000. The other settings were low volatility, high Call/Put ratio, and high exponential moving average EMA, relative strength RSI and with positive Chaikin Money Flow, CMF.



Seasonally weak August along with geopolitical chatter turned sentiment negative and equities quickly declined. However earnings reports in most sectors with the exception of retail have been positive so the decline could be limited in magnitude and duration, however only the foolish know for sure, so prudence suggests considering long position hedges since markets decline faster than they advance as fear overcomes greed.

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

"Big Data? In options we are Big Data!"

Next week will feature a more extensive market review along with a crude oil update from the Commitment of Traders perspective.

Finding Previous Issues and Our Reader Response Request

PreviousIssuesAll 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.

CommentAs 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 Support@IVolatility.com or use the blog response at the bottom of the IVolatility Trading Digest™ page on the IVolatility.com website. To receive the Digest by e-mail let us know at Support@IVolatility.com



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