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« July 2015

IVolatility Trading Digest™ Blog

Volume 15 Issue 30
Adding Cyclical Perspective [Chart]

Adding Cyclical Perspective [Chart] - IVolatility Trading Digest™

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Last week challenged the slightly positive bias previously expressed in Digest Issue 29 "Four Horsemen & Volatility Review", thereby drawing attention to the cyclical caveat that now deserves additional scrutiny.

An updated S&P 500 Index chart including cyclical analysis follows brief market comments and indicator updates including a status report the ongoing saga of the “Four Horsemen of the Apocalypse.”


Review NotesS&P 500 Index (SPX) 2079.65 closed the week down 46.99 or - 2.21% and just about the same amount of the previous week’s advance as it failed to close above the right shoulder of the already activated Head & Shoulder Top at 2129.87 and then abruptly turned lower failing to renew the uptrend by forming a second right shoulder shown below.

PowerShares QQQ Trust (QQQ) 111.10 down or - 2.49% went from a gap breakout above the previous resistance at 111to reach an intraday high of 114.39 on July 20, back to retesting 111 all within seven trading days. For amount of market capitalization involved, this could be a record swing.

CBOE Volatility Index® (VIX) 13.74 up 1.79 or 14.98% after trading as low as 11.73 just the day before, although seasonal factors alone now favor lower volatility.

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.




The day weighting applied 85% to August and 15% to September as of Friday for a 5.19% premium shown above. Our alternative volume-weighted average between July and August regularly found in the Options Data Analysis section on our homepage was higher at 10.31%.

Premiums for normal term structures 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. Last week the volume-weighted premiums were in the normal zone all week.

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.

S&P 500 Index (SPX) 2079.65 – adding a cyclical perspective




As a reversal pattern, a Head & Shoulders requires a trend to reverse. Accordingly the current uptrend defined by the upward sloping trendline USTL originates at the October 15 low of 1821.61 (below the left corner of the chart) extending upward to the right closing Friday at 2164.78 at the black arrow in the upper right corner, considerably higher than the current close. Now after two failures to continue trending higher, as indicated by the two right shoulders marked above as RS1 and RS2 chances are increasing it will close once again below the pattern neckline marked NL and continue to the minimum measuring objective at 2007 marked by the red arrow in the lower right corner.

Since the previous uptrend has apparently ended, the usual cyclical patterns are becoming more prominent as we noted in Digest Issue 29 "Four Horsemen & Volatility Review".

John Murphy provides an excellent cyclical explanation in his book Technical Analysis of the Futures Markets on pages 421- 436. In summary, the common practice is to measure the beginning and end of cycle waves from low points called troughs having tendency to occur about every 28 calendar or 20 trading days. The cycle peaks called crests will vary depending upon the next longer cycle and help determine changing trends by comparing the number of cycle up days to down days.

Presuming the cycle is exactly 20 days; a bullish bias would have more up days than down days while a bearish bias would have more down days and when crests appear at the midpoint it suggest a lack of trend influence.

Comparing up days to down days should help confirm the current trend status while projecting future turning points assuming the cycles continue lacking trend although few if any cycles will be exactly 20 days as other influences override the cyclical tendencies.

Some helpful reference information from Investment will help the analysis, saying as of as of July 6, 2015 the average (short term) cycle length, for the last 22 cycles, was 21.77 trading days and 12 cycles have a right hand bullish translation, 8 have a left hand bearish translation, while 2 were centered.

Beginning March 11, 2015 at point 1, on the chart above, here are the cycle counts.




Not surprisingly, the translation turned bearish between points 4 and 5 since this is where the S&P 500 Index first crossed below the upward sloping trendline USTL. Based upon an ideal cycle count of 20 days expect (e) the next cycle low on or about August 4, 2015 in seven trading days. However if the translation remains bearish it could be somewhat longer. If so, it is likely to be below the neckline of the Head & Shoulders Top pattern and heading toward the minimum measuring objective.

Status of the Four Horsemen

Digest Issue 25 "The Four Horsemen of the Apocalypse [Charts]" introduced four important risks to equity markets to follow. Last week some came roaring back to the front of the galloping pack while others slowed down taking a breather. First the leaders,

iShares Transportation Average (IYT) 144.63 down 3.84 or -2.59 % for the week this ETF tracks the important Dow Jones Transportation Average Index measuring the performance of transportation sector US equities and considered a leading economic indicator. After testing the downward sloping trendline, DSTL from the March 20 high of 165.00 on Wednesday as it advanced to 149.87, it then fell apart Thursday declining 3.11 to 145.53 and then continued lower Friday to ending its bid to turn the trend higher by closing above the DSLT at 149. This puts IYT back in the front of the charging horsemen galloping toward the apocalyptic cliff.

Market Breadth

The McClellan Oscillator Summation Index reported by McClellan Financial Publications resumed declining as it lost 221.96 points to close the week at 102.41 regaining its previous position near the front of the charging pack of roughriders.

ProShares UltraShort 20+ Year Treasury (TBT) 46.13 down another 3.36 or - 6.79% our preferred interest rate indicator it is now testing support at 46 as the uptrend that begin April 17 at 40.97 has been reversed. However, interest rates have tendency to fluctuate before Federal Open Market Committee meeting and since the next one is Tuesday and Wednesday, perhaps the current downtrend in rates will end but lower commodity prices greatly reduces the probability interest rates will increase very much, if at all in the near future.

US Dollar Index (DX) 97.20 down .66 or - .67 % for the week the advance from the May - June double bottom continues as the uptrend that began June 18 at 93.56 could be tested this week as interest rates and commodity prices are declining. Comments after the Federal Open Market Committee meeting Wednesday should determine if DXY continues higher or fades into the background along with TBT.


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strategyRenewing hedging calls sounds like a broken record or perhaps the boy who continued crying wolf until nobody paid further attention. However, from a fundamental perspective, earnings do not appear to be sufficient to support a resumption of the uptrend with a few exceptions. Using Warren Buffett’s favorite valuation measure showing market capitalization at 24.24 trillion and US GDP of 18.02 trillion for 134.5% ratio, equities are higher than 2007 at 124.8%, only exceeded by March 31, 2000 at 164%.

Using June 30, 2015 Ned Davis research, CMG says the S&P 500 Index over valuation places the mean price to earnings ratio of 21.5 in the highest quintile with a median of 16.8. However, using forward estimates Reuters calculates it at 16.5 times, about 10 percent more expensive than its historic average of 15.

Considering claims of overvaluation, declining commodity prices and the uptrend from last October has ended, while other indicators are turning negative again, it seems hedging market risk should continue playing a role.


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Hopes that earnings reports would help support equities seems to have faded last week along with commodity prices as the S&P 500 Index abruptly turned lower once again after failing to close above the right shoulder of the potential Head & Shoulder Top confirming cyclical crests that have become increasingly more prominent. Interest rates pulled back ahead of the Federal Open Market Committee meeting bolstering expectations they will stay lower longer, but they typically advance or decline ahead of the comments only to reverse a few days later.


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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 again fire up the rankers and scanners looking for interesting trade suggestions.


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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