« March 2017 »

IVolatility Trading Digest™

Volume 17 Issue 12
Seeking Relative Strength [Charts]

Seeking Relative Strength [Charts] - IVolatility Trading Digest™

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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Last week Digest Issue 11 "Consider Planting Hedges [Charts]" speculated the reaction last Wednesday’s FOMC meeting announcement on interest rate hikes could be another "Buy the rumor sell the news" event similar to the one after the nonfarm payroll report on March 10. That was the market reaction. The US Dollar Index and interest rates declined after the FED hiked the Fed Funds target rate 25 basis points while confirming expectations only two more rate hikes are likely this year making last week’s SPDR S&P 500 ETF (SPY) put spread hedge suggestion unnecessary. After brief market update and commentary, we have the results for one of the best sectors using our trustworthy Stock Sentiment Ranker set to scan Health Care Select Sector SPDR (XLV) stocks.

Review NotesS&P 500 Index (SPX) 2378.25 gained 5.65 points or +.24% for the week after testing both support at 2350 and the upward sloping trendline, USTL from the November 4 low. While 2350 remains the first support, the next is down at 2300 and then 2275 going all the way back to December 13.

VIXCBOE Volatility Index® (VIX) 11.28 declined .38 or -3.26% for the week while the comparable IVolatility implied volatility index mean, IVXM 8.05 declined .81 or -9.14%.

VIX Futures Premium

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

With 2 trading days until the March expiration, the day- weighted premium between March and April allocated 8% to March and 92% to April for a 16.67 % premium as the VIX declined slightly but less than the declining front month futures contracts.


StrategyHere are updates for two hedge indictors currently in focus. Although the US Dollar Index and interest rates declined after the Fed announcement these two indicators imply consider hedging activity continues. First updating the S&P 500 Index (SPX) put open interest that been trending higher. The Put/Call chart for the last two years shows the put open interest did not decline after the Fed announcement as it did in December instead it continued rising.


While put open interest always exceeds call open interest, spikes higher correspond with periods of increased uncertainty. Now put open interest remains high at more than 10 million contracts with total open interest in excess of 16 million contracts.

Next updating the total options VIX futures open interest suggests considerable hedging activity persists.


Friday’s open interest was 11.6 million contacts with the average for the week at 11.2 million shown above.

Perhaps these charts reflect an increasing risk perception due to a changing investment landscape from one of extreme monetary accommodation to a tighter monetary policy.

Relative Strength

Focusing once again on the continuing challenge of keeping up with sector rotation an updated relative strength review confirmed health care as one of the better sectors despite all the recent media attention relating to the new health care proposal underway.

With early advancing "Trump Stocks" now in retreat its seems like the current strength has more to do with rotation trading than it does with expectations of improving fundamentals or the sector will not be as disadvantaged as initially presumed.

Following the methodology used in Digest Issue 8 "The Trend is your Friend [Charts]" and Digest Issue 10 "Trend or Rotation [Charts]" we again fired up our Stock Sentiment Ranker. This time for the Stock list, we created a new group in My Favorites from the stocks in the Health Care Select Sector SPDR (XLV) to identify the top twenty set to scan for stock prices greater than 5 with market capitalizations greater than 1 billion with options volume greater than 2000. The other settings were any volatility, high Call/Put ratio, and high exponential moving average EMA, relative strength RSI and with positive Chaikin Money Flow, CMF. Results:


Set to show 20 only 9 qualified using these criteria and none have a high bullish rank but the sector is trending higher relative to the SPX.

Crude Oil COT Brief

Crude OilWTI Light Sweet Crude Oil (CL) 48.78 basis April futures recovered .29 for the week in what appers to be the start of a countertrend consolidation as a pattern begins developing. It could evolve into a continuation down or an unusual reversal pattern.

From the Disaggregated Commitments of Traders - Options and Futures Combined report as of March 14, "Managed Money," the group that best correlates with crude oil price changes and arguably the most important, were big sellers reducing longs -37,608 contracts and increasing shorts -49,176 for a net change of -86,784 contracts or from 13.40% of open interest to 9.46%. "PMP" (Commercials) added 58,753 long contracts offsetting a good portion of the selling presumably taking advantage for lower prices followed by "Swaps," "Others" and "Non Reportables." While "PMP" longs could be right, waiting for evidence that "Managed Money" has finished selling seems like the best strategy.

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The Fed interest rate hike announcement created another "Buy the rumor sell the news" event as the US Dollar Index and interest rates declined but some hedging positions remained in place reflecting a perception of increased risk due to a changing investment landscape from one of extreme monetary accommodation to a tighter monetary policy. For equities, sector rotation continues to be more important than fundamentals.

March Madness Data Sale

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Next week will include another market review and more crude oil details from the weekly Commitment of Traders report.

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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IVolatility.com is not a registered investment adviser and does not offer personalized advice specific to the needs and risk profiles of its readers.Nothing contained in this letter constitutes a recommendation to buy or sell any security. Before entering a position check to see how prices compare to those used in the digest, as the prices are likely to change on the next trading day. Our personnel or independent contractors may own positions and/or trade in the securities mentioned. We are not compensated in any way for publishing information about companies in the digest. Make sure to due your fundamental and technical analysis homework along with a realistic evaluation of position size before considering a commitment.

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