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Today


IVolatility Trading Digest™ Blog


Volume 17 Issue 30
Whac-A-Sector Again [Charts]

Whac-A-Sector Again [Charts] - IVolatility Trading Digest™

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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Review NotesFor the bulls, things were going quite will until Thursday and then suddenly the S&P 500 Index, PowerShares Nasdaq 100 ETF and Technology Sector Select SPDR all made key reversals. The transports were already declining after make an intraday high July 14. So far it seems just like another round of sector rotation when the leading sectors gets whacked, only to be replaced by others that pops up, with high frequency traders, called “Algo Rotators” doing the whacking as depicted here. There's more below including a new long idea for First Solar Inc. (FSLR).

Review NotesS&P 500 Index (SPX) 2472.10 declined only .44 or -.02% for the week after reaching an intraday high of 2484.04 Thursday and then closing at 2475.42 down 2.41thus qualifying as a key reversal, a minor trend change indicator forecasting a lower low the next day. Since it didn't make a lower low Friday the significance of the key reversal was weaken. Expect support at 2450, then at both the upward sloping trendline, USTL from the November 4 low at 2083.79 and the 50-day moving average at 2435 with considerably more support at 2400.

transportationUnlike two weeks ago in Digest Issue 28 "Bulls Still in Charge [Charts]" when it was confirming the advancing SPX, the iShares Transportation Average (IYT) 166.04 is now diverging significantly after reaching an intraday high of 175.75 on July 14 its been downhill ever since as FedEx (FDX) 208.04 tests its 50-day moving average while United Continental Holdings (UAL) 67.88 and even Southwest Airlines (LUV) 56.56 are getting whacked below their 50-day moving averages. Add Union Pacific Corp. (UNP) 103.30 below both 50-day moving average and USTL from November 4 low and the chart looks delightful to the bears. The test to determine if the decline is simply another bout of profit taking rotation or something more serious will come at the upward sloping trendline, USTL now just above 162.50.

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Technology Sector Select SPDR (XLK) 57.44

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Like the S&P 500 Index it didn't continue lower Friday so the significance of the key reversal was diluted somewhat, at least for now. Since the last key reversal on June 9 was the beginning of a meaningful correction that exceeded the 50-day moving average it looks like this one could continue somewhat lower. Then focus on the upward sloping trendline, USTL just above 55.

While money comes out of the transports and tech here is one idea where it may be headed.

First Solar Inc. (FSLR) 48.87 up 3.72 or +8.24% for the week all occurring Friday as it gapped up to close higher by 4.06 or +9.06% after reporting earnings Thursday. Since this is the second gap up quarterly report chances are it will continue higher presuming this gap will also become another break-away.

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The current Historical Volatility of 39.64 and 34.16 using the Parkinson's range method, with an Implied Volatility Index Mean of 44.43. The implied volatility / historical volatility ratio using the range method is 1.30 so option prices are about right compared to the recent movement of the stock while the implied volatility is likely to continue declining back toward 35 after reporting earnings. Note the peaks before, and declines after earnings reports in the volatility chart below.

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44.43 -12.85 or -22.43%

Friday's option volume as 43,413 contracts traded compared to the 5-day average volume of 17,560.

Consider this long call spread short put combination, short more options than long to benefit from declining volatility.

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StrategyEven though the S&P 500 Index along with the PowerShares Nasdaq 100 ETF (QQQ) and the Technology Sector Select SPDR (XLK) made key reversals Thursday but didn't trade lower Friday their wide trading ranges with increased volume was enough to take notice and prepare for a further declines perhaps limited to only a few sectors. Accordingly, it seems like a good idea to begin closing or hedging any open long calls. As long as the S&P 500 Index holds above support at the upward sloping trendline, USTL and the 50-day moving average both at 2435 and breadth remains encouraging last week's rout may be limited to the tech sector.

As for keeping up with Algo driven sector rotation here is a thought.

"Anyone who isn’t confused clearly doesn’t understand the situation."
Edward R. Murrow – A highly respected former American broadcast journalist

Summary

While most indicators still remain positive , sector rotation increased especially noticeable in the transports and technology sectors that were until recently leading the markets higher. Should they continue lower more sectors may join the decline. For the S&P 500 Index watch support at 2450 and 2435 for any signs of increasing downside momentum.

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Next week will include an expanded market review including 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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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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