« April 2017 »

IVolatility Trading Digest™

Volume 17 Issue 17
Stuck Below the 50 [Charts]

Stuck Below the 50 [Charts] - IVolatility Trading Digest™

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An alternative title could be "The Battle at the 50" both refer to the difficulty the S&P 500 Index is experiencing closing above the 50-day moving average. After closing below the upward sloping trendline from the November 4 low on March 21 thereby ending the "Trump" trade from a trendline perspective, and then closing below the 50-day moving average on April 11 confirming the trend change, it has been unable to overcome resistance at the 50-day moving average.

Review NotesS&P 500 Index (SPX) 2348.69 advanced 19.74 points or +.85% for the week closing below the 50-day moving average at 2357.42. The next support is 2300, and then the more important wide support zone between 2285 to 2275 going all the way back to December 13.


From a trendline perspective, the so called "Trump" trade ended March 21 when SPX declined 29.45 points and closed below the upward sloping trendline, USTL, marked by the arrow above.

With the recent daily trading ranges below the 50-day moving average as volume increased closing prices are tracking the average higher as it has become resistance, although the slope remains positive.

With some support at 2300, the most significant support is between 2285 and 2275 from December 13 to January 23 shown by the two parallel green lines above.

During the December 13, 2016 to January 24, 2014 range the 50-day moving average was well below, but it did act as resistance during the September 8 to November 9 decline before the election, similar to now, raising the question what's needed to overcome the current resistance?

VIXCBOE Volatility Index® (VIX) 14.63 declined 1.33 or -8.33% for the week while the comparable IVolatility implied volatility index mean, IVXM now 11.11 declined 1.83 or -14.14%.

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VIX Futures Premium

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

With 17 trading days until the May expiration, the day- weighted premium between May and June allocated 68% to May and 32% to June for a negative premium of -2.27%.


The premium measures the amount the futures currently trade above or below the cash VIX, (contango or backwardation) until front month future converges with the VIX at expiration. May futures closed at 14.33 while June were 14.23 both below the VIX at 14.63.

The Day Weighted VIX Premium chart above shows the two previous downward spikes into negative territory quickly reversed when the SPX turned higher. Although negative premiums are usually associated with reversals they can remain negative for some time even though on the last two occasions they recovered quickly.

Here is another indicator that has not received enough attention recently.

CBOE S&P 500 Skew Index (SKEW) 148.42 up 14.06 points or 10.46% for the week measures the purchase of out-of-the-money S&P 500 Index puts that require a very large downside move to profit from long put positions. An increase of this index indicates greater expectations for an extreme down move. The CBOE explains further, a Skew value of 100 means the perceived distribution of S&P 500 Index log-returns is normal so the probability of outlier returns is negligible. Calculated from SPX option prices it describes "tail risk." As Skew rises above 100, the left tail of the distribution acquires more weight increasing the probability of outlier returns.


The two previous peaks occurred on January 20 at 146.33 and then March 17 at 154.34.

Interestingly January 20 was President Trump's inauguration day. The SPX gained +7.62 or +.34% to 2,271.31 in a narrow trading range. Earlier in the week Xi Jinping vigorously defended free trade while speaking at World Economic Forum in Davos and said Beijing would not boost its trade competitiveness by devaluing its currency. In addition, Janet Yellen turned interest rates higher commenting that Fed funds could be 3% by 2019.

March 17 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. Two days later, apparently concerned that the Fed intends to reduce accommodation, on Tuesday March 21 SPX declined 29.45 points or -1.24% to 2,344.02 closing below the USTL from the November low ending the "Trump" trade.

Indeed Friday's SPX put open interest between 2325 and 2000 for just the May 19 expiration was 437,682, but that includes both longs and shorts and many could be spreads in various combinations compared to the total open interest of 14,073,120 contracts.

The current upswing seems related to Sunday's French Election and will likely return quickly to the 50-day upward sloping moving average that began rising in January.

At the extremes both the VIX Futures Premium and SKEW are contrarian indicators of the current condition and both will return to their means. However, since upcoming events creating current conditions could be short-term it may also reflect changing risk perceptions. For example the old adage "Sell in May" will soon be heard.

Crude Oil Update

Crude OilWTI Light Sweet Crude Oil (CL) 49.62 basis June futures declined 3.98 or -7.43% for the week including a 2 point decline last Wednesday after the EIA gasoline inventory report showed an unexpected increase vs. an expected drawdown.

After last week's decline here's our take on the positions of the futures market participants before last Tuesday decline.

From the Disaggregated Commitments of Traders - Options and Futures Combined report as of April 18, before the decline “Managed Money,” the group that best correlates with crude oil price changes and arguably the most important, increased longs and reduced shorts for the second week, adding +6,522 long contracts and reducing shorts +7,613 for a net increase of +14,135 contracts or from 10.27% of open interest to 11.35%.


"PMP" (Producer/Merchant/Processor/User) often referred to as "Commercials" seemed to have some inside information about increasing gasoline inventories since they reduced their longs -25,012 contracts while reducing shorts +13,926 contacts for a net -13,926 contracts thereby increasing their net short position to 7.96% of the open interest up from 7.06% the week before.


"Swap Dealers" were the most influential on the right side reducing longs -6,024 and increasing shorts -15,816 for a net change of -21,659 increasing their short position to 9.54% of the Open Interest from 8.31% the week before. A "swap dealer" or "Swaps" use the futures markets to manage or hedge risk for counterparties who may be speculative traders, like hedge funds, or "Commercials" managing risk arising from the physical commodity dealings. The "Commercials" may have used "Swaps" to obscure additional shorting activity.

Once again, "Non Reportables" and undefined "Others" were on the wrong side, "Others" by +5,936 contracts net and "Non Reportables" by +15,695 contacts net.

The combination of the expiring May futures contract on April 20 along with the unexpected EIA gasoline inventory report the day before was apparently enough to create a rush for the exit.

Now look for increasing chatter from OPEC and NOPEC about a production cut extension at the it's May 25 meeting.

StrategyWhile the 50-day moving average has become formidable resistance for the S&P 500 Index after the end of the "Trump" trade, current political and geopolitical anxiety have also increased hedging activity. The short-term looks discouraging for the bulls, and it's become more difficult to identify what may brighten the picture anytime soon. One strategy is to watch support at 2300 and 2285 -2275. If these levels should fail to hold it will be time to consider put spreads.


The inability of the S&P 500 to close above its 50-day moving average along with increasing political and geopolitical risk makes it difficult to imagine what could improve sentiment short of spectacular earnings from upcoming reports before the end of April. Watch the next two key support levels, 2300 and 2285 -2275.

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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.

"The best volatility charts in the business."

Next week we will fire up our rankers and scanners looking for trading ideas.

Our Spring Data Sale ends soon.

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