« May 2018 »

IVolatility Trading Digest™

Volume 18, issue 18
China Trade Negotiations [Charts]

China Trade Negotiations [Charts] - IVolatility Trading Digest™

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For now the yield on the 10-Year Treasury Note has settled under 3% so attention can be focused on trade and tariff issues after the US delegation returned from China. It will likely to be a long drawn out process creating a bumpy road for both equities and commodities. More follows in the market review including hedge ideas to consider for iShares MSCI Emerging Markets ETF (EEM) and United States Oil Fund, LP (USO).

Review NotesS&P 500 Index (SPX) 2663.42 slipped 6.49 points or -.24% last week after an impressive rebound Friday set off by news that Berkshire Hathaway increased its stake in Apple Inc. after testing support at the 200-day Moving Average. While remaining under the medium term upward sloping trendline from the May 18, 2017 low at 2352.72, a new downward sloping trendline, DSTL from the January 26 high of 2872.87 provides an upside objective for the reversal that began Friday.


Although this chart is busy with both the 50-day and 200-day moving averages as well as a new downward sloping trend line they all are important. Should the advance continue it will first need to close above the 50-day Moving Average now 2681.06, then the April 18, high at 2717.49 and finally above the downward sloping trendline, DSTL all formidable resistance considering previous leading sectors including PowerShares QQQ (QQQ) 164.87, The Technology Select Sector SPDR Fund (XLK) 67.62 both risk activating Head & Shoulders Tops, an ominous technical pattern already set off in The VanEck Vectors Semiconductor ETF (SMH) 100.80, while The Financial Select Sector SPDR Fund (XLF) 27.27 drifts lower with interest rates. The combination of Berkshire's Apple Inc. news and support at the 200-day could turn the market higher or it could just provide a better opportunity to reduce equity risk.

VIXCBOE Volatility Index® (VIX) 14.77 declined .64 points or -4.15% last week. Our similar IVolatility Implied Volatility Index Mean, IVXM using four at-the-money options for each expiration period along with our proprietary technique that includes the delta and vega of each option, declined .60 points or -4.74% to 12.07.


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. With 7 trading days until May expiration, the day-weighted premium between May and June allocated 35% to May and 65% to June for 9.56% premium.


Now just below the bullish green zone between 10 and 20 the futures and options indicators improved last week.

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. At the extremes, declines below 10 and advances above 30 are both unstable.

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China Trade and Tariffs


As the trade negotiation process gets underway, markets will likely remain skittish creating a bumpy road as the public comment period for previously announced tariffs ends May 22.

Further complication comes from signs of reduced global liquidity reflected by the US Dollar Index (DX) & DXY 92.57, up another 1.23 points or +1.35% last week for an advance of 3.34 points or 3.74% from the last April 17 pivot low of 89.23.


While interest rate pressure declined somewhat the dollar continued higher, creating headwinds for US based multinationals in technology and consumer staples. However, now appearing overbought it may stall at a previous resistance level adding some support for equities and commodities.

Hedge Ideas

Like the interest rate hedge using ProShares UltraShort 20+Year Treasury (TBT) in Digest Issue 16 "The 10-2 Spread [Charts]" that proved unnecessary, here are two more "Just in Case" ideas along the same line.

iShares MSCI Emerging Markets ETF (EEM) 46.43 down .83 points or -1.76 for the week closing on the 200-day moving average. Since the start of the year, until the middle of April, correlation with the S&P 500 Index was 1.00, moving with SPX. However, by April 17 the correlation declined to .85 and Friday it was .56 as EEM had been declining faster than SPX. One likely reason was the rapid advance of the US Dollar Index (DX) shown in the chart above. Another could be uncertainty about trade and tariff negotiations with China.

Although advancing .21 or +.45% to close on the 200-day moving average Friday and could be forming a double bottom any further advance will depend on the S&P 500 Index and the US Dollar Index (DX) that looks overbought and due to pull back. Just in case DX continues higher and SPX fails at the 50-day moving average or one of the other two resistance areas mentioned above, here is a hedge idea to consider.


Using the ask price for the buy and mid for the sell the put spread debit would be .53 about 27% of the distance between the strike prices with a slight implied volatility edge. Use a close back above the last pivot at 47.50 as the SU (stop/unwind). In the event it opens higher add it to the focus list and wait until it makes a pivot and turns lower again.

Crude OilUnited States Oil Fund, LP (USO) 14.09 +.36 or +2.62 for the week breaking out to the upside closing above 14 as WTI Crude Oil broke out to close above 69 finishing at 69.72 up 1.29 Friday basis June futures although the US Dollar Index advanced last week.

A quick check of the Commitment of Traders report as of Tuesday May 1, shows both "Managed Money" and "Others," together called "Large Specs" decreased their net positions, while Producers/Merchants/Processors, "PMP" and "Swaps" increased their net positions. The largest change was "PMP" increasing their longs 41,203 contracts to 640,338, to the highest level in three years. Perhaps Processors (refiners) are hedging against further price advances.

While WTI advanced from 62 in the middle of April it likely reflects buying in anticipation of sanctions being reimposed on Iran that would reduce export volume, while the continuing advance suggests hedging against something more troubling.

Since stock prices of the companies in the sector are lagging while they usually lead crude oil, the initial thought would be that crude oil was overbought and due for correction. However, lagging stock prices may be due to a weak equity market.

With uncertainty about trade negotiations with China along with concerns about the Middle East a "Just in Case" hedge against higher crude oil prices seems reasonable.



With an Implied Volatility/Historical Volatility ratio of 1.33 using the range method for historical volatility the option is moderately priced and about .43 of its 52 week range. Use a close back below 13.80 as the stop.

The suggestions above are based on the ask price for the buy and middle for the sell presuming some price improvement is possible. Monday's option prices will be somewhat different due to the time decay over the weekend and any price change.


PreviousIssues Until the S&P 500 Index closes back above resistance, hedging long risk seems right although VIX future and options indicators have improved and interest rate concerns have subsided for now, market breadth remains uncertain.


Last week the 10-Year Treasury Note yield settled under 3% and the S&P 500 Index bounced off its 200-day Moving Average helped by news that Berkshire Hathaway substantially increased its Apple Inc. position. As earnings reporting declines, attention this week will likely focus on trade and tariff negotiations with China and renewed sanctions on Iran, both making for a bumpy ride.

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Next week more market review and perhaps more trading ideas to consider from our ranker and scanner tools if the S&P 500 Index continues higher.

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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.

Our purpose is to offer some ideas that will help you make money using IVolatility. We will also use some other tools that are easily available with an Internet connection. Not a lot of complicated math formulas but good trade management. In addition to Volatility we use fundamental and technical analysis tools to increase the probability of success and reduce risk. We prepare a written trade plan defining why the trade is being made, what we call the "DR" (determining rationale) and the Stop/unwind, called the "SU".