« June 2018 »

IVolatility Trading Digest™

Volume 18, issue 23
Crude Oil Going Lower [Charts]

Crude Oil Going Lower [Charts] - IVolatility Trading Digest™

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Coming right on cue, this is time of the year when crude oil prices usually decline augmented by speculation of an OPEC production increase announcement at their June 22 meeting. Details including a WTI crude oil chart along with a Commitment of Traders summary follow the market review.

Review NotesS&P 500 Index (SPX) 2779.03 gained 44.41 points or +1.62% last week advancing up toward resistance around 2800 from both the previous March 13 high at 2801.90 and the medium term operative upward sloping trendline from February 11, 2016. Support now located at 2740 and then the 50-day moving average at 2687.04.

VIXCBOE Volatility Index® (VIX) 12.18 declined 1.28 points or -9.51% while 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, closed 1.21 points, or -12.10% lower at 8.79, below the bottom of what was considered the new range. Encouraging for the bulls.



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. Last week's reported 11.10% was calculated a week early, becoming 9.96% after revision. Now with 7 trading days until June expiration, the day-weighted premium between June and July allocated 28% to June and 72% to July for 14.93% premium, well into the bullish green zone between 10% and 20%.


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.

Outlook Improving

From a technical perspective the outlook greatly improved last week as both the Invesco QQQ ETF (QQQ) based on the Nasdaq-100 Index and the Technology Select Sector SPDR (XLK) broke out to close above their previous March 13 highs thereby negating potential Head & Shoulder Top patterns that had been a concern. Now after retesting those March 13 highs, odds are they will continue advancing.

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Crude OilWTI Crude Oil (CL) 65.74 basis July futures declined 2.14 or -3.26% for the week, closing below the 50-day Moving Average on May31 and then below the upward sloping trendline June 1. Although attention is focused on the June 22 OPEC and Russia meeting, now called OPEC+ by some, seasonality is also contributing to the weakness. In addition, Bloomberg reported the US Government asked Saudi Arabia and other OPEC producers to increase production by a million barrels a day.


Anticipated support around 67- 66 failed to halt the decline as it closed below both the 50-day moving average and the operative upward sloping trendline (USTL) on the chart.

Summary for the Disaggregated Commitments of Traders - Options and Futures Combined report as of June 5 shows "PMP" defined as Producers, Merchants, Processors and Users continued reducing both longs and shorts. Combining May 29 with June 5 "PMP" reduced their longs 44,859 contracts and "Managed Money" decreased their longs by 54,218 contracts while "Swaps," whose counterparties may be hedge funds, or commercial clients reduced their short position 52,091 contracts. While the pluses and minuses are confusing considering the possible counterparty overlap between the categories, one unmistakable development is declining open interest, one of the first signs confirming trend changes both up and down, as longs liquidate and shorts cover. Since June 22 futures expired open interest has declined 407,181 contracts.

For example, this chart for "Managed Money,” the group that best correlates with crude oil price changes and arguably the most important, reflects noticeable long liquidation.


The combination of typical seasonal weakness, the upcoming OPEC+ meeting, closing below the upward sloping trendline along with declining futures open interest, all suggest lower prices for the near term.


Based on last week's activity, the US Dollar Index (DX) appears headed lower and interest rates may already reflect the upcoming results of the FOMC meeting on Wednesday and may then decline. While positive for technology, interest sensitive, consumer discretionary and domestic companies, the S&P 500 Index could lag since declining crude oil prices will hinder further advances in the energy sector. Futures and option indicators along with market breadth are improving as the bulls continue pressing forward although sector rotation remains a real challenge.


Futures and options indicators are turning bullish and market breadth continues improving. Lower crude oil prices benefiting technology, interest sensitive, consumer discretionary and domestic companies suggests increasing long position allocations in selective sectors.

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