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Today


IVolatility Trading Digest™


Volume 20 Issue 27
Invesco QQQ ETF Uptrend [Charts]

Invesco QQQ ETF Uptrend [Charts] - IVolatility Trading Digest™

Last week Digest Issue 26 " The 200-Day Snag [Charts]" focused on the 200-day Moving Average after the S&P 500 Index closed below this important level the previous Friday. Several indicators were flashing caution lights. However, supported by the big cap NASDAQ stocks that apparently didn't see the caution signs, the S&P 500 Index advanced every day last week. The Market Review below has more along with an Invesco QQQ ETF call spread idea to consider.

Review NotesS&P 500 Index (SPX) 3130.01 gained 120.96 points or +4.02% last week after bouncing smartly off the 200-day Moving Average. The Island Top Reversal formed by the June 10 breakaway gap remains the active pattern. However, should it continue advancing into and close the open gap, thereby overcoming resistance, expect the pattern to lose its influence.

Review NotesCBOE Volatility Index® (VIX) 27.68 declined 7.05 points or -20.30% 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 6.93 points or -23.93%, ending at 22.03%.

table

The spike up to 77.15% on Monday March 16, the day SPX declined 324.89 points, likely marks the top for this market decline. Based upon regression to the mean theory its arrival near 20% suggests the SPX will likely continue higher.

VIX Futures Premium

This next chart shows as our calculation of Larry McMillan’s day-weighted average between the first and second month futures contracts as of last Friday.

With 12 trading days until July expiration, the day-weighted premium between July and August allocated 48% to July and 52% to August for a premium of 7.10% moving into the yellow caution zone; much improved since June 26 at -.87% in the red bear zone.

table

The premium measures the amount that futures currently trade above or below the cash VIX, (contango or backwardation) until front month futures contract converges with the VIX at the next monthly futures expiration on Wednesday July 22.

For daily updates, follow our end-of- day volume weighted premium version located about halfway down the home page in the Options Data Analysis section on our website.

The relationship of the futures curve to the VIX, as measured by the premium, makes a good real-time sentiment indicator based upon actual commitments of large Asset Managers and Leveraged Funds.

Other Indicators

Since the SPX is capitalization weighted and about 24% are the same big cap tech stocks included the Invesco QQQ ETF that broke out last week. Much of last week's S&P 500 Index advance came from momentum big cap stocks in both. However, market breadth continues narrowing and will eventually make a difference.

Market breath measured by our preferred McClellan Summation Indicator continued lower last week declining another 88.58 points to end at 737.62. Declining breadth reflects more and more market support comes from fewer and fewer stocks. Any further declines by this reliable leading indicator should be a reason to maintain some hedges.

As noted in Digest Issue 25 "The Gaps [Charts]" the Invesco QQQ ETF (QQQ) made the difference then, and did so again last week, but this time to the upside as it broke out taking the SPX with it.

Invesco QQQ ETF (QQQ), called "the decider," gained 11.97 points or +4.98% last week ending at 252.19 after breaking out to the upside creating new upward sloping trendline.

While momentum enthusiasts ignore various caution signs remember the Wall Street adage, "Don't fight the tape."

With that thought in mind, consider this long call spread. First the option details.

With a current Historical Volatility of 22.72 and 19.98 using the Parkinson's range method, the Implied Volatility Index Mean is 24.63 at .19 of the 52-week range having regressed back to the mean. The implied volatility/historical volatility ratio using the range method is 1.23 so option prices are reasonable relative to the recent movement of the ETF.

Friday’s option volume was 1,025,337 contracts with the 5-day average of 819,720 contracts with reasonable bid/ask spreads and plenty of liquidity.

table

Using the ask price for the buy and mid for the sell, Friday's call spread debit was 1.80, about 36% of the distance between the strike prices. In the event it opens considerably higher, adjust the strike prices accordingly. Use a close back below the last pivot at 240 as the SU (stop/unwind).


Big Data? In options, we are Big Data!
For a comprehensive review and reminder, check this out
Options: Observations of a Proprietary Trader  


Strategy

For the S&P 500 Index, the last week in June exceeded expectations as it advanced up to overhead resistance at the breakaway gap that formed the Island Top Reversal pattern. However, the Invesco QQQ ETF stole the limelight breaking out the upside and as the decider it gets the nod.

While maintaining some hedges on specific stocks that may be at risk until market breadth improves, consider adding a QQQ call spread now that option prices based upon implied volatility have returned to the 52-week mean.

Summary

The Invesco QQQ ETF quickly reversed last week and then broke out to the upside taking the S&P 500 Index with it as it bounced off support at the 200-day Moving Average. Contrary to some select indicators such as market breadth, momentum bulls ignored the warnings and charged ahead. Since the Invesco QQQ ETF made a new upward sloping trendline consider adding long call spreads.

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 the Market Review will update progress on the SPX Island Top Reversal pattern, and the new QQQ uptrend underway.

Finding Previous Issues and Our Reader Response Request

PreviousIssues

All 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 always, 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

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
Please read IVolatility Trading Digest™ Disclaimer at the very bottom of this page

To add comments or to ask questions please click here (or use the blog "COMMENTS" link at the very bottom of the blog page).

 

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IVolatility Trading DigestTM Disclaimer
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".