« September 2020 »

IVolatility Trading Digest™

Volume 20 Issue 38
Momentum Mania [Charts]

Trade Idea Generator [Charts]- IVolatility Trading Digest™

Both the S&P 500 Index and the Invesco QQQ Trust failed to hold support at their respective 50-day Moving Averages last week suggesting more downside ahead. Could an upside momentum pullback turn into a more serious correction? Some thoughts follow the Market Review along with an uptrend suggestion for Freeport-McMoRan (FCX).

Review NotesS&P 500 Index (SPX) 3319.47 slid 21.50 points or -.64% last week closing below the closely watched 50-day Moving Average at 3342.96. Already well below the upward sloping trendline from the March 23 low, the 200-day Moving Average down at 3103.53 looks like the next support area as downside momentum increases.

Invesco QQQ Trust (QQQ), 266.87, called "the decider," dropped 3.58 points or -1.32% last week closing well below and the 50-day Moving Average at 272.91. It seems "buy the dippers" were overwhelmed by profit taking in the big cap tech favorites as money rotated into industrials, mining and especially hot IPOs.

Review NotesCBOE Volatility Index® (VIX) 25.83 drifted 1.04 points or -3.87% lower 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 1.39  points or -6.04% ending at 21.64.   

Perhaps the quarterly expiration of single-stock and index options and futures played a role since the implied volatility indicators declined as both the SPX and QQQ closed below their 50-day Moving Averages. The IVXM chart below shows a modest decline while the SPX chart shows the turn lower as the 10-day VIX correlation indicator ended the week at +.03 after reaching +.32 on Thursday.


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 22 trading days until October expiration, the day-weighted premium between October and November allocated 88% to October and 12% to November for a premium of 16.84%. The Volume weighted version ended at 17.44%, both in the green zone with October Futures at 30.10 and November Futures at 30.76.


The premium measures the distance from the VIX to the average of the two front month's futures, 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 October 21, 2020. When the VIX spikes higher than the futures the premium turns negative and becomes unstable. From observation, here are the zones. Less than 0 = Red Zone associated with market declines, between 0 and 10% = Yellow Zone, between 10% and 20% = Green Zone, above 20% Super Green and unstable.

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.

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.

Foremost Indicators

Review NotesMarket Breadth as measured by our preferred gauge, the NYSE ratio adjusted Summation Index that considers the number of issues traded, and reported by McClellan Financial Publications, continued declining last week by another 47.87 points or -14.00% ending at 294.02 as the rate of decline slowed, but still below the 200-day Moving Average at 379.24.

In the past, advances above and declines below, the moving averages, first the 50-day and then the 200-day have been good leading trend change indictors. Until this indicator stabilizes and turns up prudence suggests hedging or reducing long risk in overbought sectors.

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

Rotation Trade Idea

Following up to an idea that's been on our radar screen since Digest Issue 3 "SPX Makes Multiple New Highs [Charts]"on January 21, 2020 that belongs in the Woulda, Coulda, Shoulda, file. At the time, it was 12.87 and just beginning to breakout.

Freeport-McMoRan (FCX) 17.00, up .73 or +4.49% last week as copper prices continue higher. Now well above both its upward sloping trendline, and both the 50 and 200-day Moving Averages

First, some option details.

With a current Historical Volatility of 39.10 and 32.73 using the Parkinson's range method, the Implied Volatility Index Mean is 53.13 at .12 of the 52-week range. The implied volatility/historical volatility ratio using the range method is 1.62 so option prices are moderately high relative to the recent movement of the stock. Friday’s option volume was 107,160 contracts with the 5-day average of 71,250 contracts with reasonable bid/ask spreads, so it has good liquidity. 

Consider this November long call spread with 60 days to expiration.


Using the ask price for the buy and mid for the sell the call spread debit was .57 on Friday about 25% of the distance between the strike prices with 53% of the long call risk hedged by the short call. Use a close back below 15 as the SU (stop/unwind).

From our handy Underlying Sentiment Analyzer service look at the Chaikin Money Flow.


Next, the PnL Calculator set at the short option with the dotted lines showing the value at expiration and the green line showing higher prices before expiration.      


Along with the initial position details that can be changed to simulate various combinations and alternative strategies.



The end of an irresistible momentum mania could read. Take gains in overbought tech stocks and roll the proceeds into hot IPOs at the deal prices. When they begin trading way above their initial offer price, instant gains will far exceed any manager's benchmark indices for the quarter assuming it continues long enough to make a difference. For example, last Wednesday the Snowflake (SNOW) IPO priced at 120, opened at 245, traded as high as 319 and closed the day at 253.93, then ended the week at 240, – Walla! Free money. Of course, only the privileged got in at the deal price. 

With more IPOs scheduled in the next two weeks it could be the straw that breaks the camel's back since hedge funds and privileged clients of the underwriting banks typically need to sell existing positions to raise cash for the new ones creating a serious challenge for the still overbought tech sector based on traditional (non- momentum mania ) valuation methods.  

A similar hot IPO story played out in the summer and fall of 1999 before the S&P 500 Index peaked in March of 2000. However, some argue it's not the same since the Federal Reserve began raising interest rates in June 1999 and continued raising them until May 2000, but now has no intention to raise interest rates anytime soon. Further, they claim, the current batch of IPOs are better quality.

While it's too soon to tell if IPO deal selling will overwhelm rotation into industrials and materials without financials and energy, both consumer sectors seem fully priced along with bonds. Where will funds flow? Perhaps into emerging markets or agricultural commodities.     

While the IPO privileged act rationally everybody else chases rotation into the next perceived reasonably valued market or sector.

Digest Issue 36 "Speculative Crescendo [Charts]" got it right. It can be argued the entire S&P 500 Index advance above 3400 was a blow-off top. Could this be the final top or just a prelude to a topping process underway that retests the high and then creates a double top or even marginally exceeds the previous high, as it begins forming an H&S Top pattern?

Consider hedging longs in the tech sector since a major tech induced sell off, should it occur, will not spare other sectors.


Both the S&P 500 and Invesco QQQ Trust closed the week below their 50-day Moving Averages as "buy the dippers" could not turn the markets higher increasing the risk that the pullback becomes a more serious correction. Selling overbought tech companies to raise funds for hot new IPOs brought back memories of 1999 and 2000 although interest rate concerns are not comparable. Keep hedging longs in overbought sectors such as technology while considering sectors like commodities that continue trending higher.

By Jack Walker

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 feature more updates for SPX, QQQ and the VIX futures premium.

Finding Previous Issues and Our Reader Response Request


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

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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".