« April 2021 »

IVolatility Trading Digest™

Volume 21 Issue 17
The Bulls Remain Resolute [Charts]

The Bulls Remain Resolute [Charts]

Undeterred by Thursday's news of a proposed hike in the capital gains tax rate, the bulls took charge again on Friday pushing the SPX back above Thursday's intraday high at the close on Friday. The tax declaration seemed more like a trial balloon since final details have not been released. Even so, it will take considerable time to go through the legislative process where it will encounter stiff opposition. This week's Market Review includes an update for a previous Financial Select Sector SPDR Fund (XLF) suggestion.

Review NotesS&P 500 Index (SPX) 4180.17 slipped 5.30 points or -.13% while still managing to made new closing intraday high on Friday at 4194.17 before pulling back at the close. With first support around 3985 followed by the 50-day Moving Average down at 3976.32 the uptrend remains encouraging. As if programmed by Algos the 50-day Moving Average contained the last five pullback attempts since February. With both bond and equity markets swimming in liquidity the bears stepped aside.

Invesco QQQ Trust (QQQ) 339.42 lost 2.59 points or -.76% last week after reaching an intraday high of 342.23 on April 16 . While way above the 50-day Moving Average at 323.93 the short-term direction depends on the 10-Year Treasury Note. Last week the yield ended at 1.58%, and on some charts resting right on the 50-day Moving Average. Any further rate decline should help QQQ while a bounce off the average would create a headwind especially those with stretched PE multiples, but with attention on the big cap momentum favorites scheduled to report earnings this week , the story will be how much "better than expected" compared to last year during shutdowns.

Review NotesCBOE Volatility Index® (VIX) 17.33 added 1.08 points or +6.65% 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, advanced 1.02 points or +8.07% to end the week at 13.66% . The six-month chart below shows the advance back toward 15% after reaching 12.79 %.


VIX Futures Premium

VIX futures premium with May the new front month, ended the week at the top of the bullish green zone at 21.50% vs. 13.91% on April 16.


Since most of the volume and open interest are in the two closest futures contracts measuring the volume-weighted premium relative to the standard 30-day VIX provides a good real-time sentiment indicator based upon actual commitments of large Asset Managers and Leveraged Funds. The chart reflects the distance from the VIX to the futures curve computed from the two front month contracts.

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, advanced two out of five days, and the decliners exceeded the gainers so the week ended 31.90 points or -4.44% lower at 686.57. This chart revised to eliminate the abnormal decline early last year, shows it ended the week just slightly above the 50-day Moving Average at 667.90.


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Financial Select Sector SPDR Fund (XLF) 35.38 slid -.02 points or -.06% last week, after recovering on Friday and quickly advancing back up to make an intraday high at 35.52 equal the previous intraday high reached on April 16 marked on the chart.


Should the yield on the UST10Y Note bounce off the 50- day Moving Average and turn higher XLF will likely breakout above 35.52, however if the yield continues lower, it  could end the advance and set up a potential double top. Either it breaks out or fails.

In case you were wondering, according to the trade plan in Digest Issue 11"Rotation Evaluation [Charts]" the June 18 long call spread, long one 36 call and short one 39 call, for a debit of .77 with 53 days to expiration, requires attention. Marked-to-market at .62 it shows a book loss of .15. Since declining interest rates will put the position in jeopardy a close back below last Wednesday's low (two bars back) at 34.42 means the position needs closing. 


In bull markets, a good strategy is to stay long equities and/or ETFs and then tactically hedge pullbacks as they begin developing, since ordinary pullbacks can become corrections when something unexpected happens. Then corrections can become downturns when something else unexpected happens, and downturns can become bear markets when many unexpected things change medium and long-term fundamentals.

The Federal Open Market Committee of the U.S. Federal Reserve will meet on Tuesday and Wednesday so market participants will closely listen to Jay Powell's comments for any hints of what may cause them to reconsider the current ultra loose monetary policy.

Then, more details could be released before or during President Biden's presentation to Congress on Wednesday night. For those less sanguine about the proposed capital gains tax hike, hedging may be better a better alternative than selling, but don't hedge them all, just those with extremely high valuations, such as the ones without earnings currently valued on a price to sales basis.

Yield on the U.S.10-Year Treasury Note (UST10Y) will continue as a driving force for both bonds and equities. Higher rates will likely help the Financial Select Sector SPDR Fund and hurt Invesco QQQ Trust. Lower rates should do the inverse.

This could be a good time to apply to rule of unknowns by taking small positions on both sides and then adjust when the direction becomes apparent.

Before we go, six Volatility Kings™ report earnings this week. For the entire list, see Digest Issue 16 "Volatility Kings First Quarter 2021." 


Last week both the S&P 500 Index and the Invesco QQQ Trust stalled, pulling back modestly although the S&P 500 Index made a new intraday high on Friday. Futures and option indicators remain bullish while market breadth slowed.  Interest rates on 10-Year Treasury Note, now testing support at the 50-day Moving Average, could be the decider this week. Higher rates should support financials, but not help some big cap growth companies reporting this week.

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 will feature another Market Review including an interest rate update.

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.


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