« December 2016 »

IVolatility Trading Digest™

Volume 16 Issue 49
Momentum Slowing [Charts]

Momentum Slowing [Charts] - IVolatility Trading Digest™

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).

Last week, as the momentum of the major indexes slowed rotation out of the leaders into the laggards became apparent as the financial and transportation sectors began rolling over. While too soon to say the pullback is anything more than a mild overdue correction some have become expensive from a fundamental perspective making them vulnerable to profit taking. There is more in the market review below including an update for FedEx Corporation (FDX) schedule to report earnings Tuesday after the close, followed by crude oil commentary after Friday’s Commitments of Traders report.

Review NotesS&P 500 Index (SPX) 2258.07 declined 1.46 points or -.06% for week, after reaching another new intraday high of 2277.53 last Tuesday and then began forming a possible symmetrical triangle continuation pattern on increasing volume. While Wednesday’s interest rate hike comments by the Federal Reserve gets the blame for the subsequent 18.44-point decline, a pullback was overdue.

VIXCBOE Volatility Index® (VIX) 12.20 added .41 points or +3.48% for the week. The comparable IVolatility implied volatility index mean, IVXM gained just .24 points or +2.55% to 9.65.

VIX Futures Premium

The premium measures the amount the futures currently trade above or below the cash VIX, (contango or backwardation) until front month future converges with the VIX at expiration. Depending on the time to expiration, premiums for normal term structures during uptrends are 10% to 20% and decline when the VIX advances faster than the nearest future as the market declines and/or the futures decline as the front month expiration approaches. Premiums less than 10% suggest caution and negative premiums indicate oversold conditions when the VIX is higher than the futures and are usually associated with reversals.


With just two trading days to the December expiration the Day Weighted premium between December and January ended in the bullish zone at 21.31% while the volume weighted premium was considerably lower at 12.57%.

VIX Options

The current Historical Volatility of 116.34 and 118.06 using Parkinson's range method, the Implied Volatility Index Mean, IVXM was 81.82 down 2.35 from 84.17 the week before.


Charts source: IVolatility .com/Advanced Historical Data

Custom-design an options strategy to fit your market outlook

... Or your outlook on market volatility. This guide goes beyond the basics to help you understand how to evaluate a strategy's risk as well as its reward. Download your complimentary Options Trading Strategies guide now.

FedEx Update

Last week Digest Issue 48 "Dow Theory Confirmation & FedEx [Charts]," featured expectations for declining implied volatility after Tuesday’s earnings report.

This week we continue, with emphasis on the implied volatility progress. Scheduled to report after the close Tuesday, Friday’s -1.44 point or -.73% decline to 196.48 suggests they may not blow the wheels off this quarter.

FedEx Corporation (FDX) 196.48 declined .12 points or -.06% for the week as implied volatility also declined from 29.54 to 29.38 shown below.


Charts source: IVolatility.com/Advanced Historical Data

While it could go either way Wednesday, the early read from Friday suggests a pull back after the report while implied volatility will start declining back toward 15.

Crude Oil Update

Crude OilWTI Light Sweet Crude Oil (CL) 51.90 basis January futures gained .40 points or +.78% for the week after spiking to an intraday high of 54.51 last Monday on more production limit news, but then quickly retreated.

The weekly Commitments of Traders reports from the CFTC as of Tuesday December 13, uses the Disaggregated Commitments of Traders - Options and Futures Combined showing activity by "Managed Money," the group that best correlates with crude oil price changes and arguably the most important.

A "money manager," for the purpose of the COT report, is a registered commodity trading advisor (CTA), a registered commodity pool operator (CPO), or an unregistered fund identified by CFTC. So called "hedge funds" are included in this category, regardless of whether they are registered. With the most at risk at turning points, changes in the net long position of this "Managed Money" group usually correlate the best with crude oil price changes.

Last week, "Managed Money" increased longs +8,688 contracts and decreased shorts +23,973 for a net change of +32,661 representing 10.27 % of the open interest shown below.


Noteworthy, the "Managed Money" short position at 56,312 contracts is the smallest since May 31 when it was 53,377 and cash crude was 49.10. In addition, their net long position at 359,458 contracts suggests a bullish posture while total Open Interest increased to a new high at 2,952,284 contracts.

The unusual seasonally high price for December engineered by OPEC and associates offers producers the opportunity to hedge production at a higher level during a period of normal seasonal weakness and the next chart shows an increasing short position.

The CFTC description for Producer/Merchant/Processor/User: A "producer/merchant/processor/user" is an entity that predominantly engages in the production, processing, packing or handling of a physical commodity and uses the futures markets to manage or hedge risks associated with those activities.


While producers are increasing their hedges by shorting futures, processors and other users are offsetting the increasing producer short position as the net short position is actually declining, shown below


With greater total open interest, the net position is even less dramatic from a short perspective. Here it is as a percentage of the total open interest.


The increasing producer short position does not mean they need to cover their shorts and push futures higher, since producers are naturally long crude and will cover their shorts and sell production at spot when the cash price exceeds their short futures basis, but should the cash price decline they will deliver production against their short positions at expiration.

Currently "Managed Money" seems aligned with OPEC and their associates in their efforts to support prices during the time of the year when prices are usually weak.

StrategyThe Fed apparently surprised the markets with comments suggesting three rate hikes next year, after announcing a 25 basis point hike Wednesday. By most measures, the major indexes and sectors expected to benefit from policy changes are overbought, and began staggering. Since volume could start declining this week as traders and strategists turn their attention elsewhere, the next two weeks could be uneventful. As for attempting to hedge the decline, remember the trend is up and seasonally December is one the best months of the year.

After featuring the Dow Theory confirmation last week in Digest Issue 48 "Dow Theory Confirmation & FedEx [Charts]," it diverged last week. While the S&P 500 Index declined just .06%, the decline for the iShares Transportation Average (IYT) was more severe at -2.45%, perhaps another sign of "Whac-A-Sector" rotation action by the Algo Rotators.

Since the financial sector appears extremely overvalued, watch for:


Data SaleIVolatility’s Holiday Data Sale

30 % off on Option and Implied Volatility data in November
16 years of data for US, Europe and Asia markets


Instead of supporting a further yearend rally, the surprising announcement after the FOMC meeting last Wednesday of more interest rate hikes than expected next year, set off pullbacks in the S&P 500 Index along with other major indexes and selected over extended sectors. However, since the trend is up and the December record has been positive most years any further pullback is likely to be limited.

Twitter Follow us on twitter for more ideas from our scanners and other developments.

Actionable Options™

We now offer daily trading ideas from our RT Options Scanner before the close in the News section of our home page based upon active calls and puts with increasing implied volatility and volume.

"Options data with predictive qualities - Nobody does it better!"

Since our regular Digest day next week will be on Boxing Day, also known as St. Stephen's Day in the UK, and a bank holiday, we will be dark as they say in show biz. The next issue will be a yearend summary on January 2, 2017

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 usual, 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




Comments are closed for this entry.

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".