« November 2017 »

IVolatility Trading Digest™

Volume 17 Issue 44
Bull Rotation Redux [Charts]

Bull Rotation Redux [Charts] - IVolatility Trading Digest™

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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Review NotesWith two new intraday highs and another new closing high the S&P 500 Index bull run continues along with ongoing sector rotation . After a brief market review including another Market Breadth and US Dollar Index (DX) updates we have ETF trade ideas from our Stock Sentiment Ranker for SPDR S&P Regional Banking ETF (KRE) and Power Shares QQQ Nasdaq ETF (QQQ) along with United States Oil Fund, LP (USO).

Review NotesS&P 500 Index (SPX) 2587.84 added another 6.77 points or .26% for the week including up 7.99 points Friday. The new intraday high made Wednesday at 2588.40 was quickly exceeded by another on Friday at 2588.42. Although pullback risk remains a concern, the 50-day moving average and the upward sloping trendline, USTL from last November 4, converge to provide solid downside support at 2522.41.

VIXCBOE Volatility Index® (VIX) 9.14 declined .66 points or -6.73% for the week while our similar IVolatility Implied Volatility Index Mean, IVXM that uses four at-the-money options for each expiration period along with our proprietary technique that includes the delta and vega of each option now 6.70, diverged again this week advancing .10 points or +1.52%.

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. With 7 trading days until November expiration, the day-weighted premium between November and December allocated 35 % to November and 65% to December for a 29.73% premium at the top of the of green zone between 10% and 30%.


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.

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breadthMarket Breadth as measured by our preferred gauge, the NYSE ratio adjusted Summation Index that factors out the number of issues traded, and reported by McClellan Financial Publications, continued lower declining 126.14 points last week to close at 606.24 just below the 50-day moving average.


Based upon this indicator a broad market pullback is underway and the divergence will be resolved either by improving breadth or SPX pulling back. This chart shows the Summation Index and SPX, highlighting the divergence.


US Dollar Index (DX) 94.86 advanced .04 points or .04% for the week closing above the dotted green previous resistance line at 94 where it found support as it declined intraday Friday. While many large capitalization multinationals, especially in the tech sector reported better than expected results helped by currency translation tailwinds for the last two quarters, any further advance will create currency translation headwinds during the fourth quarter.


See Digest Issue 40 "Bullish Foremost Indicators [Charts]" for a Power Shares DB US Dollar Index Bullish Fund (UUP) 24.69 long call suggestion.

Stock Sentiment Ranker – ETF Group


For the three strong bullish ETFs with good volume and open interest above:

SPDR S&P Regional Banking ETF (KRE) 57.16 trending higher since mid September it appears to be consolidating perhaps awaiting more interest rate news in December. Consider a long Dec 15 call spread, long 58 call, short 60 call.

Power Shares QQQ Nasdaq ETF (QQQ) 153.27 after gapping higher and briefly consolidating, the advance continues. With good options volume and bid/ask spreads, consider a Dec 15 call spread, long 156 call, short 158 call.

iShares 20+ Year Treasury Bond ETF (TLT) 125.64 now recovering from the late October decline it will likely encounter resistance around 126.50 as it comes back up to the upward sloping trendline, USTL from the June low. As a rotation favorite wait and see how it reacts to interest rate news in December.

Crude Oil

Based upon this indicator a broad market pullback is underway and the divergence will be resolved either by improving breadth or SPX pulling back. This chart shows the Summation Index and SPX, highlighting the divergence.

United States Oil Fund, LP (USO) 11.18 up .34 points or +3.14% for the week in a well defined uptrend and above green resistance line from the May 24 high at 10.70.


The fundamental story here is declining crude oil inventories due to production cut backs by OPEC and others often called NOPEC, evidenced by Brent futures trading in backwardation, when the front months are higher than the deferred months. Also, increasing global demand and perhaps even some risk premium is reflected in a Brent premium over WTI that began on August 18 from 2-3 over to 6.43 above WTI, on November 3.

In addition, rig counts in the US are declining and WTI futures have recently joined Brent futures in backwardation.

Since USO continually rolls futures contracts creating losses when futures are in contango, that is when deferred contracts are higher than the front month, the opposite occurs when futures are in backwardation, when deferred contracts are lower than the front month thereby adding some edge to long USO positions.

Although the implied volatility index IVXM at 23.58, is near the bottom of its 52-week range, options are expensive relative the historical volatility calculated using the range method. However since there is not enough premium to make reasonable call spreads just consider long calls, for example Jan 19 11 calls at .56 or March 11 calls at .77. Use a close back below the breakout range on October 27 at 10.70 as the SU (stop/unwind).

StrategyWhile SPX contiues making new highs as sector rotate continues, fewer issues are particiapting as seen by the Market Breadth Summation Index divergence above. In addition divergence by the DJ Transportation Average ETF (IYT) 175.67 and the iShares Russell 2000 ETF (IWM) 148.61 create enough concern to consider hedging some long positions as earnings reporting winds down. Collars are one hedging strategy for long stock or ETFs, short out-of-the money calls and long out-of-the money puts.


While the S&P 500 Index advanced into new high territory, once again Market Breadth continues deteriorating as fewer issues participate in the advance and the US Dollar Index appears headed higher. Improving crude oil prices, should they continue higher may add sufficient support from the energy sector for the advance to continue until year-end since November are December are seasonally strong months for equities.

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Next week will include an update for the WTI Commitment of Traders report along with our regular expanded market review.

Finding Previous Issues and Our Reader Response Request

PreviousIssuesAll 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".