« November 2017 »

IVolatility Trading Digest™

Volume 17 Issue 45
Bull Stumble Likely [Charts]

Bull Stumble Likely [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).

Although the S&P 500 Index made two new new closing highs last week the so called "market internals" tell the story of a bull about to stumble. The review below explains, along with a look at uptrending WTI crude oil prices.

Review NotesS&P 500 Index (SPX) 2582.30 slipped 5.54 points or -.21% for the week after making new closing highs last Monday and again Wednesday. While the chart shows it remains well above both the 50-day moving average and the upward sloping trendline, USTL from last November 4 , it fails in painting the whole picture.


Unless forced lower by panic selling due to an unexpected macro event chances are the pullback will be limited by typical seasonal strength in November and December. Both the upward sloping trendline, USTL from last November 4 that converges just below the 50-day moving average at 2536.02 should provide the necessary support to prevent a more drastic correction.

VIXCBOE Volatility Index® (VIX) 9.14 jumped up 2.15 points or +23.52% for the week while 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 now 8.04, added 1.34 points or +20%.

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 2 trading days until November expiration, the day-weighted premium between November and December allocated 10 % to November and 90% to December for a 10.56% premium at the bottom of the of green zone between 10% and 30%.


10.56% vs. 29.73 week ending 11-3-17 dropping from the upper boundary of the green zone to the lower.

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.

Options Trading Made Even Easier

Learn how to trade options simply, effectively and more importantly, profitably. You need to stop wasting time using bad methods and follow a proven winner. No matter your account size or skill level, this guide will have you feeling like a pro. Download your free copy of The Ultimate Guide To Trading Options and get my personal Trading Cheatsheet.

This link expires soon and you can only get this guide here

Hedge Indicator

S&P 500 Index Options Open Interest


Total 14,976,076 open interest with 10,250,000 puts at the top of the recent range.

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 again declining another 127.05 points last week to close at 480.28 well below the 50-day moving average. With no indication of slowing down this is the most foreboding indicator. The chart below introduced last week in Digest Issue 44 "Bull Rotation Redux [Charts]" updates it compared with the SPX to highlight the current unsustainable divergence.


After peaking at 929.82 on October 16, the current divergence will be resolved either by improving breadth, $NYSI on this chart or $SPX pulling back.

Next on the list of ominous indicators:


Now well below both the 50-day moving average and the upward sloping trendline it was the first to raise the caution flag making a key reversal October 13 after reaching an intraday high of 181.57 and then closing lower, although the volume was low.

The next chart shows concern for both default and interest rate risk.


Another indicator well below both the 50-day moving average and the upward sloping trendline, USTL. The intraday high occurred October 23, at 88.37. Now in oversold territory watch for a bounce and any attempt to fill the gap made last Wednesday.

Finally this one relates to the VIX and VIX futures.


Recently crosses below the stochastic 80 level market by the red arrows have been good pullback warning signals. After making the first intraday high on October 23 at 113.59, the same day as HYG above, it reversed and made another high last Wednesday at 114.46. Now, any further decline will confirm an SPX pullback similar to August.

Now for a sector that's supporting the major indexes.

Crude OilSince the Commitment of Traders reports were delayed last week, we will use this space to add some more detail to last week's comments that both WTI and Brent crude oil had broken out to the upside despite this being the time of the year when crude prices typically decline. First the WTI Crude Oil chart.


56.74 -.43, week +1.10 or +1.98% basis December futures with the upward sloping trendline, USTL from the June 21 low of 43.08.

The fundamental story here is declining crude oil inventories due to production cut backs by OPEC and others often called NOPEC, evidenced by both Brent and WTI 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 6.86 above WTI, on November 10

With both Brent and WTI in backwardation along with a considerable Brent premium, the picture looks favorable for more gains during the season when prices typically decline. Although the crude oil rig count increased 9 last week they had declined for eight of the previous nine weeks. The rig count chart below shows a lag of about 6 months before prices begin changing.


StrategyUntil the iShares Transportation Average ETF and the McClellan Summation Index turn higher consider hedging long positions with collars for long stock and ETFs or long put spreads and/or long VIX calls. For those with the ability to sell out-of-the-money call credit spreads now could be the time since the pullback could be limited.


Although the major indexes continued making now highs last week market breadth deteriorated further as fewer issues participate in the advance. With aggressive selling of both the Transports and the High Yield ETF the probability of a pullback greatly increased. Even though improving crude oil prices may add support from companies in the energy sector there is still time for a profit taking pullback before a final year-end seasonal advance since November are December are usually good months for equities.

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 IVolatility News section of our home page based upon active calls and puts with increasing implied volatility and volume.

Big Data? In options we are Big Data!

"The best volatility charts in the business."

Next week will include an update for the WTI Commitment of Traders report that was delayed this week along with trade ideas from our ranker and scanner applications.

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




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".