« April 2018 »

IVolatility Trading Digest™

Volume 18 Issue 15
Double Bottom Underway [Charts]

Double Bottom Underway [Charts] - IVolatility Trading Digest™

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From a classical bar chart perspective last week's advance greatly increased the probability that the S&P 500 Index correction ended after making a potential double bottom supported by several other indicators subject, of course, to any unforeseen events that may occur. The review below includes an updated VIX Futures Premium chart along with the most recent WTI Crude Oil Commitment of Traders report indicating waning enthusiasm for higher prices.

Review NotesS&P 500 Index (SPX) 2656.30 gained 51.83 points or 1.99% last week well above the prior week's downward sloping channel and short of reaching the minimum measuring objective of 2545 for the bearish rising wedge detailed in Digest Issue 12 "Rising Wedge [Charts]."


Next target, the pattern gap between 2695.68 and 2709.79, the green dotted lines above.

VIXCBOE Volatility Index® (VIX) 17.41 dropped 4.08 points or -18.99% 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 3.80 points or -20.88% to 14.40 from 18.20 at the week ending March 6, regressing back toward the new mean.


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 April expiration, the day-weighted premium between April and May allocated 10% to April and 90% to May for a positive 3.86% premium.


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 while the bullish green zone is between 10 and 20.

Foremost Indicator Update

In addition to the VIX Futures Premium turning positive last Thursday, the spread between the CBOE Volatility Index® (VIX) and the Short-Term Volatility Index(VXST) also turned positive for the first time since March 18 delighting the bulls.

Using S&P 500 Index monthly options with 30-days to expiration, the VXST looks out 9 days and includes options that expire in one week making it more sensitive to changing implied volatility. Since the VIX typically has a higher value comparing the current relationship provides a clue about changing expectations. During corrections VXST will often have a higher value turning the spread negative. Then when it again turns positive the correction maybe ending. This chart shows Friday's spread at 3.56 vs. -1.57 last week ending March 6 after being negative since March 19.


In its recent quarterly review, the CBOE reported the long-term VIX average at 19.35 compared to the VXST at 15.87 making the long-term spread 3.48, very close to Friday's spread at 3.56. The spread's regression to the mean should further delight the bulls.

Another confirming bullish indicator:

iShares iBoxx $ High Yield Corporate Bond ETF (HYG) 86.29 advanced 1.02 points or +1.20% for the week after closing above the 50-day Moving Average last Monday and then gapping higher at the opening last Tuesday before making higher lows and higher highs all week. Since riskier high yield bonds are sensitive to financial market liquidity, advancing HYG adds confirmation to the bullish view that the correction has ended.

Crude OilWTI Crude Oil (CL) 67.39 basis May futures advanced 5.33 points or +8.59% last week. Backwardation for both WTI and Brent have increased to 6.07 or 9.90% for WTI and 6.07 or 9.13% for Brent basis June futures.

From the Disaggregated Commitments of Traders - Options and Futures Combined report as of April 10, "Managed Money,” the group that best correlates with crude oil price changes and arguably the most important, reduced their long position 7,938 contracts and reduced their shorts +1,332 contracts for a net position decrease of - 6,606 contracts representing 12.38 % down from 14.51% for the week ending March 20, 2018 (see the chart below) but still up from 5.00% for the week ending August 29, 2017at the last pivot.


"Managed Money" now has 417,650 net long contracts vs.147,303 net long contracts or 5.00% of the open interest at the last pivot for the week ending August 29,2017.

For another perspective here is a chart showing "Managed Money" short position of 36,240 contracts up from 27,688 contracts on March 20 after modestly increasing their shorts for the last three weeks. For comparison, their short position was 20,094 contracts on June 10, 2014 when cash WTI was 106.85.


Any further increase in their short position could be the first sign that "Managed Money" thinks the current advance above 66 is due for a pullback.

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With a potential double bottom in the S&P 500 Index underway along with selected futures and option indicators turning positive consider closing or reducing existing hedges.

On a more cautious note, market breadth as measured by the our preferred gauge, the NYSE ratio adjusted Summation Index that factors out the number of issues traded, and reported by McClellan Financial Publications, just crossed above the still downward sloping 50-day Moving Average adding 81.44 points last week to close at 112.50. To confirm the bullish view it needs to continue higher.

A potential bottoming pattern underway in the US Dollar Index(DX) & DXY, $USD, now 89.50 down .28 or -.31% last week, is another reason for caution. Since many large capitalization multinationals, especially in the tech sector have been helped by currency translation tailwinds, a continuing advance above 90 would create an earnings headwind in the second quarter. See the chart in Digest Issue 9 "Correction Resumes [Charts]". A potential double bottom or perhaps a Head & Shoulders Bottom pattern could be forming.


The last few weeks has been tough going for the bulls as they stumbled through the woods, but now with the clearing in sight they seem ready to resume the charge helped by earnings reports. The upside progress by the S&P 500 Index last week increases the probability that the recent correction has run its course, assuming no exogenous macro events , or tweets about tariffs upset the balance. With earnings reporting underway the market should now focus less on tariff chatter and political news and more on earnings.

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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.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.

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