« May 2018 »

IVolatility Trading Digest™

Volume 18, issue 20
Neutral Zone [Charts]

Neutral Zone [Charts] - IVolatility Trading Digest™

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Cross currents, some positive some negative, describe last week's activity. Details follow including charts supporting a neutral view along with some bullish and bearish commentary, then a Commitment of Traders summary for WTI crude oil.

Review NotesS&P 500 Index (SPX) 2712.97 declined 14.75 points or -.54%, but still trading above the previous downward sloping trendline described last week in Digest Issue 19 "Correction Update". The 50-day Moving Average at 2677.49 and the previous downward sloping trendline should provide good support for any decline. The weekly chart below updates the current status from the perspective of the operative medium term uptrend that began February 11, 2016.


Now below, but following the upward sloping trendline, USTL higher, where it needs to close above, in an effort to renew the operative uptrend. As a reminder, for uptrends draw a line from the lowest low up to the highest minor low preceding the highest high so that the line does not pass through any prices between the two or more low points.

VIXCBOE Volatility Index® (VIX) 13.42 nudged up .77 points or +6.09% 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, added .63 points or +6.42%, ending just above the bottom of the new recent range.


For reference, this next chart compares the 30-day Historical Volatility to the high low range method to compute historical volatility.


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 17 trading days until June expiration, the day-weighted premium between June and July allocated 68% to June and 32% to July for 10.11% premium just in the bullish green zone.


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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Another useful short term indicator compares the VIX to the VXST. While the VIX Index is calculated using monthly options with 30 days to expiration VXST uses options with 9 days to expiration and include options that expire in one week making it more sensitive to changes in short term implied volatility. Here is a look at the current reading showing a bullish 1.94 versus 1.41 at the week ending 5-11-18.


Crude OilWTI Crude Oil (CL) 71.28 basis June futures advanced .58 points or +.82% last week. Backwardation for WTI, June 18 to June 19, was 5.22 or 7.90% while Brent, July 18 to July 19, was 4.42 or 5.66%, both continuing to suggest tight cash market conditions.

The Disaggregated Commitments of Traders - Options and Futures Combined report as of May 15, shows large Speculators, defined as "Managed Money" and "Others," reduced their net long position 44,290 contracts, without "Managed Money" significantly increasing their short position, a key indicator of changing sentiment.

On the other side of the equation, "PMP" defined as Producers, Merchants, Processors and Users increased their longs 12,238 contracts and reduced their shorts 26, 971 contracts for an increase to their net long position of 39,208 contracts to an unusual 50,933 contracts net long. As a group the "PMP" net position is typically net short as producers hedge production by shorting futures contracts, but this not the current situation as shown below.


Since "PMP" are the ones engaged in the production, processing, packing and handling of a physical commodity increasing their net long position is notable, as reported last week as it turned positive.

OPEC reports global inventories reached 340m barrels above their 5 year average in January 2017 and have been declining ever since as OPEC and Russia reduced production.

United States Oil Fund, LP (USO) 14.43 up .18 or +1.26% for the week. As a supplement to the suggestion made in Digest Issue 18 China Trade Negotiations [Charts], " USO has a backwardation edge when it sells higher priced near term futures and buys lower priced deferred contracts.

Bull & Bear – Plus and Minus

Bulls say:

Although both cyclical and seasonal, current relative strength in oil producers and oil service sectors along with small capitalization stocks represented by the iShares Russell 2000 (IWM) offsets weakness in industrials and semiconductors just enough to keep the S&P 500 Index in the neutral zone. Usually an advancing US Dollar Index pressures crude oil prices, but not now with attention focused on declining crude oil inventory levels. In addition, the bulls say small capitalization stocks benefit from the recent income tax reduction and rotation out of multinationals with currency translation drag. Further, sector rotation is normal and the market will soon be testing new highs especially with improving market breadth along with the VIX that has returned to the lower end of its new range and the futures term structure and option indicators are improving.

Bears say:

Look out for rising interest rates as the yield on the 10-year US Treasury Note closed as high as 3.11% Thursday along with a stronger US dollar and some evidence of dollar shortages appearing in the emerging markets as their exchange rates decline. Weakness in the previous leaders PowerShares QQQ (QQQ), The Technology Select Sector SPDR Fund (XLK) and The VanEck Vectors Semiconductor ETF (SMH) may soon extend to other sectors including crude oil producers when the current seasonal strength ends, especially if OPEC and Russia announce a production increase in June. Since the S&P 500 Index has been unable to resume trading above its medium term uptrend, defined by the upward sloping trendline that began February 11, 2016, it could turn lower on unfavorable trade negotiation news.


Small capitalization stocks and crude oil producers are providing just enough support to keep the S&P 500 Index from declining despite the yield on the 10-Year Treasury Note closing above 3% most of last week as the US Dollar Index continues higher. As the number of earnings reports dwindle the headlines will likely be about trade and tariff negotiations with China.

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Next week's market review will include another Commitment of Traders update along with more trading ideas to consider.

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



In your SPY Chart you refer to USTL line

What is USTL and what it stands for ?

Thank you in advance for your response

Posted by David Drozdz on May 21, 2018 at 11:44 AM EDT


Thanks for letting us know some clarification is needed. USTL is our short abbreviation for Upward Sloping Trendline. We also use DSTL when the trendline is downward sloping.


Posted by Jack Walker ( on May 21, 2018 at 12:15 PM EDT

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