« June 2018 »

IVolatility Trading Digest™

Volume 18, issue 25
OPEC+ Increasing Production [Charts]

OPEC+ Increasing Production [Charts] - IVolatility Trading Digest™

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Crude oil futures ripped higher Friday after OPEC+ agreed to increase production. Initial confusion over the exact amount likely set off futures short covering that quickly pushed prices higher. Further clarification by Saudi Oil Minister Khalid Al-Falih on Saturday could reverse Friday's gains. More follows an expanded market review including a summary update from the WTI Commitment of Traders report along with comments about last week's ideas for the United States Oil Fund, LP (USO) and BlackBerry Ltd.(BB).

Review NotesS&P 500 Index (SPX) 2754.88 declined 24.78 points or -.89% last week, unable to overcome resistance around 2800 from both the March 13 high at 2801.90 and the medium term operative upward sloping trendline from February 11, 2016 as previously noted. The 50-day Moving Average at 2714.83 should provide downside support.

VIXCBOE Volatility Index® (VIX) 13.75 gained 1.77 points or +14.77%. 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, advanced 1.49 points or +17.45% closing at 10.03.


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 July expiration, the day-weighted premium between July and August allocated 85% to June and 15% to August for a 6.32% premium, back below the bullish green zone between 10% and 20% disappointing the bulls once again.


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 considers the number of issues traded, and reported by McClellan Financial Publications, was doing fine until June 14 when it began rolling over. For the week it declined 46.04 points or -6.20% to close at 696.80.


CBOE S&P 500 Skew Index (SKEW) 140.54 down .38 points or -.27% for the week, but remaining above the important 140 level associated events. SKEW measures purchases of out-of-the-money S&P 500 Index puts that require a very large downside move to profit from long put positions.

An increase of this index indicates greater expectations for an extreme down move. The CBOE explains further, a Skew value of 100 means the perceived distribution of S&P 500 Index log-returns is normal so the probability of outlier returns is negligible. Calculated from SPX option prices it describes "tail risk." As Skew rises above 100, the left tail of the distribution acquires more weight increasing the probability of outlier returns.

The chart below shows the weekly average at 140.31 compared to last week ending June 15 at 141.36. Typically SKEW spikes up above 140 in anticipation of specific events and then quickly declines as the perceived risk fades. Remaining above 140 for the last two weeks suggests lingering concerns probably related to escalating trade barbs between the US and China.


Crude OilWTI Crude Oil (CL) 68.58 basis August futures gained 3.73 points or 5.75% for the week with most of the advance taking place Friday on what appears as short covering following the OPEC+ production announcement from Vienna. After Saudi Oil Minister Khalid Al-Falih added Saturday "But because we went away from allocation on a pro-rata basis, we will be closer to 1 million than to 600,000 barrels a day" futures traders will need to reconsider Friday's trades.

Summary for the Disaggregated Commitments of Traders - Options and Futures Combined report as of June 19 shows both longs and short in every category reduced their futures positions before the June 22 OPEC+ meeting, reducing open interest 165,036 contracts or -4.88% to 3,215,875. Since July futures expired the next day declining open interest could be expected. However, unless it increases next week, reflecting position roll over, any further decline will confirm the trend change. Open interest reached 3,785,409 contracts on May 15 when WTI closed at 71.30.

One way to measure trend momentum is to watch open interest since it needs to keep expanding to sustain the move. For a gage as to when the trend may be changing watch for declining open interest indicating existing long liquidation to existing shorts who begin covering.

Assuming open interest continues lagging a WTI price decline back below the 50-day Moving Average of 67.87 along with increased OPEC+ production and seasonal weakness suggests lower prices.

United States Oil Fund, LP (USO) 14.02 up .97 or +7.43% for the week including a gap up open Friday that negated the Flag pattern described last week in Digest Issue 24 "Crude Oil More Downside [Charts]." Should it quickly turn lower again a new pattern will be needed such as an island top, if it gaps lower at the open.

BlackBerry Ltd. (BB) 10.68 dropped 1.63or -13.24% last week with a 1.02 point decline Friday after reporting earnings and turning last week's suggestion in Digest Issue 24 "Crude Oil More Downside [Charts]" into a loser.

While implied volatility advanced into Thursday as expected it was not enough to offset the price decline that began last Monday. While our high Implied Volatility /Historical Volatility ratio identified the potential for a large move, selecting the wrong strategy resulted in a loss. In hindsight using a long straddle, long an at-the-money call and also long an at-the-money put, to be closed on Thursday would have been a better choice.


PreviousIssuesWhile seeming to recognize increased warnings of more tariffs on Chinese imports is part of the negotiation process, equity markets are now starting to reflect concern, especially since European autos were added to the commentary mix. The S&P 500 Index was unable to continue above 2800,while the VIX futures premium stalled under 10%, market breadth turned lower and SKEW remains above 140, all suggesting increased hedging activity and less enthusiasm for equities.

In response, the bulls say the US economy remains strong, interest rates stabilized and the US Dollar Index (DX) turned lower. In addition, breadth will soon continue higher since small capitalization stocks with less international exposure will benefit more from lower tax rates and with less exports, tariffs on imports could make domestically produced goods relatively more attractive.

Before we go, in this milieu of tariff threats consider what George S. Patton Jr. said, "One does not plan and then try to make the circumstances fit those plans. One tries to make plans fit the circumstances."


Last week futures and option indicators along with market breadth began displaying "Risk Off" activity while markets focused on vague comments from the OPEC+ meeting that triggered futures short covering. Should crude oil prices continue lower, interest sensitive, consumer discretionary and domestic companies, with little or no dollar exchange risk, will benefit.

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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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