« September 2018 »

IVolatility Trading Digest™

Volume 18 Issue 35
How's the Bull? [Charts]

How's the Bull? [Charts] - IVolatility Trading Digest™

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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Typically equities have a tendency to drift lower in August as volume declines while many market participants and pundits are busy doing other things. But not this year, volume hardly declined as the S&P 500 Index made four new closing highs despite an endless barrage of political, trade and tariff rhetoric coming from all directions. Since the record shows September to be one weakest months seasonally, one long and two shorter term timing indicators follow our regular market review.

Review NotesS&P 500 Index (SPX) 2901.52 gained 26.83 points or +.93% last week making three new closing highs, in addition to adding 24.56 points or +.86% the week before. The bulls have been right! There is a new support zone around 2850 and then the 50-day Moving Average now 2814.51 with considerable support between 2800 and 2790. The operative upward sloping trendline (USTL) from the April low crosses just above 2750.

VIXCBOE Volatility Index® (VIX) 12.86 edged up .87 points or +7.26% 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, advanced less, adding +.37 points or +4.40% to 8.77.


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 12 trading days until September expiration, the day-weighted premium between September and October allocated 60% to September and 40% to October for a 12.38 % premium, just inside the bullish green zone between 10% and 20%.


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. Previously declines below 10% and advances above 30% were unstable.

10 -Year Treasury Note Yield

On August 24, Federal Reserve Chairman Jerome Powell said at Jackson Hole, "Financial conditions are very good and [the Fed] is tightening in line with those trends" and signaled more rate hikes are coming. However, the Federal Reserve Bank of St. Louis President James Bullard, said the Fed should watch signals from the bond market and dial down the urgency to be preemptive against fighting inflation.

The spread between the 10-Year and 2-Year Treasury Note is one indicator being actively discussed. The small chart below shows the narrowing spread, now .24, causing concern.


While some emphasize the spread remains positive, if the typical long-term seasonal pattern holds, the 10 -Year should decline to about 2.6% into December. Then, if the Fed continues raising short rates now 2.62% the spread will narrow even more by the end of the year and approach the dreaded inversion. According to research by the St. Louis Fed recessions start on average 16 months after the yield curve inverts. As a long- term indicator, keep an eye on this spread and how the markets react as it continues to narrow.

Market 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, added 79.44 points or +14.20% last week. Up until August 17, at the last pivot shown in the chart below, it was not supporting the advance, but then turned higher. On August 27, when it crossed back above our arbitrary 50-day moving average, the green go light began flashing.


Any decline now would be consistent with September seasonal weakness.

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VIX Correlation Indicator


Now +.20, normally negatively correlated.

While usually negatively correlated, when implied volatility of options on the S&P 500 Index rises (VIX in the chart) as the price increases, the correlation turns positive. Comparing the current 10- day correlation at +.20 to the sharp peak at June 18 in middle of the chart, suggests a pullback is currently underway. Watch for a return to -.80 or below for confirmation the pullback is ending. The relationship is simple, as implied volatility declines the SPX turns higher.


As for How's the bull? Once the pullback ends the bull should be just fine.

Based on the indicators above, upon completion of the current pullback, consider using September seasonal weakness to add or open new long call spreads or other hedged long positions anticipating further advances in October though December.

Before we go, also watch the iShares China Large-Cap ETF (FXI) to see if the suggestion in Digest Issue 34 "Top 5 [Charts]" and the apparent bottoming process underway in the Chinese markets hold.


Similar to the week before, the S&P 500 Index made new closing highs despite continuing China, Mexico and Canada trade rhetoric. With considerable support at 2800, going into the seasonally weak month of September, the S&P 500 Index appears to have begun pulling back to retest the recent breakout above 2850.

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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.

Next week's market review will update the progress of the pullback and include trade suggestions 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





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