« October 2018 »

IVolatility Trading Digest™

Volume 18 Issue 42
Rising Wedge 2.0 [Charts]

TOP 5 [Charts] - IVolatility Trading Digest™

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The original plan for this week was for a brief market review and then get on with some new trade ideas, but once again it was sidetracked as the S&P 500 Index appears to be in the process of forming a bearish Rising Wedge continuation pattern much like the one that began last January, so comparing them may offer some insight. Then, adding a market breadth update, along with a look at the VanEck Semiconductor ETF (SMH) as a leading indicator, completes a rather dreary story for the bulls.

Review NotesS&P 500 Index (SPX) 2767.78 added .65 points or +.02% for the week after a large advance Tuesday followed by a big decline Thursday, then finding support around the 200-day Moving Average now 2768.24. The decline from the October 3 high down to the Oct 11 low has a striking initial resemblance to the one in January 26 that formed a Rising Wedge. Compare these two charts.


The first began January 26 and finally ended April 2, declining from an intraday high of 2872.87 to 2553.80 after 67 days. The initial leg down from the high to the February low marked 1 above at 2532.69 was -11.84%. Digest Issue 12 "Rising Wedge [Charts]" showed the chart just before it reached the April 2 pivot low.

The second began from the October 3 high at 2939.86 declining down to an intraday low of 2710.51 on October 11, a decline of 7.80%. While premature to label the reversal points, it sure looks like the first leg down to 2710.51 has been reached. The upper and lower boundary lines are dotted since reversal points 2,3, and 4 have not yet been determined. Of course, there is no requirement for it to become another Rising Wedge but using it as an analytical framework should help manage existing or new positions. Some details about Rising Wedge patterns can be found here.

VIXCBOE Volatility Index® (VIX) 19.89 dropped 1.42 points or -6.66% 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 1.24 points or -7.07% to 16.30 shown below along with a SPX line chart comparing the decline to the recently rising IVXM.


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 22 trading days until November expiration, the day-weighted premium between November and December allocated 88% to November and 12% to December for a -6.91% premium vs. -13.94% last week ending October 12, still well below the bottom of the green zone between 10% to 20%, still signaling caution.

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.

For daily updates, follow our end-of- day volume weighted premium version located about half-way down the home page in the Options Data Analysis section on our website.

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Foremost Indicators

Review NotesMarket 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, dropped 151.19 points or -43.41% last week. While not necessarily a leading indicator, advances and declines above and below the 50-day moving average have been good for confirming the market direction as reported in Digest Issue 37 "Rotation Rethink [Charts]" when it last declined below the 50-day MA.

From a market breadth perspective, this charts shows the current decline is considerably weaker compared to the one that began on January 26.


The arrow at February 9 shows the breadth reading at the initial leg down on the Rising Wedge formation marked 1 on the first small chart in the SPX section above. The arrow at Sep 6 shows the crossing below the 50-dayMoving Average. This breadth indicator suggests, until it begins to improve, buying the pullback could be hazardous.

VanEck Semiconductor ETF (SMH) 95.08 declined 2.26 points or -2.32% for the week. Digest Issue 33 "Endless Rotation [Charts]" included a chart showing a potential Head & Shoulders Top developing . Here is the update.


With two left and two right shoulders, and having closed below the Neckline the minimum measuring objective has been set at 80, below the bottom of this chart.

SMH has a good record as a leading indicator with a high correlation to the S&P 500 Index, usually .75 and above. When it diverges SMH often leads the broader market, at least on the last two occasions, June 16 down and August 17 up.

The story here is about analysts concluding the business cycle has peaked despite some companies in the sector still reporting good results


While the current condition seems bleak from a bullish perspective its worth remembering the numerous times it looked as if the long uptrend was about over just as the market reversed and continued higher. This could be another one of those times. The completion of the new potential Rising Wedge could form a base for a new upward sloping trendline, market breadth could improve and the SMH could rebound to retest the previous highs all while confronting a rising interest rate environment. The potential Rising Wedge underway does provide an analytical framework to help decide on long call or long put spreads.

Another observation about the current pullback: before quarterly earnings reporting there has been a tendency for the market to decline and then recover when the releases begin and the current decline could have began this way as well before jolted by rising interest rates.

Adding some politics to the mix. Since the mid-term elections are quickly approaching, a more cautious approach to quickly buying the current pullback, seems prudent.

Previous such wolf cries proved wrong and this may just be another hiccup as the longer term uptrend remains intact. But remember, as the saying goes, "...if you're wrong on timing...you're just wrong."


Similar to the market decline that began in January to current pullback could also be in the early stages of forming a Rising Wedge suggesting it may continue for the next few weeks. In addition, market breadth weakness and the semiconductor ETF supports the view that weakness could continue for some time unless troublesome interest rates stabilize or begin turning lower.

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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 the plan once again includes more trading ideas from our rankers and scanners.

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.

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