« November 2018 »

IVolatility Trading Digest™

Volume 18 Issue 45
Another Gap [Charts]

TOP 5 [Charts] - IVolatility Trading Digest™

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The Gap story continues as last week's new Measuring Gap helps confirm the Breakaway Gap detailed in Digest Issue 44 "The Gap [Charts]."  More on the new gap follows our regular market review along with an overdue Commitment of Traders update for WTI Crude Oil, followed by a look at last week's SPDR S&P 500 ETF (SPY) long call spread idea.

Review NotesS&P 500 Index (SPX) 2781.01 continued higher adding another 57.95 points or +2.13%, closing above the 200-day Moving Average at 2763.03. A new gap up opening on Wednesday November 7, exactly one week after the October 31 gap open, increases the probability that the first gap up opening was indeed a Breakaway. More below.

VIXCBOE Volatility Index® (VIX) 17.36 dropped 2.15 points or -11.02% 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 2.46 points or -14.62% to 14.37. Here 's the six month view with the SPX line chart below.


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 7 trading days until November expiration, the day-weighted premium between November and December allocated 28% to November and 72% to December for a 1.59% premium vs. -.79 last week ending November 2, again slightly better this week, but still below the bottom of the green zone between 10% to 20% with all futures contracts above the VIX.

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.


Still in the "Risk Off" zone, but looking better for the bulls.

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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Another Gap

Last week Digest Issue 44 "The Gap [Charts]" reviewed price gaps including Measuring Gaps that appear during a rapid straight line price moves that are never closed. On Wednesday November 7, after the US mid-term elections, the S&P 500 Index made a gap up open, creating what appears to be a Measuring Gap.

"This type of gap reveals a situation where the market is moving effortlessly on moderate volume. In an uptrend, it's a sign of market strength; in a downtrend , a sign of weakness. Here again, runaway gaps [Measuring Gaps] act as support under the market on subsequent corrections and are usually not filled.

"This variety of gap is also called a measuring gap because it usually occurs at about the halfway point in a trend. By measuring the distance the trend has already traveled , from the original trend signal or breakout, an estimate of the probable extent of the remaining move can be determined by doubling the amount already achieved." – John J. Murphy, Technical Analysis of the Futures Markets, 1986, pp.99-100.

The November 7 the S&P 500 Index volume was moderate at 2.4 billion shares, about the same all week. Moderate volume ?

So to obtain a target, measure from the prior breakout to the center of the gap and extend that distance from the gap's center. Here's the chart.


This second gap did four important things: Confirmed the Breakaway Gap shown in Digest Issue 44 "The Gap [Charts], " established an upside measuring objective at 2824 just below the 50-day Moving Average at 2829, identified a support zone for any pullback, and set a warning or stop level should it continue lower closing the gap attempting to retest the October 29 low.

Friday SPX traded into the support zone that held, closing just above the middle of the range. Will it hold again today and the rest of the week?

How about market breadth?

Market Breadth Continues Improving

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, gained 254.88 points or +36.10 % for the week ending at -451.18 with the 50-day Moving Average, now 73.77. Improving breadth supports the bullish view despite continuing rotation out of some previously high p/e multiple stocks in the tech and Communication Services sectors. Last week's sector score: "Risk On" two days, "Risk Off" three days.

Review NotesWTI Crude Oil (CL) 59.87 basis December futures down 3.27 points or -5.18% for the week, and down 15.27 or -20.32% since our last look in Digest Issue 39 "Crude Oil Positions [Charts] "as of September 28. Then there were no signs of weakness although the expected seasonal decline was overdue. Two days later it reversed and headed south


Here are three selected charts from the Disaggregated Commitments of Traders - Options and Futures Combined report (COT) by the CFTC as of November 6, (scroll down the page about one-half way), that tell the tale. Since Digest Issue 39 "Crude Oil Positions [Charts]" included reporting details they are not included here in order to save some space.

With substantial financial risk and a vast information network "Managed Money,” the group that best correlates with crude oil price changes and arguably the most important, speculate on future prices.

This chart shows the net long positions of "Managed Money" (registered commodity trading advisors (CTA), registered commodity pool operators (CPO), or unregistered funds including “hedge funds.” When added to "Other" (Other Reportables, large traders not defined as "Managed Money, ") they are called "Large Specs" (Large Speculators) when combined, and now 14.72 % of the Open Interest down from 22.01% on April 2 and just below the upward sloping trendline USTL.


Next, "Managed Money" Net Long as a % of the Open Interest at 5.39% down from 14.64% on January 23 and 15.16% on February 21, 2017. Rapid long liquidation.


At the margin, although small as a percentage of the total open interest, this next chart shows the "Managed Money" Short Position as a % of the Open Interest at 2.81% vs. just .52% on July 10 the most recent low. Based upon their prior short positions of more than 8% on August 2016 it looks like they could just be getting started shorting.


If so, prices are likely to continue lower until the Saudis and Russians agree on a production cut to balance the market at a new equilibrium price level.

Tradable Bounce

Now an update to last week's tradable bounce idea in Digest Issue 44 "The Gap [Charts]."  

SPDR S&P 500 ETF (SPY) 277.76 up 5.87 points or +2.16% for the week.

Based on last Monday's closing prices the long December 21 275/280 call spread debit was booked for 2.56 (long the Dec 21 275 call and short the Dec 280 call). Marked-to- market Friday it was 3.09 for a .53 or +21% gain in one week, with limited, hedged and defined risk.

Based upon the Measuring Gap, with a defined support zone and upside objective detailed above, chances are this spread should continue higher.


It appears the S&P 500 Index bottom was reached Monday October 29, confirmed by an upside Breakaway Gap before, and then a Measuring Gap after, the mid-term election. Unless the support zone created by the Measuring Gap fails to hold this week then it should soon reach the upside objective of 2824 and most likely continue up to the 50-day Moving Average at 2829. For now odds favor staying long, but watch support at the gap.

Since the bottom appears to have been reached confirmed by improving market breadth, consider positions in the market leaders that have gone down the least since this is where the smart money has gone. Since rotation selling continues in selected tech and the Communication Services sector be careful with high p/e multiple growth stocks.


The market decline that began after the S&P 500 Index made a small double top on October 3, appears to have bottomed October 29, now confirmed by Breakaway and Measuring upside gaps, along with improving market breadth. Odds favor the bulls. However, for crude oil it looks like selling pressure is increasing.

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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.

For next week another report on the gaps along with some trade ideas from our ranker and scanner tools.

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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