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IVolatility Trading Digest™

Volume 18 Issue 7
January Barometer & More [Charts]

January Barometer & More [Charts] - IVolatility Trading Digest™

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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Review NotesUpdating the January Barometer, also called the January Effect adds another higher January close. According to the Stock Trader’s Almanac January’s S&P 500 Index close, up or down determines the likely direction of the for the year. Adding last year’s up close to the record puts another "Right" in the result column.


While this indicator produces mixed results for the years when January closes lower, the record for predicting higher closes for the years when January closes higher is 90% going back to 1950, based data from the Stock Trader’s Almanac. Since 2011 was almost flat, it was not included in the up year column when calculating the probability. Since 2008, this indicator has been "Wrong" five out of ten years. Last week's market review concluded that rushing to judgment about the January 26 bull market top may have been premature. This week the same caution applies to the oversold bounce underway.

Review NotesReview NotesS&P 500 Index (SPX) 2732.22 bounced up 112.67 points or +4.30% for the week closing above 50-day moving average at 2725 and the operative upward sloping trendline, USTL from the August 29 low at 2428.20. Just as declines are not typically straight down oversold bounces are not typically straight up either. Since symmetrical continuation patterns are common the pattern on the right offers a guideline to watch. Continuation patterns usually continue in the direction of point 1 after completing the consolidation near point 4. However, during this bull market there have been several times they acted as less common reversal patterns.


Chart Courtesy of StockCharts.com, IVolatility

VIXCBOE Volatility Index® (VIX) 19.46 dropped 9.60 points or -33.04% for the 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 8.25 or -37.50% on the SPX rebound.


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 March expiration, the day-weighted premium between March and April allocated 88% March and 12% to April for a -8.92% premium, still below the bottom of the green zone between 10% to 30%.

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.


VIXThe entire VIX futures curve remains below the VIX so the premium remains negative. Since the premium usually returns to the green zone quickly any additional negative readings should be a sign of caution meaning the VIX remains elevated. Follow our end-of- day volume weighted premium version on our website home page.

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Indicators to watch

Updates for last week's focus section.

10-Year Treasury Note Yield (TNX) 2.87 up 4 basis points for the week. The chart in Digest Issue 5 "All About Interest Rates [Charts]" suggests 3% remains the near term target.

VIX -VXST Spread (VIX minus the short-term 9 day VIX) turned positive last Wednesday giving a weak buy signal as VIX still remains elevated.

ProShares Short VIX Short-Term Futures ETF (SVXY) 12.69 gained 1.83 points or +16.85% for the week. Once the VIX closes back below the futures it will regain the contango edge.

iShares iBoxx $ High Yield Corporate Bond ETF (HYG) 86.45. This most reliable indicator gapped up at the opening Thursday and continued higher Friday closing the week up 1.50 points or +1.77%.

NYSE McClellan Summation Index (Ratio Adjusted) Index -84.26. Stopped declining Thursday, made a pivot and gained 16.85 points then added another 21.95 Friday, as market breadth improved, but still ended the week down 29.47 or -53.79%.

Turns in the Summation Index are usually important and now it needs to continue higher to confirm the market advance.

Volatility Strategy Ideas

VIXAlthough implied volatility declined it still remains relatively high by recent standards offering continuing opportunities for Iron Condors explained last week in Digest Issue 6 "Unlikely Top [Charts]" for stocks and ETFs in the middle of a recent range. While more commission are involved they have an advantage since at expiration the underlying can't be at both extremes. Remember to check for the next earnings report dates.


The outlook for the S&P 500 Index along with all the other major market indices improved greatly last week in what is being described as an oversold bounce. While some reliable indicators turned positive oversold bounces often retest prior lows and since the VIX remains elevated a more prudent strategy includes waiting for the results of a symmetrical continuation pattern that appears underway. For the bulls last week's rebound was constructive - going in the right direction, but not yet out of the woods.

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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.

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Next week will we will return with trade suggestions 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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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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