« March 2019 »

IVolatility Trading Digest™

Volume 19 Issue 11
Finally Back Above 2800 [Charts]

PnL Calculator [Charts] - IVolatility Trading Digest™

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Last week, after several attempts the S&P 500 Index finally closed well above the resistance zone around 2800, thereby increasing the odds it will continue up to challenge the October 3, 2018 high at 2939.86. Then after a long hiatus, a brief look at the Commitment of Traders report for WTI crude oil follows.

Review NotesS&P 500 Index (SPX) 2822.48 added 79.41 points or +2.89% last week finally closing Friday above the tough 2800 resistance zone that turned it back three times. Once it closed above the March 4 high at 2816.88 a new operative upward sloping trendline from the December 26 intraday low was activated that crosses right at 2800 and will act as support on any pullback. Then the 200-day Moving Average at 2752.96 should provide the next support. Now above the 2800 resistance zone there is not much more resistance before the October 3, high at 2939.86.

VIXCBOE Volatility Index® (VIX) 12.88 dropped 3.17 points or -19.75% 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, also declined 3.14 points or -23.24 ending at 10.37 shown below with the SPX line chart.


Once again below the bottom of the recent 14-15 range that began last October the bullish implied volatility downtrend continues.

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 2 trading days until March expiration ,the day-weighted premium between March and April allocated just 8% to March and 92% to April for a 15.04% premium vs. 5.48% for the week ending March 8. Now back in the green zone between 10% to 20% associated with S&P 500 Index uptrends; supports the bullish outlook for the new upward sloping trendline.


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 unsustainable, but for the last year premiums above 10% have been scarce. If there was only one indicator available, it would be a top contender.

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.

Since VIX calls are often used for hedging purposes here is an update for the call and put open interest that could be somewhat unusual on a busy options and futures expiration day.


Big Data? In options we are Big Data!
For a comprehensive review and reminder check this out
Options: Observations of a Proprietary Trader

WTI Crude Oil

Review NotesWTI Crude Oil (CL) 58.52 basis April futures gained 2.45 points or +4.37% for the week. The March EIA production forecast was revised down more than the consumption forecast, so global inventory builds are expected to be lower, suggesting a relatively tighter market than previously expected in their February forecast.

From the December 24, 2018 intraday low at 43 WTI April futures advanced 36% compared to the avarage seasonal advance from December to October for the last 30 years of 21% , making this year's advance already above average; likely due the abnormally rapid decline from October to December last year. Now it's clearly trending higher as shown by both the black upward sloping trendline, USTL and the red 50-day Moving Average. The chart below tells the story.


Delayed for several weeks due to a partial government shut down, the Commitments of Traders (COT) report from The Commodity Futures Trading Commission (CFTC) is current again.

From the Disaggregated Commitments of Traders - Options and Futures Combined report as of March 12, "Managed Money,” the group that best correlates with crude oil price changes and arguably the most important, increased their long position 1,359 contracts and reduced their shorts +4,728 contracts for a net position increase of 6,088 contracts representing 5.70% of the open interest up from 5.41% for the week inding March 5. The following three charts show the "Managed Money" position since November 2017. First the net long position as a percentage of the total open interest showing a recent upturn.


While their long position decline began last Septmber, it has remained faily stable since the end of November.


But the short position tells the tale, increasing dramatically from July 3 at .52% peaking at 4.37% on January 8, now 2.26% and trending lower as they close shorts.


There are five reporting categories: Producer/Merchant/Processor/User
(PMP),sometime also called" Commercials," Swap Dealers ("Swaps"), Money Manager ("Managed Money"), Other Reportables ("Other"), and Non-Reportables each with six data points, long, short, net position and change for each. Since the total net longs and net shorts zero out each week, tracking the changes of each group compared to the WTI price change provides some insight especially at turning points.

While changes in other categories will occacionally affect prices "Managed Money" usually correlates best and it was increased shorting that began last October that pushed prices lower.


Review NotesWith a new S&P 500 Index upward sloping trendline and little overhead resistance until the previous October 3 high, odds favor the bulls. With declining implied volatility consider long SPDR S&P 500 ETF (SPY) call spreads along with United States Oil Fund, LP (USO) long call spreads.

Market Breadth as measured by our preferred gauge, the NYSE ratio adjusted Summation Index reported by McClellan Financial Publications, declined 88.36 points for the week ending at 983.73 after peaking on February 27 at 1288.45. Declining breadth and the threat of "sell the news" if and when, on China trade agreement announcement, along with lagging transports, are three reasons to remain attentive.


After closing above the 2800 resistance zone Friday a new upward sloping trendline suggests the S&P 500 Index will attempt to test the October 3 high at 2939.86 with options and futures indictors remaining bullish along with little overhead resistance. With increasing seasonal demand crude oil should also continue trending higher.

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Next week will feature a review of the Advanced Ranker along with the regular market review.

Finding Previous Issues and Our Reader Response Request

PreviousIssues All 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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