« January 2019 »

IVolatility Trading Digest™

Volume 19 Issue 1
Bear Trap Door [Charts]

Triple Bottom [Charts] - IVolatility Trading Digest™

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
Please read IVolatility Trading Digest™ Disclaimer at the very bottom of this page

To add comments or to ask questions please click here (or use the blog "COMMENTS" link at the very bottom of the blog page).

The Bear Trap Door opened on December 19,when Federal Reserve Chairman Jay Powell said: "The balance sheet is on auto pilot, we don't see balance sheet runoff as creating problems." The S&P 500 Index had pulled back to the long-term trendline and could have gone either way as many expected dovish comments would support an advance. Instead his comments triggered a bear market. Despite Powell's attempt to soothe the markets Friday, it will now take extraordinary positive developments to renew the uptrend that began in March 2009. S&P 500 Index charts follow in the market review along with a mark-to-market update for SPDR S&P 500 ETF (SPY) put spread suggested in Digest Issue 49 "Technical Damage [Charts]."

Review NotesS&P 500 Index (SPX) 2531.94 gained 46.20 points or +1.86 % last week after making a new low at 2346.58 on December 26 then reversing to make a wide range reversal and advancing 116.60 points. Friday it recovered 84.05 points on Powell's latest conciliatory comments after losing 62.14 the day before. Should the rebound continue considerable resistance can be expected between 2550 and 2600 as it moves up toward the broken upward sloping trendline shown in the charts below.

VIXCBOE Volatility Index® (VIX) 21.38 declined 6.96 points or -24.56% last week after peaking at 36.20 on December 26 as the S&P 500 Index made a new low before reversing. Since early October the upward sloping 50-day Moving Average has done a god job containing pullbacks and Friday's close ended just below. Any further decline would support the view that the S&P 500 Index will attempt to test resistance between 2550 and 2600. 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 5.88 points or -23.57% last week ending at 19.07. The one-year volatility chart shows a recent spike up above 30, comparable to the spike last February suggesting a capitulation bottom was likely made on December 26.


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 January expiration, the day-weighted premium between January and February allocated 35% to January and 65% to February for a .77% premium vs. -13.90% the prior week ending December 28. Still below the bottom of the green zone between 10% to 20% but improved.

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. If there was only one indicator available, this one 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.

S&P 500 Index Trendline Update

This chart updates the long-term upward sloping channel from the March 2009 bottom and includes the first four Elliott Wave counts as of June 2017 along with the 5th wave marked in red at the arrow, since the trendline from October 4, 2011 at 1074.77 (2) to February 11, 2016 at 1810.10 (4) was broken on December 19, 2018.


This close up shows the trendline from February 11, 2016 at 1810.10 and the close below the upward sloping trendline, USTL on December 19, 2018 ending the long uptrend from a trendline perspective.


Based upon many previous examples it should now attempt to retrace the decline and test the trendline that will act as resistance around 2550 to 2600. Should it fail at the resistance and turn lower , the bear market will be further confirmed. In order for the long-term uptrend to resume it will need to overcome the resistance and advance to a new high above the September 2018 high of 2940.91 at the 5 in the top chart.

Big Data? In options we are Big Data!

"Options data with predictive qualities - Nobody does it better!"

Try our new PnL Calculator


Review NotesAccording to the trendline the bear market began December 19, 2018 thanks to Jay Autopilot Powell 's comments. Nimble traders might consider reducing hedges and collars until it the S&P 500 Index tests resistance between 2550 and 2600 where it will likely experience considerable selling pressure by those convinced the bear has more downside to go. Others may just wait to see.

Opening the Bear Trap Door is like trying to put a genie back in the bottle. Once the S&P 500 Index fell through the long-term upward sloping trendline it will take considerable positive fundamental news to change investor sentiment and technical analysis models enough for it to climb back through selling resistance and reach another new high. Is it possible? Sure, it did so in 2016, but the fundamental circumstances were arguably more favorable then than now. For now and until proven otherwise, the S&P 500 Index is in a bear market hole so the modus operandi of buying the dips has been replaced by selling the rallies.

The last remaining bulls were taken to the livestock auction on December 19, 2018 and sold.

For the record here is a mark-to-market update for the SPDR S&P 500 ETF (SPY) long put spread suggestion in Digest Issue 49 "Technical Damage [Charts]."

SPDR S&P 500 ETF (SPY) 252.39 gained 4.64 points or +1.87% for the week including +8.18 points Friday. et.

Opened December 10


Debit 1.49 (5.47 -3.98)

January 4 Marked-to-Market


Credit 3.32 (5.22 -8.54)

Nimble trades may want to consider closing this and similar positions. Then if the SPY turns lower again between 255 and 260 as expected, consider another March put spread.


While the S&P 500 Index bounced off the December 26 low and the VIX turned lower while the VIX futures premium turned slightly positive, all suggest the current bounce will likely continue up to resistance between 2550 and 2600 where it will likely encounter considerable selling from traders and strategists who now consider the S&P 500 Index to be in bear market territory.

Twitter Follow us on twitter for more ideas from our scanners and other developments.

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.

Since 4Q earnings reports will soon start, next week will be devoted to our Volatility Kingslist.

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




Comments are closed for this entry.

IVolatility Trading DigestTM Disclaimer
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.

Our purpose is to offer some ideas that will help you make money using IVolatility. We will also use some other tools that are easily available with an Internet connection. Not a lot of complicated math formulas but good trade management. In addition to Volatility we use fundamental and technical analysis tools to increase the probability of success and reduce risk. We prepare a written trade plan defining why the trade is being made, what we call the "DR" (determining rationale) and the Stop/unwind, called the "SU".