« January 2019 »

IVolatility Trading Digest™

Volume 19 Issue 3
New Rising Wedge [Charts]

New Rising Wedge [Charts] - IVolatility Trading Digest™

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Although the S&P 500 Index rebound from the December 26 low has been impressive, advancing above the first resistance zone between 2550 and 2600, it could soon run out of gas, since from a classical barchart perspective, it appears to be forming a bearish Rising Wedge. A chart with details is included in our market review along with the regular weekly line-up.

Review NotesS&P 500 Index (SPX) 2670.71 gained 74.45 points or +2.87 % last week, the second week of +2% gains continuing well beyond the first expected resistance zone. Closing back above the 50-day Moving Average at 2625.45 it's approaching the active downward sloping trendline from the October 3 high at 2939.80 and more resistance.

VIXCBOE Volatility Index® (VIX) 17.80 declined .39 points or -2.14% 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 1.54 points or -9.88% ending at 14.05, near the bottom of the recent range shown in the updated one-year volatility chart with SPX 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 17 trading days until February expiration , the day-weighted premium between February and March allocated 85% to February and 15% to March for a 2.82% premium vs. 6.71% the prior week ending January 11. Still below the bottom of the green zone between 10% to 20%, it's not reflecting the recent strength of the advancing SPX.

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.

VIX - VXST Indicator

The difference between the 30 -day VIX and the 9-day VIX (VXST) can often signal a trend change as the shorter term VIX declines back below the VIX. Now at 2.58 this chart shows it turned positive on January 9 at .74 generating a buy signal, then continued to advance as the short-term VXST declined faster than the VIX suggesting less anxious short-term risk off options activity.


Now at a recent high it could be suggesting the short- term VIX has declined too much and may soon reverse. Watch the spread.

S&P 500 Index Rising Wedge

Since important changes in trend typically retest previous extremes, either highs or lows the current advance from the December 26 low at 2346.58 without attempting to retest the low, raises a question. When will it begin attempting to retest the low or could it be different this time? Odds are it will attempt a retest.

On the way down it made a bearish rising wedge that began on October 29 ending on November 9 when it closed below the lower boundary . At that time the decline looked like nothing more than a modest correction since it would not be labeled a bear market until December 19 after comments by Jay Autopilot Powell, explained in Digest Issue 1 "Bear Trap Door [Charts]." It now looks like another bearish rising wedge could be underway. Take a look.


"...Rising Wedge is a quite characteristic pattern for Bear Market rallies. "The difference between a Rising Wedge and what might be called a normal up trend channel is that the Rising Wedge sets a sort of limit on the advance. Its converging boundary lines focus on the point where the advance will halt and reaction set in." – Edwards and Magee, Technical Analysis of Stock Trends, 5th edition.

A Rising Wedge is a bearish pattern where both boundary lines slop up until prices finally break out on the downside and take out the low point that first started prices up on the bear market rally. If so, a close below the lower boundary implies at least a 324 point decline.


Review NotesBased on a somewhat threatening potential Rising Wedge watch for a close below the lower boundary as sign to begin considering new collars for long positions and put spreads to hedge portfolio risk. Once the bear market began it will take considerable good news to change the picture. Until proven otherwise, by a close back above the active downward sloping trendline at 2700, the S&P 500 Index has the dubious distinction of being in a bear market. Sure the Rising Wedge could morph into a less ominous pattern , and it could close above the defining downward sloping trendline, but for now prudence says be ready to trade what you see not what you may think based on the news.

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While both short-term options and futures indicators turned positive as the S&P 500 Index continued above the first resistance level between 2550 and 2600, a potential developing Rising Wedge could quickly change the picture and remind traders and strategists that the S&P 500 Index remains in bear market territory.

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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's Digest will once again be devoted to finding new trade ideas from our rankers and scanners.

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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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