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Today


IVolatility Trading Digest™


Volume 20 Issue 49
The Macro Bus Returns [Charts]

The Macro Bus Returns [Charts] - IVolatility Trading Digest™

Rotation into cyclical and value stocks continued last week helped by the breakdown of the US Dollar Index giving the energy sector another boost while the news media focused on Covid-19 vaccine distribution and more fiscal support. The Market Review shows the dollar breakdown along with a reminder from the Macro Bus followed by trade idea updates for Hyliion Holdings Corp. (HYLN) and Freeport-McMoRan (FCX).   

Review NotesS&P 500 Index (SPX) 3699.12 gained 60.77 points or 1.67% last week, well above the November 9 intraday high objective at 3645.99, making new closing and intraday highs on both Tuesday and Friday. Since exporters and providers of services priced in dollars should benefit from the declining dollar, along with seasonal strength, the odds favor more highs before the year-end. Just in case, look for support near 3550 and then at the 50-day Moving Average, now 3484.74.

iShares Russell 2000 ETF (IWM) 188.20 added 3.83 points or +2.08% last week and tentatively labeled the "decider," as it nudged out the SPX again.

Invesco QQQ Trust (QQQ),305.52 advanced 6.51 points or +2.18% closing well above the November 9 intra-day high of 299.14 and slightly better than the IWM reclaiming the "decider" title. QQQ also includes the leading semiconductor stocks in the VanEck Vectors Semiconductor ETF (SMH) 219.39 up 12.97 points or 6.28% last week. Until the semiconductor sector turns lower, equities will likely continue higher.

Review NotesCBOE Volatility Index® (VIX) 20.79 slid just .05 points or -2.30% 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 .74 points or -4.38% ending at 16.17, in the bullish zone, but may have reached the lower limit until after Covid-19.

The IVXM and SPX charts.

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VIX Futures Premium

This next chart shows as our calculation of Larry McMillan’s day-weighted average between the first and second month futures contracts as of last Friday.

With seven trading days until December expiration, the day-weighted premium between December and January allocated 35% to December and 65% to January for a premium of 14.11% – in the green bull zone.

table

Since most of the volume and open interest are in the two closest futures contracts measuring the day-weighted premium relative to the standard 30-day VIX provides a good real-time sentiment indicator based upon actual commitments of large Asset Managers and Leveraged Funds.


All on one page
The Sentiment Analyzer included in all IVolLive packages features a quick reference one-page summary including moving averages, relative strength, Chaikin Money Flow, Correlation, Options IV & HV and more.


The US Dollar Index

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Until last Tuesday December 1, DXY looked as if support at 91.75 the September 1 low, might hold and then bounce. That didn't happen. On Tuesday, it closed at 91.31, below the important previous low, and then continued lower closing Friday at 90.70.

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DXY drives the Macro Bus. The hard to read labels on the passenger's hats are Crude Oil, Gold, Treasuries and Equities. Hidden in the back are Copper, Silver, Corn, Wheat and other commodities as well as the iShares MSCI Emerging Markets ETF (EEM). All responded favorably to DXY's  breakdown last week.

Setting the Stage – Dollar Decline and Rotation

Although DXY now looks oversold and could bounce between now and year-end the closing below the September 1 low changed the picture, especially for the energy complex, but less for gold. For example the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) 61.00 gained 4.75 points or 8.44% on Friday and+ 3.12 points or +5.39% for the week. While the VanEck Vectors Gold Miners ETF (GDX) lagged, only gaining 1.08 points or +3.16%. 

Review Notes
Market 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, advanced  another 153.66 points or +19.47 % last week ending at 943.01 and still trending higher.

Trade Suggestion Updates

Last week's idea for Hyliion Holdings Corp. (HYLN) in Digest Issue 48 "Rotation Continuation? [Charts]" demonstrated the value of using the IV/HV ratio as an indicator for potential large price moves. Here from Digest Issue 48 "The implied volatility/historical volatility ratio using the range method is 2.46 so option prices are expensive relative to the recent movement of the stock."

On Monday November 30, it gapped lower at the opening and below trade plan stop thereby cancelling the idea.

Digest Issue 46 "Rotation Quandary [Charts]" included a January 15 Freeport-McMoRan (FCX) 21/25 long call spread, booked on Monday November 16 for a debit of 1.18. As the stock advanced from 21.00 to 25.06 by Friday, the spread increased to 2.64. Now with 39 days to expiration consider rolling it up and out by closing the January 15 spread and then opening a new February 19 26/30 call spread with an indicted debit on Friday of 1.16. Should the stock open above 25.50 use the next higher strike prices for both legs. Increasing EV production, rising copper prices and a declining U.S. dollar suggest the uptrend will continue.

Strategy

In bull markets, the strategy is to stay long equities and/or ETFs and then tactically hedge pullbacks as they begin developing. Our indicators remain bullish with no signs of an imminent pullback, but watch for reversal signs such as a new high, but a lower close on increased volume in the major indexes including the VanEck Vectors Semiconductor ETF (SMH).

Summary

As the US Dollar Index declined below a previous key support level, buying increased in previously lagging sectors such as energy and gold. For market watchers the dollar decline rang the big event bell. Other beneficiaries include the Invesco QQQ Trust (QQQ) and the VanEck Vectors Semiconductor ETF (SMH). Now oversold, downside dollar momentum could slow into the year-end, but seasonal strength suggests the odds favor higher equities for the next week or perhaps somewhat longer. Watch for reversals in the major indexes as a sign to begin considering hedges.

By Jack Walker

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.


“The best volatility charts in the business.”

Next week's Market Review will include another indicator update.

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

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).

 

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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".