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Today


IVolatility Trading Digest™


Volume 21 Issue 14
Crude Oil & U.S. Dollar Index [Charts]

Crude Oil & U.S. Dollar Index [Charts]

Last week the markets responded to more significant events than usual in fewer trading days. The S&P 500Index ended with new closing and intraday highs while the Invesco QQQ Trust ended back above the closely watched 50-day Moving Average. Details follow in the Market Review along with WTI Crude Oil and U.S. Dollar Index updates.

Review NotesS&P 500 Index (SPX) 4019.87 gained 45.33 points or +1.14% last week while making a new closing high and two new intraday highs. On Thursday, the advance began at 10 a.m. with the release of very encouraging ISM PMI data, the second leg up occurred suspiciously at 3:45 p.m. ahead of Friday's payroll report, embargoed until 8:30 a.m. Friday morning, when the markets will be closed. Now, on any pullback, something that often happens after making new closing highs, look for first support around the previous high at 3984 followed by the 50-day Moving Average down at 3553.

Invesco QQQ Trust (QQQ) 324.57 added 8.57 points or +2.71% last week closing just under the flat 50-day Moving Average on Wednesday, but then gapped open above it Thursday. While some big capitalization constituents could still be sold as they bounce up with money rotating into cyclicals, Thursday's 5 bps yield decline on the 10-Year Treasury Note to 1.69% gets credit as the most likely driver for Thursday's gain. For now, last week's sell the bounce suggestion slipped to a hold awaiting the bond market's reaction to Friday's better than expected Nonfarm payroll report.

Review NotesCBOE Volatility Index® (VIX) 17.33 slid 1.53 points or -8.11% 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, lost .63 points or -4.46% ending the week at 13.50% at another bullish 52- week low with calls at 14.04% and puts at 12.97% both at 52-week lows. As a proxy for uncertainty, are these volatility measures adequately measuring current interest rate risk?  The six-month chart below shows the 52-week low in orange.

table

VIX Futures Premium

VIX futures premium last Thursday at 20.76%, ended beyond the top of the bullish green zone between 10% and 20%. While it may continue a bit higher, it usually doesn't stay above 20% very long. For now, it adds confirmation to the bullish view.

table

Since most of the volume and open interest are in the two closest futures contracts measuring the volume-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.

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, declined every day last week until Thursday when it advanced Review Notes23.33 points, ending the week 11.94 points or -2.33% lower.


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Review Notes

WTI Crude Oil (CL) 61.45 basis May futures closed the week up .48 points or +.79%. On Thursday March 18, it declined 4.57 points or -7.07% on worsening Covid pandemic news from Europe, especially Germany.

Other reports that speculators began liquidating longs seems inconsistent with data from the CFTC's Disaggregated Commitments of Traders - Options and Futures Combined report, COT as of Tuesday February 16 when both Producer/Merchant/Processor/User (PMP) category, sometime called "Commercials," and "Managed Money" increased their net long positions however, undefined "Others" reduced longs and increased shorts for a net decline of 13,783 contracts. However, the next report as of March 23 shows substantial position declines for both "Commercials" and "Managed Money" as the April contract expired.

The price chart shows it closed below the upward sloping trendline from the November 2 low on March 23 ending at 57.76. Since then the daily trading ranges expanded reflecting uncertainty while drifting somewhat higher forming a potential bearish rising wedge pattern meaning it could breakout below the pattern in the next two weeks. Alternatively should it move too far into the apex of the triangle, forming the bearish wedge, it will likely evolve into a range or a series of a-b-c corrective Elliott waves.    

On Thursday, OPEC+ decided to gradually increase production assuming global demand will increase faster and inventories will remain tight. May and June production targets increased 350K bpd, rising to 450K bpd in July.

Seasonally crude oil prices typically drift lower in the spring, but not this year, as inventories are tight as reflected by backwardation in the futures market, when near term futures are more expensive than those expiring in future months reflecting high near-term demand. As of Thursday, the May futures closed at 61.45 while the May 22 futures closed at 57.49 or backward by 3.96 or 6.44%.

Where crude prices go from here depends on the pace of reopening from the Covid pandemic, how fast depleted inventories in many categories other than just crude oil will be replenished, long-term interest rates and the U.S. Dollar Index.   

U.S. Dollar Index (DXY) & (DX)  93.02 added .25 points or +.27% last week after reaching as high as 93.44 on Wednesday before pulling back slightly when long interest rates declined 5 bps on Thursday.

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Referring to the trend change that begin from the January 6 low at 89.21, at point 1, first came a potential  Head & Shoulder Bottom  shown in the Digest Issue 6 "Don't Worry, Be Happy [Charts]". Point 1 represented the Head of the initial potential Head & Shoulders pattern activated with multiple closes above 91, but then it failed asDXY declined back to retest the low forming point 2, setting up a potential double bottom pattern activated with closes above 91.50.

The measuring objective, determined by taking the height of the pattern from the middle of the line connecting points 1 & 2 to the top (91.50 - 89.50 =2) and then adding that distance to the breakout (91.50 + 2) equaled 93.50. Very close to last Wednesday's high at 93.44.   

Where it goes from here will have implications for equities since about 75% of equity market variance is explained by marco variables, such as exchanges rates, interest rates and bond prices. In addition, rising long interest rates with short rates suppressed increases U.S dollar demand for carry trade arbitrage.  

With markets intensely focused on long interest rates, as they should be, this liquidity thought belongs near the top of everyone's worry list.

"Keynes argued that interest is a reward for parting with liquidity, not for refraining from consumption." – Peter Bernstein, Against the Gods, p. 228.

A stronger U.S. dollar is like swimming against the tide for commodities priced in dollars, and crude oil in particular.

Strategy

In bull markets, a good strategy is to stay long equities and/or ETFs and then tactically hedge pullbacks as they begin developing, since ordinary pullbacks can become corrections when something unexpected happens. Then corrections can become downturns when something else unexpected happens, and downturns can become bear markets when many unexpected things change medium and long-term fundamentals.

ProShares UltraPro Short QQQ (SQQQ) 12.44 dropped 1.09 points or -8.06% last week with most of the decline occurring on Thursday as QQQ broke out above the 50 -day Moving Average.  According to the original trade plan in Digest Issue 10 "Bumpy Ride [Charts]," the position was closed late Thursday. Trading trend changes require patience, but this one was a hedge against any further QQQ decline so the loss becomes an insurance cost.   

Wrapping up the short week, the bulls must be saying what's not to like.

Summary

Not only the S&P 500 Index, but also the futures and option indicators and even market breadth ended the short week on a positive note. The U.S. Dollar Index and bond prices, especially the yield on 10-Year Treasury Notes, reflect improving economic conditions and reopening activity following the Covid pandemic, all influence volatile and fast moving sector rotation.

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 look at the U.S. Dollar Index near an important level.

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 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".