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Today


IVolatility Trading Digest™


Volume 21 Issue 1
January Effect [Charts]

Bitcoin Postscript [Charts]- IVolatility Trading Digest™

With the major averages at or near new highs, the bulls must be wondering how much higher they can go. Leaving the prognostications and guesses to others, we look at the current situation in an effort to set some "what if" parameters. Seasonally the January record shows small capitalization stocks tend to outperform creating what has become known as the January Effect. More follows in the Market Review along with a bit more about Bitcoin.

Review NotesS&P 500 Index (SPX) 3756.07 gained 53.01 points or +1.43% last week while making several new closing and intraday highs including Friday, the last day of the year. In terms of sectors, three of the four days were Risk Off including Friday as it made an intraday high at 3760.20 with less than average combined daily volume of 1.6 bn shares. The Georgia Senate election tomorrow could qualify as one of those unexpected fundamental events, so watch for a close under Friday's low at 3726.88, at the junction of the upward sloping trendline from last November's low. Should that fail look for the 50-day Moving Average to provide support now at 3585.48.

iShares Russell 2000 ETF (IWM) 196.06 slid 2.95 points or -1.48% last week after making a new intraday high at 201.18 on Monday. Giving up the "decider" title and closing below the upward sloping trendline from the November low, the modest decline likely reflects portfolio adjustment selling of underperforming stocks before year-end, something called "window dressing" in the trade. After all, most portfolio managers want to avoid the embarrassment of showing an energy stock in their year-end report. For example, the Energy group placed at the bottom, or near bottom, of the sector list three out of four days last week. However, the January Effect probably won't help since that phenomenon referrers to small less liquid capitalized stocks.

Invesco QQQ Trust (QQQ) 313.74 gained 4.18 points or 1.36% last week to end right on the upward sloping trendline from the November low. In the event of an unexpected decline, the zone between 300 and 295 should provide substantial support from both previous highs and the 50-day Moving Average.

Review NotesCBOE Volatility Index® (VIX) 22.75 added 1.22 points or +5.67% 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, advanced only.46 points or +2.72% closing the week at 17.37%.

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VIX Futures Premium

With 17 trading days until January expiration, the day-weighted premium between January and February allocated 48% to January and 52% to February for a premium of 8.03% just below the green bull zone and less constructive than the week before at 13.47%.

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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.


Bitcoin Futures Update

Review NotesOur Bitcoin introduction in Digest Issue 51 "About Bitcoin [Charts]" included the premise that the breakout on December 16 resulted from short covering by Leverage Funds. If so, the next report should show a reduction in total open interest along with a decline in the Leveraged Funds short position. The last Commitment of Traders report from the Commodity Futures Trading Commission as of Tuesday December 22 shows something else.

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The next report due today could show something different, but based on this data, short covering by Leveraged Funds in the futures market did not contribute to the initial breakout above twenty thousand on December 16, in fact Leveraged Funds continued increasing their short position. Perhaps they are long cash Bitcoin (BTCUSD) and selling futures as a hedge, after all that's what the futures market does best.

January futures (BTF21) closed Thursday at 29,385 up 2,275 points or +8.39% for the week after a gap up on the December 28 opening. With each point value of $5, that's an $11,375 gain for the week. Another gap up at the open should be expected today as the cash (BTCUSD) continues higher at 33,373.90 up 3,830.76 as of early afternoon on Sunday in the Eastern Time zone.

Setting the Stage

The Georgia election contest to control the U.S Senate scheduled for Tuesday has the potential to become an unexpected fundamental event since increased taxes and more regulation should not receive support on Wall Street.

Remember Tom McClellan recently published an interesting article including charts showing Bitcoin currently leads the S&P 500 Index by 5-days. However, trees don't grow into the sky.

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, continued lower by 45.50 points or -4.55% last week ending at 953.46. With the SPX at new highs, this divergence will eventually get resolved one way or the other.

Strategy

In bull markets, a best 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.

Rather than waiting to see if a pullback will become a correction or a more serious downturn, consider hedging as soon as the first signs appear and consider it like the cost of insurance. If unnecessary, existing long portfolio positions will continue higher and the insurance protection can be cancelled. In addition, by watching and managing a put spread, for example, keeps attention focused, should the pullback develop into something more serious requiring even more put spreads or even a put ratio backspread.

Summary

The S&P 500 Index regained the lead making new highs and doing slightly better last week than the Invesco QQQ Trust and even better than the iShares Russell 2000 ETF that may have been under pressure from year-end portfolio "window dressing." Diverging market breadth, the Georgia U.S. Senate election on Tuesday and the relentless Bitcoin advance are all reasons for concern.

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 the Market Review will include slightly modified indicators along with the results of the potentially unexpected fundamental event in Georgia on Tuesday.

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.
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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".