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Today


IVolatility Trading Digest™


Volume 21 Issue 47
WTI Crude Oil Seasonal [Charts]

WTI Crude Oil Seasonal [Charts]

Seasonally WTI Crude Oil prices start declining in November and since peaking in late October have managed to hold up above the 50-day Moving Average until last Friday when it suddenly broke down. Details follow in the Market Review along with highlighting a sudden bearish turn in market breadth.

Review NotesS&P 500 Index (SPX) 4697.96 gained 15.11 points or +.32% last week after making a new closing high on Thursday at 4704.54 creating a potential small double top pattern with the operative intraday high at 4718.50 reached on November 5. In the event of a decline, expect support around the September 2, high at 4545.86 followed by the 50-day Moving Average down at 4511.44.

Invesco QQQ Trust (QQQ) 403.99 added 9.29 points or a whopping +2.35%  last week breaking out above 400 on Thursday then gaining more on Friday creating an new upward sloping trendline from the October 13 low at 357.43. In the event of a pullback, the area around 400 should provide the first support followed by the September 7 high at 382.35 and then the 50-day Moving Average further down at 377.04. The relative outperformance confirms rotation back into large cap liquid growth stocks.

iShares Russell 2000 ETF (IWM) 232.72 dropped 6.78 points or -2.38% after holding up on Tuesday it headed south with urgency on Wednesday, Thursday and Friday. It's now located just above the first test of support from operative upward sloping trendline from the October 6 low at 216.76, followed by the area around 230 from previous June and July highs and finally the 50-day Moving Average at 227.54. The abrupt retreat suggests rapid diminishing expectations for higher interest rates since small caps have a tendency underperform when interest rates decline.

Review NotesCBOE Volatility Index® (VIX) added 1.62 points or +9.94% last week ending at 17.91. 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, added .69 points or +5.63% to close at 12.95%.

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For reference the estimated regression to mean of the relevant range that began on June 5, 2020 sits just above at 14.14%

VIX Futures Premium

VIX futures premium on Friday ended at 19.80% at the top of the bullish green zone as December futures became the front month with 33 days to expiration. For comparison on Friday November 12, it ended at 15.82% also in the bullish green zone.

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The chart reflects the distance from the VIX to the futures curve computed from the two front month contracts. 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 NotesMarket 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 turned lower last Monday with the rate of decline accelerating all week ending 138.41 points or -26.73% lower at 379.34. Until last week, the upward trajectory resembled the advance made last November but no longer, much to the dismay of the bulls.

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WTI Crude Oil (CL) 76.10 basis December futures ended Friday, the last trading day for December contracts, down 4.69 points or -5.81% for the week while cash closed down 3.39 last Tuesday at 80.76, the day of the last Disaggregated Commitments of Traders - Options and Futures Combined report (COT) on November 16.

The charts shows evidence of the seasonal decine from drop in futures open interest as of the recent COT report.

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While open interest declines when monthly futures expire the extent of the decline and subsequent advance in the new month gives a clue about market participants   intensions. As of Tuesday November 16, the day of the latest COT report, and before December futures decined from 80.76 on Tuesday to 76.10 on Friday, open interest declined 380, 315 contracts the largest decline in the last six months shown as the blue line in the chart above.

Watching open interest is one way to measure trend momentum since it needs to keep expanding to sustain moves in either direction. For a gage as to when the trend may be changing watch for declining open interest indicating existing long liquidation to existing shorts who begin covering. Currently it confirms the end of the uptrend from the August 23 low at 61.11.

Now 1.70 below the 50-day Moving Average, basis Juanuary futures, where does it go from here?

As a condition usually associted with tight supplies, the degree of backwardation provides one clue. On Friday January 22 futures closed at 75.94 while January 23 futures ended at 68.62, backward by 7.32 points or -9.64%, slighly less than the week before. Last Wednesday's weekly EIA report showed crude oil inventories as of November 12 at -7.3% below the seasonal 5-year average shown here.

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Tight supplies suggests the seasonal decline may be limited but a stronger dollar along with worsening COVID pandemic lockdowns in Europe could curb economic activity again and reduce energy demand thereby boosting  global inventory levels and removing the tight supply price support.


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Strategy

While both the S&P 500 Index and the Invesco QQQ Trust made new highs last week the abrupt decline by the iShares Russell 2000 ETF suggests "risk off" rotation back into large cap growth stocks confirmed by the 10-Year Treasury Note yield at 1.54% declining 4 basis points. Lower crude oil prices and lower interest rates suggest increasing expectations for slower global GDP growth once again. While it may be premature to begin implementing hedging strategies a risk review seems prudent.

Summary

Both the S&P 500 Index and the Invesco QQQ Trust made new highs last week as the iShares Russell 2000 ETF quickly declined suggesting rotation back into large cap liquid growth stocks. While options and futures indicators remained constructive, market breadth suddenly turned bearish. Although crude oil prices seasonally decline this time of the year, further declines will imply slower global GDP growth along with increased market risk.

By Jack Walker

Regularly check the Stock Trend Analysis and Best Calendar Spread ideas updated daily in the Ranker and Scanners section on our front page. 

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Next week the Market Review will again include a WTI Crude Oil 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

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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.

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