« March 2022 »

IVolatility Trading Digest™

Volume 22 Issue 10
Contrarian Signs [Charts]

Contrarian Signs [Charts]

Although unlikely based on the current geopolitical news along with an almost certain interest rate hike announcement next week, the S&P 500 Index and other widely followed equity indices seem to be holding up better than might be expected. Indeed technical patterns and some indicators suggest the pullback could be ending soon. The Market Review explains along with some ideas to consider from our Volatility Ranker tool.

Review Notes
S&P 500 Index
(SPX) 4328.87 slipped 55.78 points or -1.27% last week after bouncing up as high as 4416.78 Thursday. Should it hold above 4250 between now and the interest rate announcement, a Head & Shoulders Bottom pattern could form. However, closes below 4222.62 and especially below 4114.65 will activate a much larger Head & Shoulders Top from the January 4 high at 4818.62, with a measuring objective down at 3625, well into a bear market.

The Elliott wave alternative view detailed last week in Digest Issue 9 "Technical Tales [Charts]" suggests a possible a-b-c counter move underway with the potential for it to move back above the 200-day Moving Average. If so, the likelihood increases for the formation of the Head & Shoulder Bottom, with the potential to move back above the 50-day Moving Average.

Both the Invesco QQQ Trust (QQQ) 337.80, and the iShares Russell 2000 ETF (IWM) 198.66, display similar patterns reflecting the current known negative influences and with the potential to turn higher on any optimistic news including a smaller interest rate hike despite higher inflation.

Review Notes
CBOE Volatility Index®
(VIX) added 4.39 points or +15.91% last week ending at 31.98. 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, increased 3.04 points or +12.80% ending at 26.79%. On Tuesday, it made another new 52-week high at 28.33 before pulling back slightly, but appears trending higher.


VIX Futures Premium

VIX futures premium ended Friday at -2.14%, in the red bear zone again last week. With 8 days before March futures expire and with accelerating time premium decay.


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.

VIX Correlation Indicator

Typically, the VIX and the SPX move in opposite directions. As the SPX advances, the VIX normally declines suggesting less interest in bidding up SPX puts. Historically when the correlation turns positive it sends a warning signal since positive readings, and even some just less negative, are followed by SPX declines, perhaps just minor pullbacks, or occasionally something more menacing. The higher correlation coefficient the more significant the signal. The most important are positive, above zero. Monday it started at a normal -.87 then turned increasingly positive all week, especially on Thursday before ending Friday at -.35. Any further advance this week into positive territory will send a clear warning signal for SPX.

VIX Put/Call Ratio

The put/call ratio reflects the total number of puts traded each day divided by the total numbers of calls. As one of the best measures of market sentiment, it helps determine when option buyers are predominantly bullish or bearish and if bias is intensifying or diminishing. A rising ratio suggests increasing bearish sentiment while a declining ratio suggests bullish sentiment. The greatest value comes at extremes, similar to an overbought/oversold oscillator used as a contrary indicator.

Ratios below .3 imply a sense of overbought euphoria while ratios over .7 reflect pessimism.

However, since the VIX and the SPX move in opposite directions increased call option buying reveal increased hedging downside risk activity and shorting the market. In this case, .3 reflects maximum pessimism as in an oversold market. Friday's chart:


Friday's VIX put/call ratio ended at .29. On Friday December 17, it also reached .29 after the VIX spiked up to 35.32 intraday on December 3, called Omicron Friday. Last year including December 3 shown on the chart, it reached the .25 extreme low levels five other times. This reflects significant hedging activity on Friday and from a contrarian perspective may once again suggest a short- term SPX bottom.

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 slightly higher after making a pivot at -731.20 on February 24. For the week, it gained 45.00 points or +6.21% ending at -679.39. This reliable indicator suggests the bears are running out of reasons to keep selling.


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Option Ideas

Searching for opportunities based on the difference between option implied volatility and historical volatility, also called realized volatility helps option traders quickly find candidates for further research.

Here are Friday's results using the Underlying Volatility Ranker found under Open My Tools on the IVolLive front page, ranked and listed by high IV Index/HV, %.


High ratios means options are expensive relative the recent movement of the underlying often for good reason. Typically selling strategies, such as short put spreads, short call spreads or ratio spreads with more shorts than long benefit from high implied volatility.

Extracted from a page of 50 ranked from highest ratios in the blue highlighted column on the right, the sample above offers some ideas to consider. Using this handy tool, they can also be ranked by Historical Volatility, IV Index Change or by range.


Review NotesOn Wednesday March 15, after the FOMC meeting the widely anticipated rate hike announcement will occur with a 25 bps hike already reflected in market prices. However, the next Consumer Price Index for February will be released on next Thursday March 10, with the potential to alter the FOMC decision. Therefore, expect implied volatility to remain relatively high until Thursday.

Should the equity indices manage to turn higher expect a more cautious less speculative environment with new leaders. In the meanwhile, follow the rule of unknowns by initially positioning portfolio holdings for both up or down markets, and then adjust, and hedge until the direction becomes apparent.


The S&P 500 Index as well as other widely followed equity indices could be in the process of forming bottoming patterns, perhaps even Head & Shoulder Bottoms if they stay above previous lows. While implied volatility continues to rise, other indicators suggest an oversold market with the potential to turn higher on any improved fundamental news.

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. 

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 Digest will again feature our Market Review.

Finding Previous Issues and Our Reader Response Request


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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