Trading & Technology
Volatility Trading Digest - Super Mario
Volatility Trading Digest - Super Mario
Since it doesn't require in-depth analysis to conclude the euro is the most important market variable, we wonder how many more times the European politicians and bankers will be able to say what's necessary to support their currency without a comprehensive final solution. Last week the euro did as they expected when European Central Bank President Mario Draghi said, "Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough."
Although now yet evident, we wonder when the markets will remember: Fool me once, shame on you; fool me twice, shame on me.
Again, this week we throw our updated indicators and comments into the analytical pot all the while knowing the direction of the euro is all that really matters. As the euro goes - so go the markets.
Weekly Review
S&P 500 Index (SPX)
Once again, with a new closing high for the trend that began from the June 4 low at 1266.74, that is also the head of the active Head & Shoulder Bottom pattern, we are able to redraw a new upward sloping trendline. Since this is the second redrawing, we thought we thought it might be a good idea to review the trendline rules. For uptrends draw a line from the lowest low up to the highest minor low preceding the highest high so that the line does not pass through any prices between the two low points. Accordingly, we were again able to redraw the trendline for the second week. With each subsequent new high, the slope of the line becomes flatter and thus more sustainable. The chart on the right shows the new trendline, USTL along with last week's (dotted line) and the active Head and Shoulders pattern with its minimum measuring objective MO at 1404 that becomes more likely with each new high. Notice last week's dotted trendline with two closes below, last Tuesday and Wednesday, before reversing on Thursday to close higher once again and then the new closing high Friday redefining the trendline. Once again, we see evidence of short covering making us wonder if somebody at the ECB is doing classical bar chart work.
E-mini S&P 500 Future (ESU2)
In the last two weeks, open interest is almost unchanged at 2.8 million contracts, based upon Friday's preliminary report. However, last week the volume increased to average more than 2 million contracts as open interest increased on both Monday and Tuesday, down days, to decline slightly more on Thursday and Friday both up days. The early week decline suggests existing long liquidation to existing covering shorts while the opposite occurred on Thursday and Friday.
S&P 500 Index Implied Volatility (IVXM)
In the last week, the Implied Volatility Index Mean increased from 14.34 to 14.51, while the CBOE Volatility Index® (VIX) increased from 16.27 to 16.70. The most recent VIX low was 15.45 on July 19.
The table below shows the VIX cash compared to the next two futures contracts as well as our calculation of Larry McMillan's day-weighted average between the first and second months.
The day weighting applied 68% to August and 32% to September resulting in the average premium of 2.54 or 15.22% shown above. Our alternative volume weighting between August and September produces a 15.68% premium. Last week the day-weighted premium was 18.84% and the volume weighted was 21.83%.
For this short-term indicator the premium to the cash is a SPX sell signal suggesting professional expectations for the cash to increase toward the futures price. In the past premiums in excess of 20%, have usually preceded corrections, although not a precise timing tool it appears to be a good way to measure professional hedging sentiment. Last week we mentioned the SPX put-call ratio had increased to 2.10 from the prior week at 1.52 and now it has declined to 1.18 while the VIX options put-call ratio increased from .28 to .72 both indicate less hedging activity.
Since the CBOE updates the VIX futures term structure during the day an estimate of the current premium or discount is always available. In addition, the data is available on our Advanced Futures Options pages, using VX as the Instrument symbol and CF for the exchange. Compare the options Implied Volatility to the Historical Volatility by setting HV chart to 21 days.
VIX Options
With a current 30-day Historical Volatility of 117.81 and 93.08 using Parkinson's range method, the table below shows the Implied Volatility (IV) of the at-the-money VIX calls and puts using the futures prices based upon Friday's closing option mid prices along with their respective month's futures prices, since the options are priced from the tradable futures.
Using the IV Index Mean of 78.12 the IV/HV ratio remains low at .66, using the range method for Historical Volatility the ratio is .84 while the VIX put-call ratio at .72 is just on the bearish line for the VIX, so slightly bullish for the SPX since they move in opposite directions. Friday's volume was 297,081 contracts compared to the 5-day average of 295,660 contracts.
CBOE S&P 500 Skew Index (SKEW)
Designed to measure the purchase of out-of-the-money S&P 500 Index puts that would require a very large downside move to profit from long put positions, an increase of this index indicates a higher probability of extreme down moves. Friday's 2.52-point decline seems consistent with the SPX index advance putting SKEW just below the lower boundary of the 115-125 range since March.
CurrencyShares Euro Trust (FXE)
Since the large short interest down to 120 was widely known in the FX market, we again see evidence of short covering on Thursday as this ETF gapped open to close 1.30 higher. The cash equivalent for Friday's close was 1.2321 while the September futures contract closed at 1.2317. It is very likely to retest 120 again soon unless convincing actions are taken by the ECB as well as the German and French central banks. Based solely upon past performance this does not seem very likely so a retest of 120 is most likely.
NYSE McClellan Summation Index
In the meanwhile, the NYSE Composite breadth index, one of the most reliable early trend change indicators, slipped back 124.45 last week after 7 weeks of advances creating a small divergence with the advancing NYSE Composite Index.
iShares Dow Jones Transportation Average Index (IYT)
While there is a case for a Head & Shoulders Bottom similar to the SPX, it seems difficult to justify on a fundamental basis until crude oil declines further providing some additional cost pressure relief for this important group. We think the more likely pattern is a range between June 4 low at 86.09, the head of the Head & Shoulders Bottom and the June 19 high at 94.66.
SPDR Homebuilders (XHB)
We are still watching the potential Head & Shoulder Top pattern, with the Head at the May 2 high of 22.43, the neckline at 19.25 with a minimum downside-measuring objective at 16.57. It now seems more likely that the May 2 high will soon be exceeded, especially since PulteGroup, Inc. (PHM) reported better than expected earnings Thursday to join Lennar Corp. (LEN) who reported improving business conditions on June 27.
iShares S&P GSCI Commodity-Indexed Trust (GSG)
Without the advance made by crude oil on June 29, this index would be closer to the recent bottom just above 28 rather than above 32. Seasonally crude oil peaks August - September, but in the last five years the peak has occurred in July.
Read more: http://www.theoptionsinsider.com/tradingtechnology/?id=10396#ixzz23ixRJGcZ
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