After a strong upside breakout last week from the triangle formation (blue lines in Figure 1), the market has spent this week in a tight range. There has been an improvement in the indicators in general, but the most important indicator -- the price chart of $SPX -- has not really responded.
A clear breakdown and close below 2090 would be a short- term negative, likely calling for a retest of support at 2060. A breakout over 2115 and then 2135 would be very bullish.
This article was originally featured in the 5/27/16 edition of The Option Strategist Newsletter.
As you can see from the right, $VXST (the CBOE’s short-term volatility index) is approaching 10. That seems incredibly low, and one would naturally think that it is a warning sign. But the $VXST chart of past two years (below) shows that it’s been at this level a lot – just not since August of 2015.
The Standard & Poors Index ($SPX) broke out of the triangle that had formed on its chart (see Figure1), and that breakout was strongly on the upside. The bears had plenty of chances to violate the support at 2040 on a closing basis, but were unable to do so. So now we'll see if the bulls can do better with their chance.
This article was originally published in The Option Strategist Newsletter Volume 24, No. 8 on April, 23 2015.
One of the most successful investment strategies practiced by hedge funds (and other sophisticated investors) in the last ten years has been the “volatility short” trade. It is rarely mentioned on TV or in the media, but that is not too surprising. They would rather promote things such as the “Japan carry trade,” which wasn’t necessarily a profitable strategy at all unless a great deal of risk was taken. Not to say that the “volatility short” didn’t have its own share of risk, but it’s a lot more certain to profit if a certain status quo is maintained.
In this article, we’ll look at the history of the “volatility short” trade and see where it stands today. The long-term perspective on this trade may be a bit surprising, for it shows the tremendous toll that the $VIX futures premium takes on a long volatility position.
The chart of $SPX (Figure 1) shows a couple of things. First, the Index is in a downtrend. It has declined more than 80 points from the mid-April highs, at 2110. But the other fact that we can see from the chart is that $SPX still hasn't been able to close below 2040.
As a result, the two red lines make a triangle on the chart. Usually, a breakout from a formation like this is strong, but it can come in either direction.
This article was originally featured in the 5/20/16 edition of The Option Strategist Newsletter.
One way to take advantage of these premiums is to establish the VXX/SPY put hedge. We have had a position on constantly for nearly two months now. These option-oriented positions aren’t making much money because $VIX is going nowhere, and so we are losing the time value. That is offset to a large degree by the “edge” that the position has in the futures premium.
This article was originally featured in the 4/1/16 edition of The Option Strategist Newsletter.
It is worth noting that there has been a lot of discussion in the media about how cheap $VIX is, and these articles then have a bearish connotation for stocks. Two prominent articles appeared in the Striking Price column in Barron’s and on Zerohedge.com. The Zerohedge article covered a lot of interesting things about volatility futures and ETFs, but both of these articles mistakenly asserted that an upward-sloping term structure in the $VIX futures is bearish. I have seen the same opinion expressed many times on CNBC by traders who should know better, although I haven’t seen it there this week.
The rally has been powerful, but is it just another oversold affair? At this point, we can't really tell. The next resistance area is at 1940-1950, and that's a more crucial point. If $SPX can rise above that level, then it will have formed a "W" on its chart, and that would be quite bullish.
On the other hand, if the 1950 resistance holds, or is quickly retraced, then a much more bearish scenario unfolds.
The market broke down through support this week. $SPX retraced all the way to 1810, the January intraday lows. The $SPX chart remains negative, with a downtrend in place and heavy overhead resistance.
Conversely, the put-call ratios are becoming bullish. The computer analysis is calling these buy signals, and with the naked eye, one would have to agree.
Market breadth continues to be a problem. Both breadth oscillators remain on sell signals, but they are in oversold territory.
