By Lawrence G. McMillan
One of the reasons that we favor $VIX derivatives as a portfolio, hedge rather than $SPX (or SPY) puts, is that $VIX is much more volatile. Also, $VIX protection is more dynamic. However, there can be some problems with the timing of a market’s breakdown and the convergence of $VIX derivatives with $VIX. In this article, we’re going to look at the details behind these actions, so that those who buy $VIX derivatives for speculation or protection might better understand what the potential problems are.
By Lawrence G. McMillan
Today’s stock market action is very much like last Friday’s. There is heavy selling, and it doesn’t appear that buyers have much desire to buy before the weekend. Last week, there was a rally attempt at 3pm (Eastern time), but it eventually failed, and prices closed on the low of the day. If you’ll recall, last week the selling continued on into the afternoon of the first trading day of the next week, before a strong rally surfaced. That could well be the case again this week.
By Lawrence G. McMillan
The chart of $SPX has developed a very interesting characteristic: there is a rising channel -- called a "pennant" on the chart. A breakdown below the lower boundary of the channel creates a very negative technical formation.
Equity-only put-call ratios, meanwhile, are quite bullish. They rolled over to buy signals last week and continue to decline.
By Lawrence G. McMillan
The stock market has been swinging back and forth in wide ranges, moving from deeply oversold to deeply overbought and back again with extreme moves.
By Lawrence G. McMillan
Buyers finally emerged yesterday afternoon and they have continued into today. In my mind, the complete impetus for this rally was the severe oversold condition that had emerged over the previous three days of heavy selling. Today’s rally is on track to being a “90% up day” – certainly in terms of “stocks only” data and potentially in terms of NYSE-based data as well. At the current time, on the NYSE, advancing volume is 12-to-1 over declining volume.
By Lawrence G. McMillan
Technical indicators have turned more bullish in the past week, so the current rally probably has more room to run. The chart of $SPX has taken on a slightly more bullish tone. This week $SPX overcame resistance at 1200-1210, although it has now fallen back below that level.
There is also resistance at 1230 -- the intraday high of both the last two trading days.
By Lawrence G. McMillan
The market responded to a number of factors on Monday to put together one of the strongest days of the year. Perhaps too strong (for example, advancing volume on the NYSE was 34 times that of declining volume!). It was yet another "90% up day" and now there have been three such days without an intervening "90% down day." Odds are due for a short-term pullback. However, once that gets out of the way, we would expect higher prices in line with the improving technical indicators that we mentioned yesterday.
By Lawrence G. McMillan
Vertical skews appear in option prices during times of panic and in futures prices in terms of euphoria. Since we have been experiencing a lot of both lately, we have gotten some requests from traders asking how to play these skewed situations without using naked options. This is a subject that we have covered in the past, but it might be a good time to review it, considering current market conditions.
By Lawrence G. McMillan
The rally that could have sprung up at any time – given the oversold conditions that existed – is taking place. As we mentioned in the Volatility Report (overnight), a key factor was the CBOE’s Equity-only Put-call ratio exceeding 1.00 on Friday. That is rare and usually precedes a strong (but short-lived) rally within a day or two. It other indicators don’t chime in today, this move may more or less be the extent of that signal.
By Lawrence G. McMillan
The $SPX chart is perhaps the most negative technical indicator of all. The pattern of lower highs and lower lows persists. How far can this next down leg carry? 1100 is the intraday low from last week; 1077 is the overnight low for the futures; and some technical targets suggest a decline to the 1040-1060 area, which was support from the summer of 2010.
