Volatility Stirs From Its Stupor
Dr. Duru | Apr 14, 2015 01:11AM ET
T2108 Status: 57.0%
T2107 Status: 52.8%
VIX Status: 13.9
General (Short-term) Trading Call: Neutral. Market still seems stuck in a chopfest. T2107 is still showing the potential for an important breakout.
Active T2108 periods: Day #120 over 20%, Day #79 above 30%, Day #23 above 40%, Day #7 over 50% (overperiod), Day #1 under 60% (underperiod), Day #189 under 70%
I tweeted my comments on volatility (through StockTwits) soon after the market open. I was looking at ProShares Ultra VIX Short-Term Futures (ARCA:UVXY). UVXY was stretching below its lower-Bollinger® Band (BB), but I did not know that the volatility index would gap up before declining toward Friday’s low. My data source (FreeStockCharts.com) has a 20-minute delay on the VIX. So, I just assumed the VIX was getting just as over-stretched as UVXY. This was a VERY interesting case of a divergence that quickly corrected.
ProShares Ultra VIX Short-Term Futures (UVXY) was trading well below its lower-BB as the current downtrend accelerated – the bounceback was sharp
The volatility index, the VIX, gaps up and closes higher for a rare wake-up call
Regular readers can easily guess what I tried after this tweet: I loaded up on UVXY call options. The trade turned into what will likely be my best trade for the entire week. I sold the position after it doubled late into the trading session.
This awakening of volatility out of its stupor is not as surprising as the stupor itself just ahead of earnings. I discussed my surprise in the last T2108 Update, so I was mentally ready to pounce on a contrarian trade. The rise in volatility occurred just as the S&P 500 stopped short at a minor downtrend line.
The S&P 500’s small rally into earnings season takes a pause at a minor downtrend line
This decline was enough to send T2108 back under 60%. I am once again standing down from expectantly waiting for overbought conditions (at or above 70%).
Get The News You Want
During the day I took note of two interesting charts. I post these with the standard caveat that earnings news usually trumps technicals.
h3 Intuitive Surgical (NASDAQ:ISRG)/h3Timing is everything. I have been waiting and waiting for a good re-entry for ISRG. In fact, it has been too long since I was last in this stock. Well, on Friday, ISRG tripped a price alert with a strong buying surge. I could not get around to making a trade. Yesterday, ISRG demonstrated convincing follow-through with more buying on high volume. The stock faded a bit from its intraday high but it still closed at a 52-week high. Earnings are on April 21st. I could not find any news to explain the move.
ISRG closed for a second day yesterday, above its upper-Bollinger Band (BB). A typical pattern on a sustained extension beyond the BB is for latecomers to add one more day of follow-through before some kind of reversal or consolidation. I was of course trying to get into ISRG before such a surge got rolling.
Intuitive Surgical (ISRG) surges to a 52-week high on strong buying volume
Can’t blame a short squeeze: bears gave up on ISRG with a quickness last summer
Netflix (NASDAQ:NFLX)
Netflix (NFLX) has also surged toward its 52-week high (which is also an all-time high).
After hours on Friday, the company released its proxy statement . It included a request to shareholders for approval of the issuance of a tidal wave of stock:
“To amend our Certificate of Incorporation to increase the number of shares of capital stock we have authorized to issue from 170,000,000 (160,000,000 shares of common stock and 10,000,000 shares of preferred stock), par value $0.001, to 5,000,000,000 (4,990,000,000 shares of common stock and 10,000,000 shares of preferred stock), par value $0.001;”
The market being what it is, responded very favorably to the news, egged on by big analyst upgrades in the morning. Benzinga noted five bullish analyst calls going into earnings on Wednesday evening. Perhaps most important was the 180 degree turn by UBS to jump off the bear truck to the bull train. UBS delivered an upgrade from neutral to buy and a revised price target from $370 to $565. MKM Partners also encouraged boldness going into earnings on Wednesday evening:
“MKM Partners also projects strong results and outlook, and ‘would continue to own the stock into the report,’ a recent research note assures. The analysts model EPS of $0.68.”
Altogether, NFLX experienced a tremendous gap up that represents a climax of sorts on top of the rally going into earnings from churn around 200DMA support. Given the leap, of course I attempted a fade. It went well for the first 15 to 20 minutes or so until the stock got a second wind and rallied as high as $485 and a 6.8% gain.
The stock did fade from those highs and sent me back to even on the fade. These kinds of gaps well beyond the Bollinger Bands are just about the most dangerous moves imaginable ahead of earnings. The risk of a reversal becomes extremely high as expectations become extremely high (or low in the case of accelerating downside). I am considering holding through earnings…unless I get a good enough fade before that.
Accelerating exuberance and increasing expectations ahead of earnings as NFLX retests its all-time high
Daily T2108 vs the S&P 500
Black line: T2108 (measured on the right); Green line: S&P 500 (for comparative purposes)
Red line: T2108 Overbought (70%); Blue line: T2108 Oversold (20%)
Weekly T2108
Be careful out there!
Full disclosure: long NFLX puts and short shares
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.