Topping Action For Volatility
Dr. Duru | Sep 03, 2015 04:21AM ET
T2108 Status: 15.2% (jump of 27.3%)
T2107 Status: 20.8%
VIX Status: 26.1 (down 16.9%)
General (Short-term) Trading Call: Bullish
Active T2108 periods: Day #9 below 20% (oversold), Day #10 under 30%, Day #33 under 40%, Day #73 under 50%, Day #90 under 60%, Day #288 under 70%
Commentary
I am writing this T2108 Update with a HEAVY dose of tentativeness. Just yesterday, sellers were able to extend this oversold period into historic territory, so I can only talk about bullish signs with a salt shaker on the table. While T2108 is once again within a stone’s throw of ending this oversold period with its close at 15.2%, I am very cognizant of the possibility for more churn ahead that could include a rapid return to oversold conditions.
On Wednesday, September 2, 2015, at least two measures of volatility printed what I interpret as major and important topping patterns.
The volatility index, the VIX, dropped out of the danger zone. This second time left behind a clear topping pattern known as a spinning top; one could even call it an abandoned baby top. In this pattern, folks who chased volatility higher suddenly found themselves with instant losses the very next day. The pressure is now on them to decide whether to wait for a new surge or to bail quickly and limit losses.
The volatility index drops out of the danger zone for the second time in this oversold period.
The ProShares Ultra VIX Short-Term Futures (NYSE:UVXY) breaks down below its 200DMA and adds to my sense of a top in volatility
Less aggressive traders once again get the green light to start making T2108 oversold trades (buys). While this is still a tough time to buy given the S&P 500 (SPDR S&P 500 (NYSE:SPY)) printed its own topping pattern after a 2-day rally, at least the index is trading below where it stood when the VIX last fell out of the danger zone (last Thursday and Friday, August 27th and 28th). This discount could come in handy for enhancing profits on the way back up. Less aggressive traders should be prepared to stop out of new positions on a new low for the S&P 500.
Get The News You Want
The S&P 500 (SPY) rallies in an attempt to print a higher low and the beginnings of a bottoming pattern.
Sandwiched between the topping patterns of the VIX and the S&P 500 is the potential for a LOT more churn. While the S&P 500 is a tough call here for new entries, I am liking a fade of volatility more and more. I think there are three main catalysts ahead which could be powerful enough to force resolution of the tension: the monetary policy decision from the European Central Bank (ECB) on the morning of September 3rd, the U.S. jobs report on Friday the 4th, and, of course, the rate decision from the U.S. Federal Reserve on September 17th.
The second, and potentially even MORE interesting, topping pattern for volatility comes from the oil patch. The CBOE Crude Oil Volatility Index (OVX), a volatility measure based on the United States Oil ETF (NYSE:USO), soared as much as 29% before completely fading and ending the day DOWN 6.5%. At its high, OVX made a new intraday high for the year. The end result was a potentially major blow-off top. This means the most fearful players in the market who were bidding up the price of protection may have finally exhausted themselves.
The CBOE Crude Oil Volatility Index fades hard off a major high to close down for the day.
I have successfully used OVX to signal some key oil-related trades (and I wish I had used it MORE consistently!), so this major move made me sit up straight. I believe the message now is that the United States Oil ETF (USO) will finally start to calm down. After USO made its incredible V-bottom, I projected a 50% retracement of those gains. USO bounced nearly perfectly off that 50% point. The subsequent intra-day rally accompanied a major taming of volatility. Unfortunately, I was not prepared to jump at the bounce from the 50% retracement level.
The United States Oil ETF (USO) looks ready to wrestle again with stiff resistance at the 50DMA downtrend line
Despite the topping patterns in volatility, yesterday was another generally quiet day for trades. It FELT like a day I should be doing SOMETHING, but I greatly resisted the temptation to venture far off my T2108 trading results to, effectively, take random shots at a few select buying opportunities. USO was a huge exception.
Finally, the Australian dollar (Guggenheim CurrencyShares Australian Dollar (NYSE:FXA)) continues to cling to 3-year lows against the Japanese yen (Guggenheim CurrencyShares Japanese Yen (NYSE:FXY)). My favorite currency indicator, AUD/JPY, is warning me that any kind of stock market bottom must be considered tenuous until it proves itself. “Proof” could come from a major breakout of the S&P 500 from its most immediate topping pattern.
The Australian dollar clings to lows against the Japanese yen
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 SVXY shares, long SSO shares and call options, short USO call spread, short USO put options
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