Vix: A Note of Caution

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VIX: A NOTE OF CAUTION The S&P 500 is enjoying its longest rally since March and closed higher for its 5th week in a row. The S&P has rallied 10% since June 1 and is now back at its highest level since April 1 and back up at a 12% gain on the year. Earning beats for the S&P companies are at 72%. Backed by a better than expected earnings season and possible stimulus programs by the Fed and the EU the stock market has been on a roll. The Dow is seeing its longest bull run since October. The Nasdaq closed out Friday up 0.22%, up 1.78% week, up 2.77% for the month and up 15.96% year to date. On Friday the VIX slipped 5.8% to 14.74, the lowest it has been since March. In the world of “risk on, risk off ” it has been “all on” lately. Last Wednesday the VIX was trading around 16, which is the low end of its trading range. While we have been and remain bullish, we also know the VIX is in striking distance of the 13.66 multi-year low set March 16, two weeks before the S&P's April 2 high. It was a good idea to buy put protection then, and as the S&P gets closer to the old 1422 highs from April, the price action is strong but the watchword is caution.
As bullish as things look, this week is the August options expiration. After being up 5 weeks in a row and the S&P sitting at the “big figure” 1400, the NASDAQ sitting 3,020, and the Russell 2000 sitting at 801, market participants should not forget the word resistance. Especially as we get up into the April highs. On Friday the S&P was down most of the day but began to short cover in the afternoon and closed at its highs at 1402.25. With overall volume being some of the lowest of the year, it's not hard to move the S&P up and down. We thought the S&P wanted to go higher weeks ago and felt strongly that eventually the index would shake off the negative headlines out of Europe, but after Draghi's comments there have not been as many European negatives hitting the tape, so the overall tone of the S&P has been fairly clear. If the S&P opens higher, it sells off a little, back and fills and then starts moving higher again. The patterns have been very solid over the last two weeks. Real buying or short covering? One of the problems with investing in the new world order is deciphering what's real and what's not. With volumes being at historic lows and program trading making up the lion's share of volume, it's not like it used to be. Despite being bullish, we also know there is a big wall of resistance above. So far this year every pullback has offered a buying opportunity, but with the VIX nearing 14 we think the risk of some type of letdown only increases. Expiration Study for August: Average % Changes For S&P 500 Cash Total Months Tested For Daily Stats: 28 Study Expiration Date Range : 8/17/1984 – 8/19/2011 Overall Expiration Date Range: 1/20/1984 – 7/20/2012 DAILY STATS Day (Period) Geo Avg Ari Avg Median Num Up Num Dn Total ————– ——– ——– ——– —— —— —— PreviousFriday -0.02038 -0.01635 -0.07322 12 16 28 Monday 0.29669 0.30102 0.23261 21 7 28 Tuesday -0.04621 -0.04110 0.15247 15 13 28 Wednesday 0.11448 0.11897 0.07720 18 10 28 Thursday -0.11678 -0.11017 0.06013 16 12 28 Exp. Friday -0.10860 -0.10352 0.02328 15 13 28 PrevFri-Mon 0.27625 0.28554 0.19955 14 14 28 Day AfterExp -0.02537 -0.02057 -0.00058 14 14 28 WEEKLY STATS Period Geo Avg Ari Avg Median Num Up Num Dn Total ————– ——– ——– ——– —— —— —— Study Exp Week 0.13903 0.15818 0.37543 16 12 28 All Exp Week 0.29698 0.32636 0.55624 204 139 343 NonExpire 0.09454 0.12167 0.23793 635 510 1145 All Weeks 0.14117 0.16886 0.29860 839 649 1488 ———————————————————————- For today: The global markets were weak overnight and the ESU is down a couple of handles. There are no scheduled economic releases. Mutual Fund Monday has been down 4 out of the last 5 occasions. According to the Ned Davis S&P cash study, the Monday before the expiration has been up 21 / down 7 of the last 28 occasions. Based on how the futures closed on Friday, we think the S&P could see higher prices. Buy stops start 1402.80 up to 1406 and again above 1409 up to 1412-1413. Buy the pullbacks. As always, keep an eye on the 10-handle rule and please use stops. It's 6:00 a.m. and the ESU is down 2.24 handles at 1400.25, crude is up 63 cents at 93.50 and the EC is trading 1.2331, up 34. In Asia 6 out of 11 markets closed lower (Shanghai Comp -1.51%). In Europe 6 out of 12 markets are trading lower (CAC +0.48%, DAX +0.35%). Today's headline: “Index Futures Seen Lower; Global Growth Worries” Economic calendar: There are no scheduled economic releases, but Sysco reports earnings.. VOLUME (LOW): 1.24mil ESU and 6.8lk SPU traded SPREADS: 3k SPU/Z spreads traded FAIR VALUE: S&P -2.00, Nasdaq flat MrTopStep Closing Print Video: http://www.mrtopstep.com/videos/?id=24496 Friday's S&P 500 futures wrap-up: China exports and the Eurozone weak demand added pressure in the overnight session. The markets have been consolidating this week in potentially the lightest 5-day volume of the year as vacation and back to school preparations continue. Philly Fed Forecasters Lower Growth, Jobs Estimates– U.S. GDP Seen Growing 1.6% In 3Q And 2.2% In 4Q / Forecasters See Jobless Rate Above 8% Into 2013. Fuels more QE hopium. Paradoxical Quote of The Day from Ben Stein: “Fathom the hypocrisy of a government that requires every citizen to prove they are insured… but not everyone must prove they are a citizen.” Now add this, “Many of those who refuse, or are unable, to prove they are citizens will receive free insurance paid for by those who are forced to buy insurance because they are citizens.” Friday's S&P 500 trade started with 185k ESU and 800 SPU traded on Globex, trading range 1400.50 – 1393.00 / Thursday's range 1402.80 – 1395.40, settled 1400.60 up 2.4 handles. The RTH's opened 6 handles lower at 1394.60 – 1395.20, traded 1395.50 then down to 1392.30 and popped after hitting stops above 1396 area leading to an early high 1397.80 high. @princetontrader aka Mike_V,, (08:50:57): ES: 1399.00 x 1388.50 = vol window. The vol window is always a good thing to keep your eye on. EUBIE (09:17:00): I'd FADE the 98 area 1st pass with the “3′S RULE / the WIDOWMAKER should chew ya up for awhile mid mo VIX lows @ 15.15 -.85% EUBIE (09:37:19): Potential 2XTOP 1398 area min charts. By 9:40CST the equities were losing their bid and starting at 10:04:55 CST and lasting for 3 seconds, approximately 15,000 eMini contracts traded, causing a significant market disruption. At the same time, approximately $100 Million worth of SPY traded http://www.nanex.net/aqck2/3530.html After the dust settled ths spoos were trading 1398.50 at 11:00CT. The sideways to lower trade set in as traders were heading for the exits midday and the spoos lingered in the 1396 – 1398 area. The spoos were retesting the daily high 1398.80 at 1:57 and printing 1399 at 2:01 as the VIX breached 15, sending the spoos up to 1400 by 2:25. 1401 area was trading as the closing imbalance showed the broader market with large $1.3Bil to the buy side. Traders speculated the $1.3b could partially be the KO funding trade due to the stock split. After posting a new high at 1402.80, the cash close traded 1402.00 before settling at 1402.40 up 1.8 handles today, last Fridays settle 1389.00. MTS video: http://www.mrtopstep.com/2012/08/8-10-2012-rich-canlione/ Please visit www.mrtopstep.com and take a look. There are webinars, market updates, news and more… Also, please click on the education tab http://www.mrtopstep.com/trading-101/ We believe there is very useful information on the MTS site – so take advantage and check it out while you start your free trial.
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