These are two Exchange Traded Notes (ETN’s) that attempt to hedge a long “stock market” portfolio by using a long volatility component. We have written about VQT before (Volume 21, No. 4), and I often talk about it in my seminars and webinars that discuss volatility trading.
The feature article is brief this time, but it is pertinent in that a potential buy signal has just set up in the Total put-call ratio – or has it? It doesn’t completely fit the parameters that we have laid out for such buy signals, but perhaps “close enough” is sufficient. The article discusses whether it is or not.
We have very well-defined criteria for determining a major Total put-call ratio buy signal. These are powerful signals, worth a 100-point rise or more in $SPX. There have been twenty such signals since the year 2000, of which 11 have produced the desired 100-point gain, and three others produced smaller gains. The total $SPX points gained from the twenty signals is +960. So, these signals are not to be taken lightly.
The stock market has traded in an ever-narrowing range for over a month now. The most recent range has been bounded by 2090 on the upside and 2050 on the downside. But now $SPX is trying to break through 2090. Even if that is accomplished, there is still considerable overhead resistance at 2110-2120 (the all-time highs).
Most of the other indicators have taken on a more positive slant in the last week or so. As a prime example, the equity-only put-call ratios have turned bullish.
$SPX couldn't develop any momentum this week. Perhaps -- as the media were saying -- stocks were just waiting for the jobs report this morning. It was a very poor jobs report, and S&P futures are down 20 points. If $SPX does indeed open 20 points lower on Monday morning, that will be a violation of the 2040 support area. With that support level broken, $SPX prices are likely to test the lower support near 2000 or slightly lower.
We have taken a new (or have returned to an old) approach for earnings-related straddle buying recently, and that is the subject of the feature article. The article also summarizes other approaches to the strategy. On page 3 is this week’s recommendation – in KMX.
When $SPX broke down through the 2090 support level, that was a very negative sign, especially since stocks failed at the old highs.
There is now strong resistance at 2110-2120 (the February and March peaks), as well as at 2090 (again). As for support, the initial support level will be 2040, the early March lows. Below that, there is support at 1970-1990, which is the area of the December and January lows.
Everyone is aware of the fact that stocks gap sharply on certain news events – primarily earnings reports and, for biotechs, FDA-related news. Other events, such as lawsuit verdicts or settlements, can cause gap moves, too. Option traders are aware of the potential of these events, especially when the timing of the event can be determined with some certainty.
In figure 1, the support at 2040 and the resistance at the recent all-time highs of 2120 are marked as a trading range. Until $SPX breaks out of that range, it really doesn't have a trend in place. To support that conclusion, the indicators are somewhat mixed.
Equity-only put-call ratios have remained on sell signals during this latest rally.
The U.S. Dollar has been getting a lot of press lately as it has nearly gone parabolic with a huge rally on top of an already long-term rally. Optimism is rampant, and bears are cowed. This is likely a good time to lay out a plan for a trade on the short side.