Although the S&P 500 Index closed below its important 50-day moving average it rebounded Friday to close above the Head & Shoulders Top neckline
This week features a chart detailing a possible S&P 500 Index Head & Shoulder Top followed by the VIX futures premium and VIX options data along with comments on US Dollar Index and market breadth. Then we have an informative article on selling calls in an uncertain market environment by The Blue Collar Investor.
S&P 500 Index (SPX) 2052.32 up 5.71 or +.28% for the week with the entire gain occurring Friday as it advanced 12.28 after testing the neckline of a potential Head & Shoulder Top while making the fourth close below the widely followed 50-day moving average. Since Friday was monthly options expiration the reversal may have been options related, if so the decline may resume this week.
From a classical barchart perspective, the advance up on May 10, RS above followed an almost equal decline the next day formed a potential right shoulder as it continued declining down to the reversal last Thursday after testing the pattern neckline, NL above. Watch for a close below the neckline at 2034, the low it made after forming the left shoulder, LS, as it would set off the pattern with a minimum measuring objective down at 1962, MO, determined by subtracting height of the pattern from the low of the left shoulder.
Head & Shoulder patterns have a well-deserved reputation for reliability once activated by closing beyond their necklines. Regular Digest readers may recall while there have been a few failures, since the 2009 bottom, most followed the script.
CBOE Volatility Index? (VIX) 15.20 was up .16 for the week after reaching an intraday high of 17.64 as S&P 500 Index tested the neckline of the Head & Shoulders Top Thursday and then reversed. Based on real-time prices of options on the S&P 500? Index, VIX reflects investors’ consensus view of future (30-day) expected stock market volatility.
The table below shows the VIX cash compared to the next two futures contracts as well as our calculation of Larry McMillan?s day-weighted average between the first and second months.
With 17 trading days until the June monthly expiration, the day weighting applied 85% to June and 150% to July for a 15.56% premium shown above. Our alternative volume-weighted average between June and July regularly found in the Options Data Analysis section on our homepage was slightly higher at 17.26%.
While day-to-day VIX changes offer little forecasting insight following the VIX futures premium helps since it measures expectations of tactical professional traders and money managers using VIX futures and options for hedging long portfolio risk.
The premium measures the amount the futures currently trade above or below the cash VIX, (contango or backwardation) until front month future converges with the VIX at expiration. Depending on the time to expiration, premiums for normal term structures during uptrends are 10% to 20% and decline when the VIX advances faster than the nearest future as the market declines and/or the futures decline as the front month expiration approaches. Premiums less than 10% suggest caution and negative premiums indicate oversold conditions. Last Tuesday the premium was 8.72%, the last trading day for May futures and then increased to 11.01% Wednesday as June became the front month, ending at 17.26% Friday.
VIX Options
With a current 30-day Historical Volatility of 96.57 and 90.07 using Parkinson?s range method, the table below shows the Implied Volatility (IV) of the at-the-money VIX calls and puts using the futures prices based upon Friday?s closing option mid prices along with their respective month?s futures prices, since the options are priced from the tradable futures.
Compared to the current range historical volatility of 90.47 June and July at-the-money option prices are inexpensive relative to the recent movement of the VIX futures. Interestingly the total VIX options volume was just 188,349 contracts compared to the 5-day average of 611,230 contracts.
Summary
Although the S&P 500 Index closed below its important 50-day moving average it rebounded Friday to close above the Head & Shoulders Top neckline although the dollar continued advancing and market breadth continued deteriorating. If May options expiration contributed to reversal, it will likely unwind early in the week.