Will The VIX Vex The Spoos?
This weekend (Aug.
19 and 20), Dave Landry is presenting some of his trading
ideas at the International Online Trading Expo in Ontario,
California. Friday night’s column is written by Marc Dupee.
Dave will be returning to this column next week.
The Market
Volatility Index
(
VIX |
Quote |
Chart |
News |
PowerRating) closed at its lowest level in 13
months. This measure of the volatility of the S&P 100
(
OEX |
Quote |
Chart |
News |
PowerRating)
shows that "investors" are unusually complacent.
Dow futures and the S&Ps have rallied 6% and 5%,
respectively, in August. The low VIX reading implies a
reversal.
The S&Ps have
shaped a head-and-shoulders top. Three down signals on the
Bias Indicators Page suggest that stock-index futures
will decline. The S&Ps are also on the
Days Low Volatility List, implying a larger-than-normal
move. The last time the VIX dropped into the teens (its
current reading is 19.42), in July 1999, the S&Ps
dropped 10% in a matter of weeks. After the VIX hit a low in
July 1998, the S&Ps fell 20% in the following two
months.
Any break above
either the "failsafe" line or the 1,512.40 high of
the left shoulder (established on June 19) of this
symmetrical pattern would be a failure of the H&S
argument and a good place for a protective stop loss. One
scenario places a downside objective in the 1,300 range if
the Spoos drop sharply and then break the downward-sloping
neckline. In its current formation, this would give an
excellent reward/risk situation. For more information on
calculating objectives, see the article on
Reward/Risk Ratios In The Futures Market.
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Dow futures are
tracing a pennant, which could provide a reduced-risk entry
on a break of the pattern.
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What would
generate such a move to the downside in stock-index futures?
A blindside hike in interest rates at the Fed’s FOMC meeting
next Tuesday (Aug. 22). Currently, the market is not pricing
in a rate hike: September federal fund futures
(
FFU0 |
Quote |
Chart |
News |
PowerRating)
closed at a multi-month high, leaving implied rates
practically unchanged, but the contract logged a potential
Soup Plus One Sell Reversal Friday.
Also, T-bond
futures
(
USU0 |
Quote |
Chart |
News |
PowerRating) are oversold, and recent highs are
diverging from their RSI. Look to fade any rally in the USU0
in a spike above, then a push below, the 100 12/32 high.
From the
5 List, cotton
(
CTZ0 |
Quote |
Chart |
News |
PowerRating) rallied up to a line that has
proven pivotal in price action in the December futures. A
move above this line could portend a rally to new highs.
Again, this sets up a measured-move objective. Look to go
long. For a strategy on finding entries in momentum markets
such as cotton, see the educational piece that describes the
The Blocks Method.
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Finally, Swiss
francs failed to rally on good news (Euroland inflation data
that increases the chance that the European Central Bank
will raise interest rates and close the gap with U.S. rates)
and closed near the contract’s bottom and at a two-month
low. The September contract also began imploding out of a
1-2-3-4 pullback from lows setup after signaling on the
Off Lows List Friday, and it could see downside
follow-through on an
5 List reading.
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