Contracted Volatility Signals Next Move

From 1990 to 1997, Kevin Haggerty served as Senior Vice President for Equity Trading at Fidelity Capital Markets, Boston, a division of Fidelity Investments. He was responsible for all U.S. institutional Listed, OTC and Option trading in addition to all major Exchange Floor Executions. For a free trial to Kevin’s Daily Trading Report, please click here.

The SPX remains in the uptrend from the 741 low (11/21/08), and has been locked in a narrow range (relative to recent volatility) between 918.85 and 851.35 over the past nine days. The mean implied volatility that we use in the trading service for the SPX volatility bands has declined as the “Panic of 2008” gets worn down. For example, the SPX closed at 887.39 on 11/26 with the IV at 55.14, and declined to 42.91 on Thursday on the 885.28 close. This range will be resolved before yearend.

Crude oil (January contract) is trading at 34.50 this morning following the -9.6% decline on Thursday, while the $WTIC (continuous contract EOD) closed at 44.72 and remains above that 40.50 intermediate low with key price and time symmetry versus the 7/11/08 147.90 high. The bounce off 40.50 was +30.7%, and it has given back half of that the past few days. The $USD made a 77.69 low on Thursday and then bounced to close at 79.80 (+1.5%) and above the 79.43 200DEMA. It had peaked at 88.46 on 11/21/06 as the SPX made the 741 low, so it will certainly be a positive if the SPX holds its gains and trades higher into yearend despite the weak dollar.

The Fed statement on Tuesday with the rate cut was probably the most positive and definitive one we have seen so far in that they planned to keep the rates low indefinitely in addition to being a buyer of mortgage backed securities to support the housing market. The 30 year mortgage rate is close to 5.0%, and is the lowest we have seen since in almost 40 years so the combination of the two is a real plus for the housing and equity market. The Fed essentially said that will do whatever is needed, but “show me the money” Mr. Bernanke.

Today is a “triple witch” expiration, and there will also be some rebalancing, so day traders should stick with the defined strategies and stay away from the “I think” type of trades. There was some program activity Thursday in the last 2 hours after the SPX had traded in a narrow range up to that point from (911-900.10). It declined to 878.08 before bouncing to the 885.28 close (-2.1) NYSE volume remained on the light side at 1.38 bill shs with the volume ratio 24 and breadth -502.

Have a good trading day!

Click here to find full details on Kevin’s courses including Trading with the Generals with over 20 hours of professional market strategies. And for a free trial to Kevin’s daily trading service, click here.