Where has all the fear gone?
Net Changes for the ESZ15 +20 1.02%, YMZ15 145 +.88%, NQZ15 +36.75 +.86%, CLX15 -.40 -.82%, 10 yr -085 -.21% GCZ15 -1.40 -.12%.
In many cases, when the S&P rallies as much as it has over such a short period of time, there is a tendency to pull back or sell off. After the fifth day closing higher, the ESZ15 pulled back on Tuesday, then rallied and sold off again on Wednesday, and then rallied once again. One of the things we look at is how the big investment banks and mutual funds buy stock on the final days of the quarter and the first three or four days of the new quarter, but the rally and the buyers are not letting up five trading days into the quarter. The best way to describe the overall price action of the S&P futures right now is ‘up too high to buy, and too firm to sell’, but for how long will these conditions last? As the CBOE’s VIX starts to break down, many traders we speak to are asking the same thing; Where has all the fear gone?
With the ESZ up so much we are going to start concentrating on the PitBulls trading rule about a low being made the ‘Thursday or Friday’ the week before the October options expiration. Meaning as the week drags on, we will be looking for some type of sell off, or pull back, going into the end of the week to set up for a push back up early next week. According to the October S&P cash study, tomorrow, the Friday the week before the expiration has been up 20 / down 11 of the last 31 occasions, and next Monday’s stats show the S&P cash being up 23 / down 8 of the last 31. Tuesdays stats are the weakest of the week, up 14 / down 17 of the last 31 occasions, Wednesday up 17 / down 14 of the last 31, Thursday up 19 / down 12 of the last 31, expiration Friday is up 18 / down 13 of the last 31, and the Monday after the October expiration is up 19 / down 12 of the last 31.
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Download the October expiration stats here…
VIX Down To 18.53
On August 24th, the Chicago Board of Options volatility index (VIX), which is based on the S&P options, rallied to a high of $53.29, and in September traded as high as $33.82, which occurred on the first of the month. We knew going into the end of July that the markets were going to be susceptible to a decline, but we didn’t think the Dow Jones futures (YMZ15:CBT) would or could be off 1,100 points, and the S&P 500 futures (ESZ15:CME) down 140 points on one open. It was a hectic day for the CBOE. Despite the big drop, the VIX was still showing 28.03 the prior days close. The 10 minute outage sent shock waves through the S&P options as most market makers would not make prices, or made them so wide the quotes were untradable. The CBOE’s explanation was that market conditions made quoting S&P 500 options prices difficult, leading to the difficulty in calculating the VIX, but according to Barclays, what happened that morning did not fit the exchanges explanation. Barclays said that on 14 other occasions over the last 15 years it didn’t happen in circumstances that experienced extreme volatility. They pointed out that the VIX futures had no problem in the first 30 minutes of trade, but somehow the VIX could not be calculated? The issue with the VIX came from the recent change in how the index is calculated, but the CBOE didn’t want to admit that. Analysts say the problem arose from the CBOE ‘adding’ weekly options or ‘non-standard’ expirations.
In the end, the week of August 24th was not something many people expected, but with the S&P rallying so much over the last week and a half, one has to wonder if the worst is over? Was the jump in volatility enough to cover the month of October? Thats hard to say, but what we know for sure is things have somewhat settled down, and if the S&P cash study is correct there could be more upside on the way. I never thought there would be an extended stock market let down. Part of my thinking is due to the stock market moving into the best 6 months for stocks (November to April), and the other more important part is what’s been helping move the S&P higher for the last 6 years… zero borrowing cost! ESZ 2150.00 – 2200.00 ON TAP!
In Asia, 6 out of 11 markets closed lower (Shanghai Composite +2.97%), and in Europe 6 out of 12 markets are trading modestly higher this morning. Today’s economic calendar starts with the Chain Store Sales number, Jobless Claims, St Louis Federal Reserve Bank President James Bullard’s welcoming remarks at children’s savings account symposium, in St. Louis, EIA Natural Gas Report, Minneapolis Fed President Narayana Kocherlakota welcoming remarks at event in Mankato, Minnesota, 30- Yr Bond Auction, September Federal Reserve Minutes, San Francisco Federal Reserve Bank John Williams outlook speech, in Spokane, Washington, Fed Balance Sheet and Money Supply.
PITBULL Thursday / Friday Low The Week Before the OCTOBER Expiration:
Our View: It feels like the markets are going quiet, but I think it’s the quiet before the storm. October is not going to go out without some big ups and downs.
Today has one of the busiest economic schedules of the week on top of three separate Federal Reserve Bank presidents speaking. This should mean increased volatility. My gut feeling is that resistance in the S&P is going to be at 1992 to 2000. While I am a bull market guy, I also think the remaining 17 trading days in October could make for some big drops and rallies. According to the S&P cash study, the Friday before the October experation has been up 20 / down 11 of the last 31, and Monday has been up 23 / down 8 of the last 31 (see study). If the stats are correct and we see a pull back later in the week it could be a perfect setup to try a going long into the next week. Our view for today is the same as yesterday; sell the early rallies and buy weakness keeping in mind how much the S&P has rallied.
As always; please use protective buy and sell stops when trading futures and options.
- In Asia 6 out of 11 markets closed lower : Shanghai Comp. +2.97%, Hang Seng -0.71%, Nikkei -0.99%
- In Europe 6 out of 12 markets are trading higher : CAC +0.02%, DAX +0.15%, FTSE +0.36% at 6:00 am CT
- Fair Value: S&P -8.57. , NASDAQ -11.82 , Dow -100.41.
- Total Volume: 1.9mil ESZ and 6k SPZ
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