« March 2020 »

IVolatility Trading Digest™

Volume 20 Issue 13
Elliott Waves [Charts]

Elliott Waves [Charts] - IVolatility Trading Digest™

While COVID-19 news remains distressing and crude oil prices continue declining, at least the uncertainty about governmental fiscal action has been clearly resolved with substantial rescue measures underway. As for the oversold S&P 500 Index, last Tuesday's rebound looks like the start of a bottoming process that may unfold in a classical Elliott Wave pattern. The Market Review includes charts to help explain.

Review NotesS&P 500 Index (SPX) 2541.47 bounced up 236.55 points or +10.26% after reaching an intraday low last week Monday at 2191.86. From the February 19 intraday high of 3393.52 to the low, one that may prove temporary, and the decline reached - 35.41%. The degree and rapidity of the drop confirms the bear market status and importantly confirms the end to long uptrend from the March 2009 low.

From an Elliott Wave perspective, the counts so far.


It hit the 3-wave bottom last Monday at 2191.86 and the bounce underway appears as an attempt to reach a 4-wave counter trend rally. Then, assuming the pattern holds, it will arrive at a final 5-wave bottom near or even below the 3-wave low.

For the 4 wave, odds favor a continuation up to somewhere between the Fibonacci ratios of 38% and 62% of the initial decline, or between 2649 and 2937, while an arbitrary, but popular 50% retracement, puts it at 2793.

The price retracement action after breaking an important trendline makes another argument for reaching somewhere near 2800, as it tests the old upward sloping trendline, now resistance, labeled USTL in the long-term log chart below.


Since bottoms, historically form patterns as the shorts cover and the longs begin bargain hunting, this decline needs more time to develop more legs in order to identify a measuring objective like a symmetrical triangle or rising wedge continuation pattern.

Review NotesCBOE Volatility Index® (VIX) 65.54 declined .50 points or -.76% last week. Our similar IVolatility Implied Volatility Index Mean, IVXM using four at-the-money options for each expiration period along with our proprietary technique that includes the delta and vega of each option, declined .78 points or -1.33% ending at 58.03%.

It looks like the spike up to 77.15% on Monday March 16, when the SPX declined 324.89 points, will probably hold the record for this market decline. Since then implied volatility remains high at around 50% reflecting increased demand for puts in an uncertain environment.


VIX Futures Premium

This next chart shows as our calculation of Larry McMillan’s day-weighted average between the first and second month futures contracts as of last Friday.

With 12 trading days until April expiration, the day-weighted premium between April and May allocated 60% to April and 40% to May for a premium of -23.80%, still in the bearish red zone after improving to -7.26% the week before.


The premium measures the amount that futures currently trade above or below the cash VIX, (contango or backwardation) until front month futures contract converges with the VIX at the next futures expiration on Wednesday April 15. The position of the futures curve relative to the VIX, as measured by the premium makes, a good sentiment indicator and last week it didn't improve. In addition, for some reason both futures volume and open interest on Friday were both lower than usual.

For daily updates, follow our end-of- day volume weighted premium version located about halfway down the home page in the Options Data Analysis section on our website.

Big Data? In options, we are Big Data!
For a comprehensive review and reminder, check this out
Options: Observations of a Proprietary Trader  


While implied volatility remains high, the edge goes to strategies that rely on selling elevated priced options with limited and defined risk such as Iron Condors and Short Put Spreads like to ones suggested last week in Digest Issue 12 "High Volatility Trades."

For long stock or ETF positions, consider selling out-of-the-money calls or creating collars by using the proceeds of covered call sales to buy out-of-the-money puts for some downside protection.

For the Record

Now that the government rescue plan has been approved, the challenge for the next few weeks will be watching for signs of implementation and market reactions. Will the old tech and cloud favorites lead once again? This quote from Digest Issue Volume 9 Number 3"Political Picks" on January 19, 2009 seems even more relevant now.

When buying and selling are controlled by legislation, the first things to be bought and sold are legislators.” – P.J. O’Rourke (an American political satirist, journalist, and writer)


After the S&P 500 Index declined 35.41% from the February 19 intraday high well into bear market territory and greatly oversold, it rebounded with equal vigor last week. Adding Elliott waves and the long-term trend chart to the analysis helps anticipate the rebound may continue up near 2800 before turning down once again. Since options implied volatility remains elevated, consider high volatility trades like Iron Condors, Short Put Spreads, Covered Calls and Collars.

Actionable Options™

We now offer daily trading ideas from our RT Options Scanner before the close in the IVolatility News section of our home page based upon active calls and puts with increasing implied volatility and volume.

“The best volatility charts in the business.”

As 2Q earnings reporting will begin soon, next week will feature our Volatility Kings™ list of companies that have a regular tendency to experience high options implied volatility before reporting earnings and this quarter should be unusual.

Finding Previous Issues and Our Reader Response Request


All previous issues of the Digest can be found by using the small calendar at the top right of the first page of any Digest Issue. Click on any underlined date to see the selected issue. Another source is the Table of Contents link found in the lower right side of the IVolatility Trading Digest section on our website homepage.

CommentAs always, we encourage you to let us know what you think about how we are doing and what you would like to see in future issues. Send us your questions or comments, or if you would like us to look at a specific stock, ETF or futures contract, let us know at Support@IVolatility.com or use the blog response at the bottom of the IVolatility Trading Digest™ page on the IVolatility.com website. To receive the Digest by e-mail let us know at Support@IVolatility.com

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Although I am not informed enough to know all that youuse in your daily report, I never the less pick up some small piece of knowledge every time I read your report. Thank you

Posted by Steve Pruskauer on March 31, 2020 at 03:12 PM EDT

An extreme bottom as occurred in March 2009 is rarely IF EVER used as a trendline point. Look at your line..useless as a price guide for most of this 11 year period. Instead draw it connecting the lows of mid 2009, late 2011, etc. And you get a parallel channel across the tops which has been meaningful also. The fibonacci stuff is helpful but a chart would help.

Posted by Gary Jakacky on April 01, 2020 at 01:33 AM EDT

Steve, Thanks for your comment and support. We try to make the weekly Digest relevant supplemented by tweets during the week @ivolatility. Jack

Posted by Jack on April 02, 2020 at 12:24 PM EDT

Gary, Thanks for your comment and your trendline observation. You are right, there is some subjectivity when choosing the starting point and the channel you describe is relevant along with the 2016 low. Since the March 2009 low was a major event the trendline on a log chart up to what appears, as the final top for this advance seems relevant and would define the lower tine of an Andrews Pitchfork with an upper channel like the one you describe. As for the Fibonacci retracement ratios a chart would be useful especially since reaching 37% before turning lower after making a rising wedge with a measuring objective below 2192 and eventually an Elliott 5-wave bottom. Jack

Posted by Jack on April 02, 2020 at 12:26 PM EDT

Permalink Comments [4]

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