How can we tell when the market is primed for further recovery? Are there any indications that this initial buying is going to continue, or should I be looking for reasons to sell the bounce and play for further market downside?
When I see a situation like we have seen over the past couple of weeks, I often start looking at leading indicators for the market to see if I can find the next most likely move. For example, in the past I’ve looked at semi-conductors as a major component of technology stocks and a leading indicator of the tech sector. However, I’m not focusing on the technology sector today. Instead, I’m focusing on the broad market, and I’m looking for indications of what happens next now that we’ve started to form potential support.
First, let’s look at SPY:
Here, I see that the market found support at the 100-Day Moving Average and appears to be primed for a recovery into the range of the prior highs where we had some consolidation. In other words, it appears we have about 5% upside followed by a stall. However, if the 100-Day Moving Average fails, then the potential downside to the 200-Day Moving Average, or perhaps lower, starts to become a very real possibility.
To get a better indication of what the market is expecting, I will look toward the VIX, often referred to as the fear index of the market, to see how much panic is out there:
In the VIX, there are 2 key points to address. First, the VIX is closer to lows than I would have expected for the market’s recovery. The market is still about 3% below where it was when the VIX was last at these levels. Second, the leading indicator of the VIX that I watch is VVIX, which tells me how much panic and expected volatility there is in the VIX index. In other words, are people buying VIX options, which usually occurs when they expect a spike in VIX and a selloff in the broad market?
VVIX is very close to lows, indicating minimal demand for VIX options. In other words, people are expecting the VIX to either stall or fall, which would normally come with the market drifting higher. So, given everything I’m seeing in the world of volatility and technical signals, I’m looking for ways to buy the market!
That’s where my Outlier Watch List comes in – I have a list of stocks in many sectors that I’m looking to buy into with options so that I can define my risk, leverage my potential returns, and maximize my expected return in the process. Be sure to check it out to see how a professional trader uses options to trade directional moves in the market!
As always, please go to http://optionhotline.com to review how I traditionally apply technical signals, volatility analysis, and probability analysis to my options trades. And if you have any questions, never hesitate to reach out.
Keith Harwood
Keith@optionhotline.com
Recent Comments