Last week, I discussed using the VIX and derivative analysis of the VIX to predict market direction. This week, I’m going to hammer home this concept. Why? Because it’s telling me a story that may give me an edge and confidence in my directional market predictions in the coming days and weeks.
The market simply doesn’t have a clear direction here, as seen in the ETF SPY:
After bouncing back to the 50-Day Moving Average, the market is pulling back. Is this setting up a bear flag and a liquidation, a short-term buying opportunity, or a choppy market with no real direction? For now, there’s a wedge between the 50-Day Moving Average and the 100-Day Moving Average that should clarify things in the near future. But I’m going to try to get ahead of this and look for an indicator of which direction is more likely given the current market inputs.
As I mentioned last week, when VVIX is low and shows no indications of rising, it tends to predict a low VIX and a drifting higher market. So, let’s look at VVIX:
VVIX continues to trade near lows, and if the recent cycles have been any indication, I would not be surprised to see VVIX stay around these levels for another week or so. If the market is to get a pullback, the VIX and VVIX would, of course, be expected to spike. But given the lack of interest in buying options here on a market-wide scale, I lean towards an expectation of implied volatility staying low and the market drifting higher.
Let’s not forget to look at the VIX itself:
The VIX is also trading at lows and looks to be confirming what I’m seeing in VVIX – low implied volatility, little market panic, and a potential for a bullish bias in the broad market as a result.
When I see that kind of setup, I certainly look at potential sectors to put on the buy list in my Outlier Watch List. And this time is no different. I’ll go back to a sector I looked at recently, biotech, with the ETF XBI:
With clear support at the 200-Day Moving Average, a potential for a turn around with the move above the 10-Day Moving Average, and an expectation for a bullish broad market backdrop, I am getting excited about looking at more biotech names that can be leveraged with options.
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
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