Option Investor
Index Wrap

A trimming of the hedge\?

Printer friendly version

Bulls ran rampant in today's trade and either today's economic data, which was largely inline with economists' forecast was much better than equity traders thought it would be, or President Bush said something in last night's speech that had a hedge being lifted in today's trade.

When the morning trade began I mumbled to myself... "here we go again, another tight range of trade," but by the close, the major indices all finished with 1% gains or more, with all closing back above their longer-term 200-day simple moving averages.

While I can't be certain, some things Jane Fox first mentioned in this morning's Market Monitor 10:39:03 "the most encouraging thing I see is the VIX, it has fallen below 18 and is not at 17.30" regarding the declining Market Volatility Index (VIX.X) 15.96 -11.72% which simply imploded would strongly suggest to this trader that some type of downside hedge, which may have been initiated just about a month ago triggered today's bullish gains.

While July Light, Sweet Crude Oil Futures (cl04n) $41.14 -1.39% retreated from recent contract highs, I don't think a 58-cent decline in oil could have sparked today's broad gains for equities.

Market Volatility Index (VIX.X) - Daily Intervals

A daily interval bar chart of the VIX.X shows just what type of volatility collapse was seen, where action like this on a rather "light news day" is suspicious.

Market Volatility Index (VIX.X) - 5-minute intervals

The major indices were sideways to lower early this morning and really didn't make much of a move until after this morning's 10:00 AM release of May Consumer Confidence (93.2 vs. consensus 94.0) and April Existing Home Sales (6.64 mill. vs. 6.45 mill consensus). Alternating buy and sell program premium alerts were found ahead of, and just after the economic data as the SPX seemed pinned at its MONTHLY S1 (1,092.92) and WEEKLY Pivot (1,092.96) as it was trading 1,093.00. Jane's notes came just as the VIX.X fell under 18.00 (10:10-10:15 buy program premium marked the end of the alternating buy and sell programs we had been seeing) and the further unwinding or collapse of the VIX.X would suggest to me that there was some type of meaningful option action driving today's action.

S&P 500 (SPX.X) Option Chain - 05/25/04 Most Active

At tonight's close, I wanted to quickly update ourselves on some comments made in the 01:00 PM intraday update. Note the amount of option volume in some of the June 2004 contracts (arrows), where if I (Jeff Bailey) think a hedge was taken off in today's trade at SPX 1,093 and a correlative WEEKLY/MONTHLY level, its really the June 1,150 calls (SPTFJ) that grabs my attention. I'll discuss the 1,150 calls in a minute when we look at the SPX chart. Let's also take note that the June 1,125 calls (SPTFE), which I've marked with a BLUE arrow, would have this 1,125 strike (sound familiar? keeps showing up month after month in "max pain" calculations) a familiar level for Index Trader Wrap readers.

One thing that has me thinking we saw a hedge removed today, was if I were to simply split the difference from the 1,025 and 1,150 strike, I'd come up with 1,087.50. This too is a bit suspicious to me (Jeff Bailey) when we've been noting how the SPX has been wanting to show very modest gains/losses on a closing basis the past several sessions. Almost as if it was being "pegged" to a level, and today, as if a hedge is fully unwound, or really starting to be unwound, we get a pretty sizeable move in VOLATILITY and the SPX, or major indices themselves.

Market Snapshot / Internals - 05/25/04 Close

I've made a coupe of notes as it relates to the NH/NL breadth indications, where today's trade would have the NASDAQ Composite's NH/NL 10-day average ratio reversing up to "bull alert" status, where this would be the first sign of meaningful bullish leadership returning. But also look at the intra-day point moves for the major indices from the 12:00 to 01:00 PM and then to the close point changes after having observed the intra- day VIX.X chart.

S&P 500 Index (SPX.X) Chart - Daily Intervals

I've marked the 1,150 level to get a visual price perspective on just who in their right mind would have been an active buyer of June 1,150 out the money calls today. Was the consumer confidence or existing home data that much of a bullish catalyst? I don't think so, and in April, June 1,150 calls were selling for between $30 and $20 and I think call buyer was a covered call seller locking in gains.

The one SHORT-TERM trade setup an SPX option trader might look for from the CALL side tomorrow is a pullback into the 1,106.50 or better yet 1,099 area, have VIX.X stay BELOW 16.78, then trade the 1,100 June strikes long, but don't hold if failure back below 1,093, where a further bounce target to trend and 1,130.

NASDAQ-100 Tracker (QQQ) - Daily Intervals

Not unlike the SPX, the QQQ made a strong move above an overlapping MONTHLY Pivot ($35.66) and WEEKLY R1 ($35.64) resistance, and this should serve some support on any near-term retest. Volume of 90.7 million wasn't overly heavy, which may be partially explained by a volume at price study on the QQQ.

NASDAQ-100 Tracker (QQQ) - Volume at price

In my opinion, there was a lot of selling that "should have taken place" today among some QQQ stocks that didn't. After giving a very bearish triple-bottom sell signal at $79 on May 10, and a fitting bearish vertical count of $70, which would have tied in very nicely with a QQQ at about $33.00, shares of eBay (EBAY) $85.33 negated the triple bottom pattern objective of Professor Davis, and its bearish vertical count of $70 when it traded a negating $84 buy signal and then goes on to trade a new all-time high. A volume at price study has the QQQ now entering an area that would be considered "void" of much near-term resistance where $36.65-$37.00 looks near-term achievable.

A trader in the QQQ might well associate any re-test of the MONTHLY Pivot as a good support entry for a continued bounce higher. Later tonight I'll check the NASDAQ-100 Bullish % ($BPNDX) where I know EBAY was at least one stock to generate a reversing upward point and figure buy signal, but if the QQQ was to have found it pullback bottom then $34.00 may well have been it on a longer-term basis, where the only upward trend on the QQQ, and a longer-term one at that from the October 2002 lows certainly would grab some attention at this point.

Jeff Bailey

Index Wrap Archives