THE BOTTOM LINE:

For now, the major indexes remain within broad trading ranges but with the threat of a downswing ahead that carries to below prior lows. A sell off below support would be consistent with another potential shot up in the VIX volatility Index, which looks possible with the VIX chart patterns seen below.

MONTH END REVIEW:

The S&P 500 (SPX) finished down 64 points in January for a loss of 3.1%. The Dow 30 (INDU) was off 3.6%, down 658 points, on the month. The Nasdaq Composite (COMP) fell 101 points, a decline of 2% from its December and year-end Close of 4736.

Not a great start to 2015 but losses in January are not uncommon as investors assess the new year's earnings potential even within the current bull market dating from 2009; e.g., January 2009 decline; also seen in 2010 and 2014.

The current Market has of course been dominated by broad back and forth price swings since early-December. Stock market volatility, as measured by the S&P 500 volatility Index VIX has seen several spikes to above 20, and the VIX has yet to dip back to 14 or under in the past two months.

I'm anticipating continued trading opportunities in VIX options. This is a market much dominated by portfolio managers due to VIX's negative correlation to stock prices; it's cheap insurance and very under-reported. If you look at say, Investors Business Daily, which reports as much or more data than most Market related print publications, you'll find the S&P, Dow Index, Nas 100 and Russell 2000 'Index' options prices and volumes but no reporting on the most-active VIX puts and calls. Surprising considering VIX options have far greater average daily volume and a larger Open Interest than all but volume and OI for SPX puts and calls.

Time to include the VIX index options in trade selection? YES!

VIX Technical Commentary; Daily and Hourly charts

I'm trying out regular weekly commentary on the S&P 500 Volatility Index (VIX); I'll continue this week to feature both the VIX daily and hourly charts.

As to the importance of taking a look at trading the VIX, one reason is that it is negatively correlated to stock prices or there's an inverse relationship. A perhaps overly simplistic way to say this is that when Market volatility goes up, stock prices will tend to come down; conversely, when volatility measures like the VIX starts coming down from peak levels, stocks will tend to rally; i.e., a good hedge against stocks losing value. So, like SPX options, sizable fund participation.

BEST KEPT SECRET: DAILY TRADE VOLUMES IN VIX!

Yesterday (1/30/15), daily volume in VIX put and call options on the CBOE was 425,734 and Open Interest (OI) was 4,226,125. Compared to the daily trade volume of the S&P 500, at 1,183,397 and OI at 11,279,735, VIX options' volume doesn't seem enormous but it is quite substantial. VIX options volume is a strong number 2 in volume compared to all other 'Index' options.

Compare VIX volume (425,734) to QQQ options that saw 104,180 contracts change hands on 1/30/15 or to the Russell 2000 daily options volume of 38,673; NDX options saw a volume of 10,008 on this same Friday of the past week. Spreads (between bid/offer) tend to be relatively 'tight' due to the amount of stock portfolio/VIX arbitrage going on and the volume levels involved.

Volatility indexes like the VIX and VXN (the Nasdaq 100 Volatility Index) measure the market's expectation of 30-day volatility implicit in the prices of near-term index options. The indexes are quoted in percentage points, just like the standard deviation of a rate of return, e.g. 19.36.

Two recent Trader's Corner articles of mine were on the S&P 500 Volatility Index (VIX) with the idea of covering the basics of contract specs and looking at how the VIX Index trades technically:

1.) "Trading volatility, Pt.1" (1/15/15): The tremendous growth in volume in VIX options on the CBOE, ideas on trading strategy and contract specifications.

2.) "Trading volatility with VIX options, Pt.2" (1/22/15): Spotting tradable shifts in trend based VIX chart pattern and indicator analysis and discussed and illustrated.

VIX trends, both on a 2-3 day basis and in a 2-3 week outlook, can be assessed with the same chart analysis and related technical indicators, that work with any other index or stock; e.g., pattern recognition, overbought/oversold considerations (especially when VIX is at overbought extremes), etc.

My VIX daily chart below illustrates the recent 'extreme' upside area where VIX has been tending to make tops. VIX relative to the price of the S&P 500 (SPX) tends to have an inverse trend relationship. When VIX has shot up into a possible TOP in the higher 'extreme' ranges shown below we can anticipate a BOTTOM in the S&P although we can't say exactly how long that will take to happen; but, it's usually within days, not weeks. Conversely, when VIX has bottomed in the areas highlighted, we can anticipate a counter-trend move HIGHER in VIX at some point ahead, coupled with a DOWNWARD slide in SPX.

It has often been easier to anticipate VIX falling back toward the 14 to 12 range from spikes into the 22 to 26 zone, by buying VIX puts than it has been to anticipate a SIZABLE upside move per the VIX daily chart below. Although, 'oversold' RSI readings, at 40 in the period shown below (on a 13-day basis) in the Relative Strength Index (RSI) has suggested a reasonably good 'bet' on the Call side; e.g., in late-August and early-December.

Note that VIX could be headed to extremes seen previously in the 22 to 26 zone (before the Market rallied previously) and that in turn suggests buying VIX puts. Long VIX puts, long SPX calls could work in tandem.

You'll notice that I'm using a Close-only 'line' chart below. On an intraday basis VIX peaked at 22.18, saw a intraday Low of 19.24 and Closed up 2.21 (+10.5%) at 20.97.

I highlighted the 16 area in VIX as technical/chart support last week on my extended hourly chart seen next. Moreover, the Relative Strength Index (RSI) hit an 'oversold' extreme on a 21-hour basis. The RSI 'length' setting of 21 is what I use on my extended hourly stock index charts and is part of the Fibonacci number series (e.g., 1,2,3, 5, 8, 13, 21, etc.)

I made the following VIX strategy comments last week: "look for a potential break of the up trendline intersecting just under 21, which would then suggest a move to at least 18 and possibly or probably lower such as to support in the VIX 16 to 14 zone. I would exit VIX puts on dips to 16 or under."

I went on to say last week that I was less inclined to buy VIX calls in the 16-14 range as volatility, represented by VIX can be down for lengthily periods before a rally develops, as seen on the daily chart above. Actually, the dip to support AND the oversold RSI suggested a possible (relatively) low risk trade in VIX calls; with use of a Call trade exit/stop out point just below 14. VIX can trend sideways in the 14-12 range for extended periods of time, whereas peaks in VIX above 22 tend to be relatively short-lived.

S&P 500 (SPX) DAILY CHART:

The S&P 500 has a multimonth trading range pattern between 2060-2090 on the upside and 1993-1973 on the downside. Recent lows in SPX have formed in the 1990-2000 zone; there's then potential to test December lows in the 1973 area. A next lower target/support comes in around 1950 at my lower (-3.5% under SPX's 21-day moving average) trading envelope/'band'.

Near resistance comes in at the 21-day average (2030), extending to 2040 on up to a line of prior intraday highs at 2063.

Another shot down such as to the 1973 to 1950 area would probably see the Relative Strength Index get to a 'fully' oversold reading. Trader sentiment has been showing more bearishness as stock put volumes rise relative to equity calls.

I'm taking a wait and see attitude on staking out a bullish trade as I would rather be the full on contrarian and see an 'oversold' RSI and a further build up of bearishness in order to then speculate on SPX continuing to see two-sided trading swings. One more shot down and SPX would look 'due' for a rally. Stay tuned!

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) chart is mixed in its pattern. On one hand, OEX could be at the low end of its 2-month old trading range and may rebound from there. On the other hand, lower relative highs since the intraday top at 924 and the average number of days since early-December BELOW the 21-day moving average, is a bearish intermediate pattern.

OEX has arrived at prior support found in the 873 area. Next support or a next downside target area is to 860.

Near resistance is highlighted at 893 and then at the January down trendline currently intersecting around 904. A sustained period above 900 would be a bullish plus and suggest a possible test of resistance implied by prior highs at 910-911.

THE DOW 30 INDUSTRIAL AVERAGE (INDU); DAILY CHART:

The Dow 30 (INDU) Average has the same pattern as the S&P; i.e., declining upswing highs since the 18100 peak, trade mostly below its 21-day moving average and having seemingly 'pulled' back to lows made in mid-December in the 17075 area. I've highlighted potential 'support' at 17075, then a next downside target area and potential support around 16900.

Very near resistance is at 17400-17500, 17555 and the current intersection of INDU's 21-day moving average; next resistance is then seen at INDU's down trendline in the 17725 area.

Dow stocks remaining in strong uptrends are few: BA, HD, MMM, PFE and CSCO probably, plus TRV. (UTX was looking like it could break out in a new up leg but has recently retreated from prior highs in the 120 area.)

A dip into the 17000-16900 zone may offer trade potential for a rebound back to the 17400 area, then on to possibly test resistance at the 21-day average.



NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) is mixed in its pattern also as the Index trends sideways. The Nasdaq is holding farther above its lows than the S&P and Dow and was down 2 percent on the month versus down 3+ percent in the S&P and Dow for January.

The Nasdaq pattern is roughly the same in the number of days trading below its 21-day moving average; and in the declining relative upswing highs forming a tentative down trendline. Resistance is seen in the 4700 area, then at 4760 at the current intersection of the down trendline.

Near COMP support is at 4600, extending to the prior 4550 lows; a next potential downside target is to 4500, at my lower trading band, more properly known as a (21-day) moving average envelope line; in this case set to 'float' at 3% UNDER the Average.

COMP is both in the (more or less) middle of its trading range and is not at an oversold extreme per the 13-day RSI, with trader 'sentiment' showing dips toward what would be a bearish 'extreme' but isn't there yet. Not a lot to decide on a directional trade here absent a bullish breakout or bearish 'breakdown'.

NASDAQ 100 (NDX); DAILY CHART:

The NDX 100 (NDX) has the same lateral trading-range pattern now two months old that has hit highs in the 4325-4345 area and, on the downside, has traced out a well-defined line of lows around 4085. Next support below 4084-4100 is suggested at 4009-4000 and my lower trading 'band' at 3.5% UNDER the 'centered' (21-day) moving average.

Key near resistance is highlighted at 4250, extending next to the 4300 area. A sustained move above 4300 would likely result in renewed upside momentum.

NDX may be headed to another oversold reading in the RSI. Another noteworthy indicator is seen with the relatively high level hit by the Nasdaq 100 volatility Index, VXN. Above 20 and especially at 21-22 (VXN Closed this past week at 21.59) VXN has tended to suggest potential for NDX to rally. Stay tuned on that!

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The QQQ trend is mixed to bearish in the pattern of lower relative highs on rallies into late-December and the recent advance to the 104 area. 103, then 104 are the key resistances in the Q's. The 'mixed' part of the trend picture is that the broad movement over recent weeks is predominately sideways.

Yes, a mildly bearish pattern of somewhat lower upswing highs made on two subsequent rally attempts after the 106 peak (11/28/14) but with QQQ also consistently bottoming in the 100 to 99.36 area. Below 99.36, a next possible downside target is to the 98 area.

A sustained move above 104 resumes bullish upside momentum. Conversely, a couple of back to back Closes below 100 would tip the chart more to a bearish interpretation. Even then and even with a dip to the 98 area, I'd cover puts and look for possible bottoming action or an upside reversal pattern.

RUSSELL 2000 (RUT); DAILY CHART:

The Russell 2000 (RUT) has a slightly different pattern than the other major indices with its converging up and downward sloping trendlines. A suggestion with this pattern is that a breakout above or below the upper and lower trendlines would then often lead to a substantial further move in the direction of the breakout; e.g., a decisive upside penetration of 1200 would suggest upside potential to 1260-1280 whereas a decisive downside penetration of 1160 could lead to decline to 1100-1080.

Near chart support: 1160, extending next to 1140. Near resistance is seen at 1200, extending next to the prior 1220 peak of late-December.


GOOD TRADING SUCCESS!