Look at this stock chart. The underlying security here jumped in mid-August, on high volume, and was followed by a ‘cooling off'. Now it appears to be ‘coiling up' for possibly another sharp up-thrust.
This may be the type of stock chart an active trader might like to come across. An analysis of the past year or two shows the high 15's is a long-term area of support. Now, this stock is basing at the 18 level, and may be ready for another big move. A stop-loss below 18, or even below the long-term support around 15.9, is not much risk for a stock that has shown it can quickly gain 20 to 30 percent or more.
The only problem is this isn't a stock. It is VXX, the iPath S&P 500 VIX Short-Term Futures ETF. Using derivatives, VXX is a tradable security that amounts to bet on market volatility. Actually, since it is a measure of option implied volatility, it really is a bet on the expected market volatility, or at least on the level of discomfort of option traders.
And we can see that as VXX generally moves opposite to the S&P 500. A rising VXX indicates option traders are bidding up put prices (in other words, bearish bets against the market). The following chart shows clearly how the VXX (purple line) moves opposite to the S&P 500 (green line).
As the S&P 500 stalled in mid-2015, the VXX dropped to long-term lows as traders became complacent with the markets' inability to set new highs. But with the VXX ‘coiling up' recently, professional trades may be expecting a big move. The VXX can jump temporarily on a big index move to the upside, but VXX jumps are most often related to market drops.
The S&P 500 fell 12.5% in mid-August, and VXX jumped 98%. Now, VXX has set short-term support at 18 and is trading at 20.16, which represents a 27% higher level than early August.
Is VXX showing that professional traders are preparing for a sharp move to the downside? Today is a ‘Quadruple Witching' day, with expiration of stock index futures, index options, stock options, and single stock futures. I may consider a small position in VXX at today's market open, as the risk-reward on this trade would be pretty decent (and would function as partial portfolio protection against my long positions).
And if nothing happens today, VXX is likely to bounce sometime within the next two months. The S&P 500 has an approximately 6-week short-term cycle. Sooner or later, the S&P will drop, heading to a short-term cycle low, and VXX will jump. The rising support under VXX shows professional traders may be expecting it sooner rather than later.
(Note: Because VXX is based on derivatives, there may be tax implications. VXX may not be suitable for retirement accounts. Anyone considering trading something like VXX should consult their trading and tax advisors).
Of course, there's much more you need to know and many more stocks you can capitalize upon each and every day. To find out more, please click on the following link: www.markettamer.com/seasonal
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Gregg Harris is the Chief Technical Strategist at MarketTamer.com.
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