Is Volatility Making a Return? Here’s How I Trade It.

Is Volatility Making a Return? Here’s How I Trade It.

Just yesterday – I mean, literally, just yesterday – I warned you there was a volatility storm brewing in the markets. Now, one day doesn’t make for a trend, but volatility storms are usually triggered by conditions very similar to what we saw just a few months ago. 

The S&P 500 breadth continues to wane (as we talked about in yesterday’s installment) while we’re seeing an increase in actual and implied volatility. That’s a poor combination for the Bulls. 

Let’s follow the signals from the top to the bottom of the market. 

The CBOE Volatility Index (VIX) 

Here we go… the VIX is making its way to the 20 level, and that may be the exact catalyst for the markets to run into a volatility storm. The reason is part technical and part psychological. You’ll see what I mean in a minute. 

Technically, the VIX is potentially taking out two “lines in the sand” today, which is likely to drive the “Fear Index” to 30. 

But first, the 20 level. This is nothing more than psychological or self-fulfilling, but that’s what the VIX is all about for me. Traders watching the VIX driving above 20 will react by buying more premium. As proof, the last two pops above 20 have resulted in moves to 24 and then 30. 

Now the 50-day moving average (MA50). The last four breaks above the VIX’s MA50 has resulted in average moves of 40% higher. Right now, a 40% move would take the VIX to somewhere around 29. 

SPDR S&P Semiconductor ETF (XSD) 

After failing to break back above its 200-day moving average (MA200), XSD has now opened a path to lower prices, as the ETF’s Bollinger Bands are now expanding. This means a new trend is being fortified. 

For the bulls out there, the XSD poked its head above its 20-month moving average for two months, signaling it was one of the few sectors to have successfully broken its bear market trend. Well, that’s changing. 

This is more than a technical trade, but the technicals are enough to target $165 with the longer-term potential of reaching $140. 

Breadth on the sector is decidedly negative, as only five of the 30 companies in the XSD are trading above their respective MA50s. That’s poor and only set to get worse. 

I’m trading this using a July Put. 

Marvel Technology (MRVL) 

Shares of MRVL are still one of the most loved stocks in the semiconductor sector. What does that mean? It means the trade is still crowded with buyers. Anytime that happens, you must think about the fact that current buyers can easily be turned into active sellers. The technical pattern of MRVL shares may just be the thing that makes that happen. 

Shares are trading below their MA50 and MA200, both of which are in bearish trends. That puts the stock at risk of seeing more selling as these trends push MRVL stock lower. There’s more… 

MRVL shares are heading back to a test of the $37 price level, and t…

 

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About the Author

Chris Johnson is a highly regarded equity and options analyst who has spent much of his nearly 30-year market career designing and interpreting complex models to help investment firms transform millions of data points into impressive gains for clients.

At heart Chris is a quant – like the “rocket scientists” of investing – with a specialty in applying advanced mathematics like stochastic calculus, linear algebra, differential equations, and statistics to Wall Street’s data-rich environment.

He began building his proprietary models in 1998, analyzing about 2,000 records per day. Today, that database, which Chris designed and coded from scratch, analyzes a staggering 700,000 records per day. It’s the secret behind his track record.

Chris holds degrees in finance, statistics, and accounting. He worked as a licensed broker for 11 years before taking on the role of Director of Quantitative Analysis at a big-name equity and options research firm for eight years. He recently served as Director of Research of a Cleveland-based investment firm responsible for hundreds of millions in AUM. He is also the Founder/CIO of ETF Advisory Research Partners since 2007, noted for its groundbreaking work in Behavioral Valuation systems. Their research is widely read by leaders in the RIA business.

Chris is ranked in the top 99.3% of financial bloggers and top 98.6% of overall experts by TipRanks, the track record registry of financial analysts dating back to January 2009.

He is a frequent commentator on financial markets for CNBC, Fox, Bloomberg TV, and CBS Radio and has been featured in Barron’s, USA Today, Newsweek, and The Wall Street Journal, and numerous books.

Today, Chris is the editor of Night Trader and Penny Hawk. He also contributes to Money Morning as the Quant Analysis Specialist.

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