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 this time, the momentum of the stock's decline looks to break through that floor. That break to new recent lows, along with pressure from the semiconductor sector, will target a selling trend to $35.
I'm targeting the move using July Put options.
The post Is Volatility Making a Return? Here's How I Trade It. appeared first on Penny Hawk.
About the Author
Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.