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Michael Filighera
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Michael's history with financial markets dates back to 1979 on the Pacific Stock Exchange Options trading floor. Michael has traded in the US, UK (London Traded Options Market), Netherlands (Amsterdam's European Options Exchange), and Germany (DTB). He is also an internationally published... More
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  • Never Short A Dull Market, Or ... 0 comments
    Aug 5, 2013 6:28 PM | about stocks: VXX, UVXY, SPY
    Never Short a Dull Market or What Happens When You Host a Party and Nobody Comes - the Volatility Indexes

    Have you ever gone to highly anticipated event and wished you were anywhere else? That is what the markets were like on Monday. Stuck in neutral with nobody left to push prices in either direction. Other than Bonds and Nat Gas which continued to build downside momentum the balance of what I watch and trade went nowhere fast.

    The U.S. trading sessions were very narrow and without volume. Volatility continues to get crushed with several of the volatility indexes and ETFs moving to new 52 week lows. The Euro gave a nice trade first thing on the opening of U.S. trade but reached the highs around 1.3265 and proceeded to trade in a 10-tick range much of the balance of the day. Gold dipped briefly below 1300 but failed to attract any attention or trigger any sizeable stops with prices then moving back above 1300. Bonds took a breather from Friday's bounce higher and remain the area where near term strength is still expected.

    Current expectations remain in place where a correction for the broader equity indexes increased in probability on Monday - a bounce in Treasuries should continue and be lead by the 10-year Note. The Euro is still looking weak and running out of steam for an additional push above 1.33. At least not until a further break down carries prices below 1.32 to begin and ultimately into the support zone at 1.26 to 1.28.

    Volatility Indexes

    The way volatility works in the markets can move contrary to what most think in that "normally" when the market moves into a period of uncertainty which can produce a increased sense of movement risk. Upside fear is almost non existent with downside fear being the force behind most spikes in volatility and the respective indexes.

    A trading friend called me on Monday wondering why the VIX , VXX, and UVXY were all down along with the broader indexes. "Shouldn't they be higher today?" My answer was yes and no - trading strategies have increased exponentially with the advent of more sophisticated algorithmic trading programs.

    Each day volatility programs determine what the daily (intraday - high to low) moves should be. For example, the current level of the VIX suggests that the SPX will have an intraday range of approximately $12 - however, that didn't occur on Monday - in fact it was half that coming in at about $6. Therefore prices were adjusted via selling to reflect what actually was going on. It remains important to remember that this can easily change on Tuesday. Should the intraday range for the SPX expand look for volatility indexes to move higher.

    S&P 500 VIX Short-Term Futures Index -
    • Summary -
      • The S&P 500 VIX Futures Index measures the movements of a combination of VIX futures and tracks changes in the expected volatility based on 30 days forward. The index maintains an average weighted settlement date of one month by rolling a portion of the position from the front month to the next month out, which is done on a daily basis.
      • The VIX is a measure of the expected volatility of the S&P 500 over the next 30 days. The VIX is not a traded index, but does have listed futures and options. The VIX futures reflect expectations for the level of the VIX on the settlement date of the contract.

    There are several ETFs and ETNs that are tied to the VIX :

    • VXX
      • The VXX tracks the VIX and offers exposure to a daily rolling long position in the first and second month VIX futures contracts to reflect the implied volatility of the S&P 500 index at various points along the volatility forward curve. The VXX future also rolls continuously throughout each month from the front month to the next month out.
      • UVXY
        • The Ultra VIX Short Term Futures ETF looks to produce a return that is 2x the return of the VIX for a single day. This can and has produced a situation where the returns over periods other than one day will not be as correlated to the amount or even the direction of the target index.

    The charts below of the VXX and UVXY show both probing the bottom of their ranges. UVXY has dropped 65% since reaching a high of 90 on June 21, 2013. This index is extremely oversold but don't be mislead here - the UVXY has been oversold since July 3rd. The VXX has followed a similar pattern dropping from 23 to 14 during the same period and is extremely oversold.

    The oversold readings within the volatility indexes and the overbought readings within the broader indexes continue to suggest a period of correction and consolidation is coming up next. (click the chart to enlarge)

    (click to enlarge) (click to enlarge)

    Indicator Warehouse

    Indicator Warehouse has in my opinion the best platforms available covering a wide range of traders from novice to expert.

    The Diversified Trading System from Indicator Warehouse offers cost effective products that allow a trader to enter into the "chaos" and trade more effectively.

    Trade Manager from Indicator Warehouse automatically calculates the correct amount of contracts or shares based on your account size or market volatility. Automated stop-loss management and position sizing eliminates most of the problems most individual traders have. Day trading and position trading both require (actually demand) good risk management. Trade Manager does the job across the board and is an essential trading tool that ensures that you take the maximum profit from all your trades.

    A newer member of the money management tools available from Indicator Warehouse is the Profit Finder - System Back Tester. When implemented it allows the user to:

    • Immediately know the impact of parameter changes.
    • Automatically reads all of your DTS entries and exits
    • Calculates the profit/loss of each trade
    • Performs a wide number of essential intelligence boosting calculations instantly
    • Provides solid details about the effectiveness of your trading strategy/ methodology/ indicators

    The last two points above are valuable tools to use. It will show you where some "tweaking" is needed to improve results through the back testing feature.

    My point on money rotation and sector rotation is similar to that on parabolic moves that they happen with frequency within many time frames. As traders these types of moves can be a bonus for day trading or position trading so again don't get caught up in the "what's the catch." Realizing a rotation is occurring within a stock you trade or a sector is a great source of stocks to plug into the Diversified Trading System. Allowing DTS to cleanly and beautifully capture the moves though any or all three DTS trading platforms. Our goal remains to assist traders to make greater profits during all types of markets. Sector and money rotation is another tool.

    The Diversified Trading System used together with Trade Manager should continue to produce numerous trading signals in the DJIA, YM (mini), S&P 500, ES (mini), RUT, TF (Russell 2000 mini), AAPL, AMZN, GOOG, NFLX, and LNKD, GS, and Tesla Motors (NASDAQ:TSLA). In the near future I will be adding options strategies to the trading list.

    Here is an updated (7/31/2013) list of the markets where I have found that DTS (all three birds) are producing numerous signals. Continue to bear in mind that there are days when trading opportunities are not as plentiful. These are days when not trading is likely more profitable than attempting to "force" a trade":

    • DJIA future (e-mini available) - highly recommended for experienced traders
    • S&P-500 future (e-mini available) - highly recommended large intraday moves.
    • Russell 2000 future (e-mini available) - highly recommended can lead in either direction.
    • NASDAQ 100 future (e-mini available) very highly recommended and dominated by AAPL, AMZN, NFLX, GOOG, and TSLA
    • US$/Euro futures (e-mini available) - very highly recommended - easy to trade afterhours as well.
    • V (Visa) - stock and options - recommended - large swings in both direction likely
    • MA (MasterCard) stock and options - recommended - $600 stock - large swings likely
    • GS (Goldman Sachs) - good two way volume -
    • AAPL (Apple Computer) - highly recommended - Options trading as well
    • GOOG (Google) - highly recommended
    • LNKD (LinkedIn) - solid intraday range
    • NFLX (Netflix) - solid intraday range
    • TSLA (Tesla Motors) - highly recommended
    • 30-yr Treasury Bond future - highly recommended
    • 10-yr Treasury Note future - solid two way trade
    • TLT (Treasury Bond Long ETF) - very active
    • TBT (Treasury Bond Short ETF) - very active (moves inversely to TLT)
    • Gold (futures and ETF - GLD) very active - not suitable for all traders
    • Silver (futures and ETF - SLV) - very active - not suitable for all traders
    • EURO FX (futures, mini and micro contracts available) very active suitable for all account sizes

    Disclosure: I am long VXX, UVXY.

    Themes: SPY, VXX, UVXY, Volatility Index Stocks: VXX, UVXY, SPY
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