Friday, July 22, 2016

VXX is signalling a reversal

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Market Overview - Fully Long, but "long" in the tooth too.

Long-Term Timer:  Long
Intermediate-Term Timer: Long
Short-Term Timer: Long, Under Pressure


Long-Cash Ratio Table

The left side of the table is indicating that we are fully long on all time frames but the right side is showing weakness:

Click on the image to enlarge.

On the far left, a LCR value of 2.423 indicates that we are extremely overbought and that a reversal is possible.  Sure, we can continue to move upwards (the markets climb a wall of worry and we are in earnings season), but the high values indicate a certain level of caution.

The right side shows red on some time frames, green on others.  This is a mixed message, but with red creeping in, and more importantly, the "hit" we took on Tuesday with everything showing red, indicates that we should be more cautious.  Buying stocks now that are correlated with the S&P 500 (or the GGT index, which looks mostly like the NAS or R2K right now) could be a losing strategy.

If you're not in the market at the present time, I would keep your powder dry with respect to stocks.

VXX Naked Put Strategy

A number of my readers attended our local AAII meeting this past Saturday and Alan Ellman, of the Blue Collar Investor, was the presenter.  I was unable to attend, but note that I am a subscriber to his service and like his approach.

Alan teaches investing with options, and the approach is sound.  It is a conservative approach, and he uses Covered Calls (CC) as well as writing Naked Puts (NP) as a focal point.  I focus on naked puts as this generally uses less capital, and it ties in closer with certain transitions within my GGT strategy.

We are nearing one of those transitions.  Whether we are there today (Friday) remains to be seen -- futures are up as I write but not very strongly.

The VXX is an ETF that moves with volatility of the markets.  I prefer it to other ETFs for CC/NP writing, but also fully buy into the view of writing NPs on quality stocks that are at a local minimum in the markets but are in an uptrend.

VXX is NOT in an uptrend, but is signalling that it is hitting bottom.  I doubt today will be the day to enter, but I could see entering a position in VXX quite soon if the short-term topping formation in the markets continues.

Click on the image to enlarge.

The left two panels show a daily analysis of VXX, and the right two panels show a 78-minute analysis, which is 1/5 of the daily trading interval.  I watch the 78 minute, daily, weekly, and monthly charts for many of my stocks.

The top left shows a "new uptrend" using one of my two trend-identification methods.   I have noted this as "NU".  You can see that the line is below the daily bar, and this is new as of Thursday's action, which is why it appeared on my radar scan last evening.

The bottom left has not confirmed this and indicates that VXX is still in a downtrend.  Note that any strength in the VXX above Thursday's high will trigger the signal to a "NU"; the trend analysis is a "ratchet" in that it can only move lower until it doesn't, which then causes a new uptrend to occur.

With Friday's futures pointing higher I do not think the VXX is moving upward, but of course, your crystal ball is as good as mine.

On the right side, you see that on the 78-minute bar time frame, we have a NU for VXX using two independent trending methods.  This is a necessary requirement for the left side to move higher -- and consequently, this too is why VXX appeared on my radars last night.

All I need is the confirming "NU" on the lower left window to tell me that an initial trial balloon in VXX could be a good choice.

VXX is one of the most liquid ETFs on the market.  VXX 160819P11, which is the August 19th put option with a strike of $11 (current price of the VXX is $11.34) presently has an open interest in excess of 60,000 contracts and a spread of $0.03.  Liquidity and spread are important if you need to exit a contract.  It is also important when it comes time to enter the contract.

If the VXX moves up from here, writing a naked put (NP) on this contract will pay about $73 for a single contract.  Here's the risk profile:

Click on the image to enlarge.

This graph is indicating that a single contract in VXX 160819P11 will pay $73 if the price remains above the strike price of $11 by the August 19th expiration.  This includes my round-trip commissions.  Below $11 the amount that the contract pays is less, and a break-even occurs at $10.27 (not shown but that is where the blue line intersects the $0 line).  Below $11 on August 19th the contract will most likely be assigned and you'll have to buy the VXX at whatever price it is below $11, resulting in the reduction in profits.

Let's suppose that the VXX moves up from here by August 19th.  Because I am selling the contract, I would collect $74 today ($75 credit less $1 write commission as of today).  This would be a credit to my account. If assigned @ 11.00 my total return would be 7.12% = (75-1-1)  / (1100-75).  Your commission structure may be different so your round-trip commissions could be higher/lower per contract. 

Hence, as long as VXX moves upwards from $11 I could collect the full premium.

Here is the summary:

Click on the image to enlarge.

Of course, if we continue to climb the wall of worry then VXX will continue to drop and if it drops below $10.27 on or before August 19th, we are at our break-even point.  

I note that the implied volatility (IV) is presently 72.95% with the average implied volatility at 71.32%, so we have IV rising above historical and I expect VXX premiums to increase.  This is desired as this means I collect more for writing the contract.

There is a strike in VXX at $10.50.  Here are those numbers:

Click on the image to enlarge.

The table shows that if we lower the strike to $10.50 in VXX, same expiration, then we drop about 2.4% in possible maximum profit to 4.69% and we lower our break-even level to $10.03.  This is a very good return so this could be a further consideration.  Note that this contract (VXX 160819P10.5) is currently trading at $0.49.


In the end, I will not pull the trigger on writing a NP on VXX today unless I see the daily trend (lower left in the quad chart above) also move to a "NU" signal.  We are close, but I need the markets to indicate that volatility for stocks in general is moving upward.  We have the start of this, but it is not confirmed.

Certainly, the Weekly trend charts (not shown) are still quite bearish and have some time before they move to a NU.  VXX has to rise above 14.91 AND 13.17 in order to get both weekly charts to move to a confirmation of a market downtrend/VXX uptrend.


My stock alerting service is fully functional and is available at  Follow me and "Turn on Mobile Notifications" from within Twitter to get notified every time a breakout or pocket pivot is detected on a Greenfield Leader stock.  Here is a portion of my Twitter feed from yesterday:

This service is free and those that are subscribed tell me they really enjoy the notifications and their review of the quality of the stocks is quite positive.  These would be stocks that would be ideal for a CC or NP strategy, provided that the market cycle confirms (it presently does not so be careful).


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As with all my ramblings, you are responsible for your own investment decisions and I am not.  Please do your own diligence, and please take ownership for your actions.  The equities I have listed here are not recommendations -- they are seeds for you to do your own research.