Finally Back Above 2800

Last week, after several attempts the S&P 500 Index finally closed well above the resistance zone around 2800, thereby increasing the odds it will continue up to challenge the October 3, 2018, high at 2939.86. Then after a long hiatus, a brief look at the Commitment of Traders report for WTI crude oil follows.

S&P 500 Index (SPX) 2822.48 added 79.41 points or +2.89% last week finally closing Friday above the tough 2800 resistance zone that turned it back three times. Once it closed above the March 4 high at 2816.88 a new operative upward sloping trendline from the December 26 intraday low was activated that crosses right at 2800 and will act as support on any pullback. Then the 200-day Moving Average at 2752.96 should provide the next support. Now above the 2800 resistance zone there is not much more resistance before the October 3, high at 2939.86.

CBOE Volatility Index® (VIX) 12.88 dropped 3.17 points or -19.75% last week. Our similar IVolatility Implied Volatility Index Mean, IVXM using four at-the-money options for each expiration period along with our proprietary technique that includes the delta and vega of each option, also declined 3.14 points or -23.24 ending at 10.37 shown below with the SPX line chart.

Once again below the bottom of the recent 14-15 range that began last October the bullish implied volatility downtrend continues.

VIX Futures Premium

The chart below shows as our calculation of Larry McMillan’s day-weighted average between the first and second-month futures contracts.

With 2 trading days until March expiration, the day-weighted premium between March and April allocated just 8% to March and 92% to April for a 15.04% premium vs. 5.48% for the week ending March 8. Now back in the green zone between 10% to 20% associated with S&P 500 Index uptrends; supports the bullish outlook for the new upward sloping trendline.

The premium measures the amount that futures currently trade above or below the cash VIX, (contango or backwardation) until front month future converges with the VIX at expiration. Previously, declines below 10 % and advances above 30% were unsustainable, but for the last year premiums above 10% have been scarce. If there was only one indicator available, it would be a top contender. 

For daily updates, follow our end-of-day volume weighted premium version located about half-way down the home page in the Options Data Analysis section on our website.

Since VIX calls are often used for hedging purposes here is an update for the call and put open interest that could be somewhat unusual on a busy options and futures expiration day.

 WTI Crude Oil

WTI Crude Oil (CL) 58.52 basis April futures gained 2.45 points or +4.37% for the week. The March EIA production forecast was revised down more than the consumption forecast, so global inventory builds are expected to be lower, suggesting a relatively tighter market than previously expected in their February forecast.

From the December 24, 2018 intraday low at 43 WTI April futures advanced 36% compared to the average seasonal advance from December to October for the last 30 years of 21 %, making this year's advance already above average; likely due to the abnormally rapid decline from October to December last year. Now it's clearly trending higher as shown by both the black upward sloping trendline, USTL and the red 50-day Moving Average. The chart below tells the story.

Delayed for several weeks due to a partial government shut down, the Commitments of Traders (COT) report from The Commodity Futures Trading Commission (CFTC) is current again.

From the Disaggregated Commitments of Traders - Options and Futures Combined report as of March 12, "Managed Money,” the group that best correlates with crude oil price changes and arguably the most important, increased their long position 1,359 contracts and reduced their shorts +4,728 contracts for a net position increase of 6,088 contracts representing 5.70% of the open interest up from 5.41% for the week inding March 5. The following three charts show the "Managed Money" position since November 2017. First the net long position as a percentage of the total open interest showing a recent upturn.

While their long position decline began last September, it has remained fairly stable since the end of November.

But the short position tells the tale, increasing dramatically from July 3 at .52% peaking at 4.37% on January 8, now 2.26% and trending lower as they close shorts.

There are five reporting categories: Producer/Merchant/Processor/User
(PMP), sometimes also called" Commercials," Swap Dealers ("Swaps"), Money Manager ("Managed Money"), Other Reportables ("Other"), and Non-Reportable each with six data points, long, short, net position and change for each. Since the total net longs and net shorts zero out each week, tracking the changes of each group compared to the WTI price change provides some insight especially at turning points.

While changes in other categories will occasionally affect prices "Managed Money" usually correlates best and it was increased shorting that began last October that pushed prices lower.

Strategy

With a new S&P 500 Index upward sloping trendline and little overhead resistance until the previous October 3 high, odds favor the bulls. With declining implied volatility consider longSPDR S&P 500 ETF (SPY) call spreads along with United States Oil Fund, LP (USO ) long call spreads.

Market Breadth as measured by our preferred gauge, the NYSE ratio adjusted Summation Index reported by McClellan Financial Publications, declined 88.36 points for the week ending at 983.73 after peaking on February 27 at 1288.45. The declining breadth and the threat of "sell the news" if and when, on China trade agreement announcement, along with lagging transports, are three reasons to remain attentive.

Summary

After closing above the 2800 resistance zone Friday a new upward sloping trendline suggests the S&P 500 Index will attempt to test the October 3 high at 2939.86 with options and futures indicators remaining bullish along with little overhead resistance. With increasing, seasonal demand crude oil should also continue trending higher.