After a surprising decline early in the week, the S&P 500 Index made a wide outside range upside reversal Friday since with all the uncertainty about a China trade agreement who would risk being short over the weekend? This week the decline could resume. Our Market Review below includes an overdue update to the Commitment of Traders report for WTI crude oil and the United States Oil Fund, LP (USO) idea for consideration.

S&P 500 Index (SPX) 2881.40 dropped 64.24 points or -2.18% starting last Monday when it closed well below the newly established upward sloping trendline from the December 26 low. Then on the turnaround Friday it traded below the 50-day Moving Average before recovering to close back support at 2880 and from the moving average. Increased volatility in a highly news charged environment comes with the territory and it could continue for some time.

CBOE Volatility Index® (VIX) 16.04 gained 3.17 points or +24.63% last week after spiking up to 23.38 on Thursday. 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, added 3.72 points or 37.20% closing the week at 13.72% after reaching 16.80% on Thursday. Take a look.

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 7 trading days until May expiration, the day-weighted premium between May and June allocated 28% to May and 72% to June for a 3.83% premium vs. 16.10% for the week ending May 3, well below the green zone between 10% to 20% associated with S&P 500 Index uptrends.

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.

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.

WTI Crude Oil

WTI Crude Oil (CL) 61.66 basis June futures were down .28 for the week, but well below the upward sloping trendline from the December 24 low, as shown in the chart below.

From the Disaggregated Commitments of Traders - Options and Futures Combined report as of May 7, "Managed Money,” the group that best correlates with crude oil price changes and arguably the most important, reduced their long position 18,619 contracts and increased their shorts -10,811 contracts for a net position decrease of -29,431 contracts representing 9.21%. For the last two reports, their net position declined 42,475 contracts. The charts below help show the changes.

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.

The financial media, as well as some analysts, often refer to "Large Speculators" consisting of both "Managed Money" and "Other Reportables." However, since Other Reportables are defined as traders not placed in one of the other three categories including them with "Managed Money" can obscure changes made by "Managed Money."

For for the purpose of the report, "Managed Money" are registered commodity trading advisors (CTAs), registered commodity pool operators (CPOs), such as commodity ETF managers or unregistered funds identified by CFTC engaged in managing and conducting organized futures trading on behalf of clients. So-called “hedge funds” are included in this category, regardless of whether they are registered.

For "Managed Money," the changing short position is most important. When they begin shorting and when they begin to cover (reducing) their shorts. As of May 7, they increased their shorts 10,811 contracts after increaseing them 3,408 as of April 30.

In addition, "Managed Money" reduced their long position 18,619 contracts and 9,639 as of April 30.

Therefore, the net long position declined to 9.21% of the total open interest vs. 10.21% on April 30.

Seasonally WTI crude oil tends to advance from January to August or September after pausing in May and June before continuing higher. Based on the seasonal tendency and the chart above showing a "Managed Money" open interest decline until late May last year, suggests the current price decline could be limited.

So what's the trade? Based on the premise that the seasonal pattern for WTI crude oil will follow the usual pattern and will soon be advancing again, consider this somewhat contrarian idea.

United States Oil Fund, LP (USO) 12.84 ended the week down .03 or -.23%. After reaching 13.86 on April 23, it now looks oversold right at the convergence of the 50 and 200-day moving averages. While below the upward sloping trendline from the December 24 low the current pull back has the look of an Elliott 4 wave and this would be consistent with a modest pullback in May before turning higher for the summer.

With a current Historical Volatility of 23.36 and 14.70 using the Parkinson's range method, with an Implied Volatility Index Mean of 28.42 at .16 of its 52-week range, the implied volatility/historical volatility ratio using the range method is 1.93, so option prices are somewhat expensive compared to the recent movement of the ETF. Friday’s option volume was 47,788 contracts traded compared to the 5-day average volume of 66,690 contracts with favorable bid/ask spreads.

Consider this synthetic long risk reversal idea.

With some implied volatility edge, on Friday the debit was .02. Use a close back below 12.50 as the SU(stop/unwind). With a small debt, but with the risk of assignment should it quickly decline and close below support at 12, this position should test the WTI crude oil seasonal tendency premise.

The suggestion above is based on the ask price for the buy and middle price for the sell presuming some price improvement is possible. Monday’s option prices will be somewhat different due to the time decay over the weekend and any price change.

Strategy

Uncertainty about the ongoing trade negotiations with China dramatically changed the near term outlook with the S&P 500 Index closing well below the operative upward sloping trendline. Friday's turnaround reversal will only be important if the trade and tariff rhetoric improves this week. In the meanwhile, market breadth as measured by our preferred gauge, the NYSE ratio adjusted Summation Index declined every day last week ending at 726.78, down 191.61 points or -20.86%. Not encouraging for the bulls but consistent with the pullback.

However, unless rattled by more unsettling trade and tariff news, the decline in WTI crude oil could be ending soon.

Summary

Even the best technical indicators are not much help when unexpected news suddenly increases uncertainty. However, the S&P 500 Index made an upside reversal Friday that could just be short covering. For now, it's all about China trade and tariff rhetoric.

From a seasonal perspective WTI crude oil looks oversold and could be worth considering on the long side in the next week or so.