It seems last week's claim about the S&P 500 Index forming a new uptrend was premature. We got ahead of ourselves presuming it soon make a new high and redraw the upward sloping trendline. Instead when it failed to make a new high a potential double top pattern and range formed. The Market Review adds details along with a chart to help tell the story followed by Sorrento Therapeutics Inc. (SRNE) news.

S&P 500 Index (SPX) 2863.70 declined 66.10 points or -2.26% last week after challenging the April 29 high on Monday before tuning lower Tuesday. Declining down to support at 2800 on Wednesday would create a potential double top should it close below the May 4 low at 2797.85. Early Thursday it looked as if the double top with a measuring objective (MO) at 2641 would activate. Then, it abruptly reversed and closed well back above 2800.

Support from big capitalization NASDAQ stocks represented by the Invesco QQQ Trust (QQQ) 223.27 helped turn SPX higher, forming a range between 2800 (blue horizontal line above) and 2955, the April 29 high (green horizontal line). The chart also adds the likely Elliott wave 3 at the March 23 low and wave 4 at the April 29 high, still defining a potential double top with its measuring objective at 2641 (MO above).

CBOE Volatility Index® (VIX) 31.89 added 3.91 points or +13.97% 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, advanced 4.63 points or +20.13%, ending at 27.63%.

The spike up to 77.15% on Monday, March 16, the day SPX declined 324.89 points, likely marks the top for this market decline.

VIX Futures Premium

This next chart shows our calculation of Larry McMillan’s day-weighted average between the first and second-month futures contracts as of last Friday.

With just two trading days until May expiration, the day-weighted premium between May and June allocated 8% to May and 92% to June for a premium of 2.31%, just in the yellow caution zone vs.8.35%, for the week ending May 8.

The premium measures the amount that futures currently trade above or below the cash VIX, (contango or backwardation) until front month futures contract converges with the VIX at the next monthly futures expiration on Wednesday, May 20.

The relationship of the futures curve to the VIX, as measured by the premium, makes a good real-time sentiment indicator.

For comparison with 2019, this chart zooms in to start on January 4, 2019

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

Option Ideas

For ideas go to Top 5 stocks by implied volatility change located in the Rankers and Scanner section on our home page at the right side.

SRNE in the top spot for both range and change on Friday.

Sorrento Therapeutics Inc. 6.76 up 4.14 points or +158.02% on Friday trading 507.6 million shares and more than 260 thousand option contracts on news of a possible COVID-19 treatment.

Strategy

As markets respond to COVID-19 news, consider the possibility of a series testing the tops and bottoms of the range –from a potential double top to a potential triple top and perhaps more, until it finally breaks out and up or down to retest the March 23 low, and the much anticipated Elliott 5 wave bottom as the bears expect.

Well-defined trading ranges, such as the one for the S&P 500 Index between 2800 and 2955, provide easy definable action levels. On a close below the range, open new out-of-the-money protective put spreads should the S&P 500 Index close below the May 4 low at 2797.85. Alternatively, a breakout above the range will activate a new bullish upward sloping trendline.

In the meanwhile, liquidity and narrow credit risk spreads seem more important than price-to-earnings ratio valuation based on unknown future earnings.

Summary

After coming close to activating a small double top last week the S&P 500 Index supported by the large-capitalization favorites in the Invesco QQQ Trust (QQQ), reversed higher last Thursday establishing a well-defined trading range between 2800 and 2955. A close below the range should activate protective puts while a breakout above the range creates a new bullish upward sloping trendline.