“… Cboe Market Volatility Index Futures option buyers have returned. The 20-day call / put ratio (to be opened) was 2.21 … the highest level since the end of May 2020, which preceded a VIX pop. Long-term readers of Monday morning view I’ve seen comments in the past along the lines of VIX option buyers who have historically been smart money. The VIX moved below half its 2021 closing high (37.21) by 18.60. Look for a sharp rise as the VIX closes back above 18.60 in the coming days and weeks. “

– –Monday morning view, April 12, 2021

A month ago, the CBOE Market Volatility Index (VIX – 16.69) hit a pandemic low of just under 16. The decline in volatility we saw at this point is usually bullish for stocks, but there was something that wasn’t as described agreed in the observation I made in mid-April above.

In particular, option buyers on VIX futures bought calls at an increasing rate compared to puts, an action that preceded VIX Pops in the past. Therefore, I found that this option activity increased the risk of a pullback, even though the momentum continued to favor the bulls in the equity markets.

At this point and in retrospect, the 20-day call / put volume ratio for VIX futures peaked at 2.50. Meanwhile, just a few days after my comments, the VIX hit a calendar year and a 52-week low at 4:25 p.m. in mid-April.

Fast forward to early last week with the VIX hitting an intraday high of 21.85 and a closing high of 19.48. VIX option buyers were right about the direction of the VIX the following month. However, any further move above the 18.50 level, or half of its 2021 closing high, proved temporary.

What is encouraging for stock market bulls is that the options activity I saw last month preceded a tight trading range around all-time highs in the S&P 500 Index (SPX – 4,232.60), which simply resulted in a loss of momentum from late March to mid-April Rally.

While volatility expectations, as measured by the VIX, have risen over this period, it was hardly a volatility pop like in early June 2020, when the VIX rose nearly 50% in just one week. This pop occurred after the ratio of VIX futures call purchases to VIX futures purchases hit 2.50 in late May, as we saw in mid-April this year.

Since the VIX is back below 18.60 after the gradual increase discussed above, the 20-day ratio of call buy to put buy is declining and currently stands at 1.75. With the VIX call buying down relative to the put buying, possibly the worst spike in volatility hinted at in the last month has passed.

5-10 Diagram 1

“… After the Fed meeting, the SPX completed a third straight day with the opening and closing roughly the same. I’ve called them “doji-like” because the opening and closing weren’t exactly the same, but close enough that it was easy to see. It remains to be seen whether last week’s reversal pattern will precede an immediate decline as we saw in January and February. “

A switch to the channel suggests a loss of momentum since last month’s breakout and the risk of another retreat into a second line of defense at 4,131, which is exactly 10% above the 2020 close. A third potential support level is 4,100. This is the level at which the breakout occurred over the top of the channel on April 9th. “

– –Monday morning view, May 3, 2021

I have been seeing an increasing vulnerability to market pullback for weeks, whether based on sentiment or, in the case of the last week, the daily candlestick patterns that appeared in late April – the three-star doji pattern (circled in the graph below) – . this traditionally points to trend reversals, as we saw in January and February.

5-10 diagram 2

At the same time, I suggested that given the apparently higher trend in stocks and the fact that the index is still respecting pullback support levels, emerging risks can be managed by simply hedging or selling long positions. At the very least, these various risks suggest that one has a plan to hedge a portfolio without hesitation if or when the support levels of the SPX cease to exist.

As such, I wouldn’t have argued with anyone who started hedging last week when the SPX broke back into their channel and the VIX surged above 18.60 as it makes sense to buy insurance when it’s relatively cheap and the technical background looks “dubious”. For example, last week the SPX returned to a channel it had been trading broadly on since early April.

But as I noticed last week, there are several areas of support that are not far below the current level of the SPX. It was the level coinciding with the 10% round – above the 2020 close that marked the support. This SPX 4.131 level was only about 1% below this channel line. If last week is indeed a low for now, the bearish “tri-star doji” pattern from late April turned out to be good for a negligible 1.3% decline in a few days following the pattern seen during the last day Week lows loomed. While the SPX fell below its popular 20-day moving average for the day, it never closed below. The action around this moving average was like the end of March.

With the SPX ending at an all-time high on Friday, surpassing more than a week since the “Tri-Star Doji” bearish reversal pattern emerged, one must wonder if the bulls dodged another bullet.

With the SPX channel topping at 4,200 early in the week and 4,215 on Friday and last week’s intraday low at 4,130, or 10% above the 2020 close, the areas between 4,130 and 4,215 are potentially strong areas of support for the week ahead . Keep in mind, however, that other levels of support (discussed in detail last week) are not far below this zone. Therefore, hedging is still recommended as a cheap method to protect yourself from a great deal of optimism, instead of switching to cash or even becoming overly aggressive on the short side and thus against the big trend.

Keep up to date with the support levels I’ve discussed. With many companies reporting profits over the past two weeks, the implied volatility of many stock options has decreased significantly. Therefore, you can play the price dynamics with call options, these stocks supporting the market, e.g. B. Reopening games such as traditional retailers, restaurants and metal names that have large price movements when expectations are low.

Todd Salamone is Schaeffer’s Senior VP of Research

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