The Action to Watch on 6/6

Maybe we should be buying coffee futures – or anything else that might help keep traders awake.

Yesterday was another ridiculously tight trading session for the broad stock market. From high to low the S&P 500 moved a total of just five points. That’s 0.21%.

To put that in perspective…

In the past 27 years, there have only been 15 days where the daily trading range on the S&P was 0.25% or less. We’ve had four of those days in the past month.

That helps explain why the Volatility Index (VIX) is in single digits. But, remember this… periods of low volatility are ALWAYS followed by periods of high volatility.

Don’t get complacent. Risk has a habit of showing up when you least expect it.

Here’s what to look for in the action today…

Stocks

For today, let’s take another look at the 15-minute chart of the S&P 500. Recall, the 15-minute chart is a short-term chart which displays the market action in 15 minute intervals – as opposed to the standard daily chart which shows one-day intervals. When there’s not much action to look at on the daily chart, sometimes it’s useful to look at a shorter-term time frame to get an idea of what’s going on.

Here’s the 15-minute chart of the S&P 500…

This is similar to the chart I showed you last week. The blue circles on the chart show the periods the S&P 500 was stuck in a tight trading range for a few days. This choppy, consolidating, back-and-forth action is one way the market builds up energy for its next move.

Notice how during each of these periods the MACD momentum indicator reached overbought levels and then gradually cycled back to neutral. That’s like the stock market recharging its battery. Once the MACD cycles back to neutral, the market is ready to make another move.

On May 17, the move was to the downside. On May 25 and June 1, the move was higher.

Now the MACD has cycled back to neutral again. The market is ready to make its next move.

We could go either way here. Last week, I guessed the market would go lower. I was wrong.

Now, though, like the guy who just knows he can toss that small ring around the neck of the coke bottle at the carnival, I’m going to give it another try.

My guess… and it’s only a guess… is the next move will be to the downside (surprise).

I just keep looking at the action in VIX options. And, based on the success of this indicator over many years, I have to keep looking for a downside move.

I posted the following note on my trading blog Jeff Clark Direct yesterday afternoon…

The Volatility Index is trading at 9.70 right now. The VIX June $10 puts – which expire on June 21 (different than standard exp. date) – have an intrinsic value of $0.30. But, they’re offered at only $0.10.

This condition would not be possible if the VIX options were “American style” – meaning they could be exercised anytime. Traders would buy the puts for $0.10, exercise them and sell (short) the VIX for $10, then go into the market and buy the VIX for $9.70. They’d make an immediate arbitrage gain of $0.20 per share until the price of the put option “normalized.”

But, VIX options are “European style” contracts. This means they can only be exercised on option expiration day – not before. So, there is no chance to arbitrage the price discrepancy.

The benefit to this, though, is we can look at the VIX option prices and see what traders expect to happen to the VIX by expiration.

At the moment, traders are saying the VIX is headed higher over the next two weeks.

While the VIX June $10 puts are only $0.10, the VIX June $10 calls are trading for $1.60.

Think about this for a moment…

The VIX is at 9.70. Yet, VIX option traders are willing to pay 16 times more to bet the VIX will be above 10 in two weeks than below 10.

If we go out to July, the situation is even more obscure. The VIX July 19 $10 puts are also just $0.10. The VIX July $10 calls are $2.50.

Traders are clearly betting on a higher VIX over the next two weeks and over the next month and a half. And, a higher VIX usually means a lower stock market.

We saw this same sort of discrepancy in May. And, the VIX exploded 50% higher for one day right before the VIX options expired. That was when the S&P lost 1.8% in one session – and wiped out several weeks of stock market gains.

So, this current situation tells me two things…

If you’re bearish on the market, you’ll likely be proven correct. But, you may have to suffer the water torture action as the market grinds higher until we get closer to the VIX option expiration dates.

If you’re bullish on the market, you’re likely to get a decent decline within the next two weeks, and certainly within the next six weeks, that will give you a better chance to buy.

Traders should be cautious here. Any short-term gains are likely to be given up over the next few weeks. I can’t recommend getting aggressive with short positions. But some small exposure to the downside seems like a pretty good bet to me.

I’ll update Delta Report readers on these trends throughout the day on Jeff Clark Direct.

Best regards and good trading,

Jeff Clark

P.S. Last week, my publisher told you to “keep an eye out for something big.” That “something big” is here.

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Mailbag

Thanks to everyone who’s sent in feedback. Keep it coming with more questions, concerns, and great trading stories right here.

Here’s what came in for today…

Jeff, I can not disagree on Bob W's feedback more vehemently. He is simply wrong, wrong, wrong about trading in options (smartly). My own track record is that I have had a total net gain of nearly $37,000 during the past 18 months in options trading – mostly selling uncovered puts.

Bob W. states that “…if you sell puts, most will expire worthless.” Which, of course is exactly the desired outcome. Doesn't Bob W. realize that you make your profit when you initially sell the put? He also states that “…the few that don't (expire worthless) will causes losses that wipe out all your gains.” That has not been my experience whatsoever. In fact, if you only sell puts on stocks that you would not mind owning (which should always be the case), there is an excellent chance that you will come out ahead even if the put option is called at or prior to expiration.

I just reviewed my records and found the following: of the roughly 150 put options that I traded since 01/01/16, only 12 did not have a full, positive outcome at expiration date**. And, of those, I had the shares “put” to me on 7 of them, and I “bought” my way out on the other 5. On the 7 blocks of shares put to me, I eventually made money on three of them and had a small loss on three, totaling a mere $1,300 with one still pending. So, in summary, gross gain of $38,100 less gross loss of $1,300 = net gain of $36,800.

I don't think Bob W. has much experience at all in trading options, or he has not been paying attention to your guidance (or that of Stansberry Research). Remember Bob… do not sell uncovered puts on any stock that you would not mind owning. Thx, RJL ** that is a success rate in excess of 90%, with an average gain of about $250. You have to be willing to “work it.”

– Dick L.

Bravo Jeff – Bob W has got it all wrong. Maybe a mirror would be more useful to him than a high quality research backed newsletter written by a real hands on pro. I use a lot of your ideas (although not always as you suggest) and most come to fruition. Keep up the good work.

– Roy C.

J, your reply to Bob about why you continue with the newsletter business to maintain your trading EDGE was superb.

– David E.

Hello Jeff, I enjoyed reading both the positive and the 'long' negative feedback you shared just. I'm in your corner. I'm a small investor but maybe someday I can be bigger. Keep up what you're doing. I'm a fan.

– Jimmy N.

Hi I loved your work at Stansberry and was greatly disappointed when you vanished into the ether. Never forgot you and wondered where you went so I took the time to look for you, and happily found you. Look forward to reading your work again. Thank you for all you have done and will continue to do. Accountability is not a fashionable concept anymore, just transfer blame and whine poor me. Alas, covfefe. Godspeed and keep up the good work.

– P. W.

Followed from previous publisher, where Jeff's training videos started me, to now where he has shown with his experience, humbleness and honest work ethics to be among the best market analysts. He has given me timely opportunities to profit. He gives us daily “in's and out's” and the behind the scenes of the market. Jeff can be trusted to give us his best. A thankful subscriber.

– Harvey Ken H.