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Quadruple Witching Week and Volatility

Options Expiration Week


This week is options expiration week. In fact, on 6/19/20 stock options, index options, index futures, and single stock/ETF futures all expire at the same time. This event is typically referred to as Quadruple Witching. Other Quadruple Witching months occur during September, December, and March. Historically, December’s and March’s option expiration weekly performances tend to have a clearly bullish bias. This is mixed for the June and the September expiration weeks. Nonetheless, the rollover of the June futures contracts to the September forward months this coming Friday can led to higher than normal market whipsaws and reversals resulting in the potential for an increased in market volatility.


Perception or Reality?


Many believe volatility is synonymous with increased market risk. This is not entirely true because volatility is not necessarily a good thing or a bad thing. It depends on the type of market volatility and whether you are a trader, an investor, or something in between. Some degree of volatility is necessary for an efficient and healthy market. After all, to make money in the financial markets, there must be price movements. It would be difficult to make any profit or incur any loss if the market or stock trades is trading at a constant price or at zero volatility. Some volatility is good because it gives traders and investors opportunities to buy and to sell. Market volatility can also bring about increased opportunities to profit at a shorter time frame, but at the same time it can also lead to higher risks.


Speed of Change in the Prices or Volatility


Although price movements are constant in the financial markets, the key factor is how rapidly prices are moving and most important, the speed of change in the prices or more commonly referred to as volatility. One of the most popular and best measure of the U.S. large-cap stock market’s volatility remains the S&P 500 Volatility Index (VIX). Other volatility indexes are DJIA Volatility Index (VXD), NASDAQ Volatility Index (VXN), S&P 100 Volatility Index (VXO), and Russell 2000 Volatility Index (RVX). Enclosed below is a technical update of VIX and the SPX Index (SPX).


Correlation between VIX Index (33.67) and the SPX Index (3,124.74)


The fear indicator has declined from its Mar 2020 high (85.47) to a recent low of 23.54 (6/5/20). This has resulted in SPX rallying from 2,191.86 (3/23/20) to 3,233.13 (6/8/20). The ability of VIX to rebound from its 200-day ma (25.03) coupled with the 6/11/20 gap up has led to a VIX rally toward 44.44 (6/15/20). Just as VIX threatened to explode higher it quickly faded near key initial resistance at 47.18-47.77 or the 38.2% retracement from the Mar-Jun 2020 decline and the 4/21/20 high.


The June 2020 sharp rise in market volatility also triggered a bearish island reversal pattern in SPX on 6/11/20. The ability of VIX to convincing breakout above 47-48 and SPX violating key initial support at 2,835-2,927 (38.2% retracement from Mar-Jun 2020 rally and the 50-day ma) would warn of the next VIX rally to 54.5 (50% retracement). This suggests SPX can decline to 2,712.5 (50% retracement). A breakout in VIX above 54.5 warns of a rally to 61-62 (61.8% retracement) and SPX possibly falling to as low as 2,590 (61.8% retracement).


On the other hand, if VIX fills its 6/11/20 gap up (29-29.5) this is technically constructive as this can lead to SPX filling its recent 6/11/20 gap down at 3,123.5-3,181.5. VIX trading decisively below 23.5-25 (6/5/20 low and 200-day ma) is technically important as this action hints of VIX falling toward major support coinciding with the extension of the Dec 2018 downtrend breakout (VIX at 14.5). This suggests SPX can once again challenge its 2/19/20 all-time high of 3,393.52.



Source: Courtesy of StockCharts.com

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