In many of our nightly updates we talk about the inverse relationship between the VXX, an ETF proxy for the Volatility Index and the market proxy SPY. A divergent MACD up or down in either frequently coincide with the opposite divergence in the other. As you can see from this overlay chart, the two ticker do indeed inverse each other.
The hourly chart of SPY is overlaid with the hourly chart of VXX, notice the double top in VXX at the same time as the double bottom in SPY
VXX had an MACD divergence to upside on August 9, 2018 at 3pm, out of the money options rose sharply before end of the day and this continued into next morning. This occurred on lower time frames so the move would be short term. SPY showed the opposite pattern as expected with OTM SPY 284 puts went to from 7c to $1.22.
A clearly defined double top with MACD divergence on VXX on hourly charts occurred over 3 days through to 8/2/18. As we know the SPY had the opposite divergence and gave us an opportunity to trade OTM options. The trade length is determined by the length of the divergence pattern, 3 days.
After a volatile day in the market, Dale examines the volatility surge on Monday that lapsed by midday. At that time the MACD was clearing undermining the price on 10 and 15 min time frames and SPY was showing the opposite divergence, giving foundation to a tradeable event. Late in the day SPY out of the money calls under a dime, expiring Monday June 25, 2018 gained 20 -30 times their value.
Recall what I explained in Tuesday’s class about the sectors ETF’s such as RETL?? Note how RETL, the 3X Retail stock index, with stocks such as M, KSS, TGT & others is up another 4% today while the SPY is almost flat & Q’s Down! AMZN is down, so it is not part of the RETL move.
Dales nightly update the action on the VXX on longer and short term time frames were discussed. Action looks to be heading to retest the lows and would indicate more upside on the SPY. During the day VXX did move back up short term.
In this video from Dales nightly update to subscribers, he discusses the VXX downside divergence later in the trading day that presaged the move up on Monday. The downside divergence in the semiconductor index and associated stocks was also covered.
Dale discusses the continued downside move on the VXX and the MACD upside divergence clearly stalled the trend, but with no divergence in place, there are no actionable moves until later in the day when a downside divergence appeared. Nimble traders could have grabbed some VXX puts for under a dime.
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