Drop To The IV Baseline

It’s EOY rally season and apparently everyone has been at their best behavior this year as Santa already has delivered in spades. At this point however what I care more about is what lies ahead for us, and given a technical vacuum at all time highs it may be worthwhile to take a look at implied volatility for clues.

Before we go there let’s however take a quick glance at the Zero indicator which yesterday showed us minimal participation accompanied by a lot of whipsaw.

This may be related to today’s congressional impeachment vote, but purely technically speaking a big part of the current advance off the 3069.5 low has been overnight (exception being last Wednesday’s ramp).

Which makes me wonder if we are looking at a bit of distribution here. Seasonally speaking we it may be a tad early for that.

The volume profile charts shows the ES in the process of accumulating a bit more depth but a sudden drop back to 3140 could happen anytime, but most likely in early to mid January.

Realized (i.e. historical) volatility has continued to drop which isn’t overly surprising given that we are in the last full trading week of the year. Things may get a bit more jumpy after the holidays but as most of us won’t be around – who cares?

Now per the title of this post here’s that IV baseline I have been talking about for the past few months now. One the past quarter the 12 and change mark has been when IV started to punch higher.

Most interestingly the frequency of those touches and the resulting IV expansion has increased in frequency in the past month, suggesting that investors/traders are starting to get a bit more jumpy.

Of course on a long term basis we are reverting back to ~2012/2013 levels or perhaps late 2016 levels. A lot has changed since then – for one the introduction of more weekly options expirations (3 for most liquid instruments including the SPX) has made markets a lot more efficient.

But it’s still worth considering how far we’ve come during a decade long bull market and how market psychology has evolved during that time. Just because we are at new ATH doesn’t mean that we can’t push even higher in 2020, especially with an increasingly responsive/dovish Fed at the helm.

Update on the gold campaign – it hasn’t really moved much but it also hasn’t stopped us out. My stop now advances to break/even and I’ll let the market sort it all out.

Fortunately I also suggested a hedging position in the USD/JPY which has been performing phenomenally. With over 2R on the books right now I’m shifting my trail to the last spike low marked at around 1.9R.

Technically speaking we are looking at a possible wall here given the current formation on the daily panel. But what the heck – I’m feeling lucky, especially since the USD was able to revert this strongly after the massive bond purchases the Fed announced last week.