On the Charts

Hey There Income Hunters,

 

I hope you’re enjoying Easter Weekend!

 

Is it just me, or do things seem a little bit brighter this year as we head into the Best Quarter Ever?

 

Money and vaccines are flowing, and the next several months should be very memorable — in a good way, this time around.

 

Of course, my work never ends, and as I looked through the charts yesterday I was keeping an out for cracks in the foundation …

 

What I mean by that is, price is just one part of the story. I wanted to see if this is a trend that can last …

 

In order to get the whole picture, I need to include volatility — and even volume — to confirm there is power behind the trend.

 

So, I wanted to really dissect the markets and see if these trends are for real.

 

Powerful combinations:

 

        • Prices rise, volumes rises, volatility declines: Green light to buy
        • Prices decline, volumes rises, volatility rises: Green light to sell

In other words, both higher volume and inverse volatility confirm the trend’s strength


So, to be sure Thursday’s breakout rally, we want to see volumes rise and volatility decline …


Nasdaq-100 (Ticker: NDX)


Now, since tech has been paired with interest rates the past couple of months, I thought this would be a good time to get the real story from the NDX itself.


The truth is, higher rates may impact a handful of the big names negatively … However, when you are trading the index, you have to let the market tell you the real story. 


Trading the index cuts out the noise and the recent trends in the NDX and the NDX volatility index (Ticker: VXN) tells a great story…


Check it out: The VXN has been plummeting while NDX was trading off. That is a very powerful “divergence” from the normal negative correlation between price and volatility …

 


The chart above shows you the power of options … 


And here’s why …


Volatility is a major factor in the price of an option… Great option traders, like Option Pit Founder and CEO Mark Sebastian, always account for volatility because it is often a leading indicator of market direction.


Now, the last piece of the price/volatility/volume risk management model is … volume. And on the day NDX began a new distribution higher, volume was up 11% …

 

 

Now let’s take a look at another critically important market to monitor since it was the best performer of the first quarter (+30%). I’m talking about energy and more specifically, oil …


 Crude Oil


Expectations for oil increases as the prices have trended higher … 


That shows the uncertainty surrounding future performance for oil as the global economy moves towards green energy.


But the market itself may be telling a different story, as you will see in the numbers…


In March, volatility spiked higher (+68%) as prices corrected 16% after reaching a March 8 high of $68. A battle between buyers and sellers ensued between $57-$61.5 into the end of the first quarter.


On Thursday, the first day of Q2, a report was released showing an increase in production — and the price plunged over 3%… however, once again buyers came in…


Q2 began with Oil closing up 3.9% while the CBOE Crude Oil Volatility Index (Ticker: OVX) closed down 12%.


It may be deja vu all over again …


In 2007, went through a similar correction while a similar spike in volatility ignited a major move higher. See the red circle in the chart below… 

 

 

In December 2020, OVX also spiked higher and collapsed back to the lows as oil soared 45% higher in a 25% move from $61 to $75: 

 

 

We will know just how much strength there is in the months ahead. It’s possible we’ll see oil go above $75 — $100 could be in the cards by the end of the year.


Bring It Home


Don’t underestimate the potential for outsized moves in the months ahead. The signals we are getting now show real underlying strength in the markets.


Plus, the money will keep coming …


The real key will continue to be interest rates and the Fed’s reaction to accelerating growth and inflation.


Power Income will continue to monitor the Fed and dissect the market factors for clues on where the real money is flowing.


Enjoy your family this weekend and as always …


Live and Trade with Passion My Friends,

 

Griff

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