foxex: Volatility Signal

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Chart Advisor | Focus on the Price

By Gordon Scott, CMT

Tuesday, August 11, 2020 Headlines

1. Nasdaq drops sharply as S&P 500 shifts lower

2. Precious metals may pause their strong uptrend

3. Twitter's overhead resistance

Market Moves

Since the beginning of its influence on the markets, the COVID-19 pandemic has been reflected in the risk premium of option prices. Even as early as late December the CBOE Volatility Index (VIX) showed a slightly elevated price level. That elevated level still remains, even though the S&P 500 index (SPX) has reached its pre-pandemic price levels. However, one characteristic of the price action is quite different when comparing the charts of January and July. The chart below shows how the VIX trended upward during the first part of the year, but is trending lower nowadays.

Oscillating price studies, such as the Relative Strength Index (RSI) shown in the lower panel of the chart, confirm the sharp change in move. With no divergence evident in these moves, this study confirms that investors are indeed becoming more complacent with the current level of pricing for the broad market index.

However, one important difference still remains. The price level of the VIX during January was between 10 and 20, and closer to 15 most of the time. Nowadays, the level of the VIX remains above 20. The extra measure of risk pricing reflects the fact that option sellers know their expectations could rapidly change. This means that option sellers may worry about assets that have had a quick run higher recently, which could indicate that an impending pullback could come along any day.

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Precious Metals May Pause Their Strong Uptrend

State Street's Gold Index ETF (GLD) has tracked the price of gold increasing in price by more than twenty percent in the past month alone. Other precious metals tracked by the Aberdeen Standard Palladium Trust (PALL), the GraniteShares Platinum Trust (PLTM), and iShares' Silver Trust (SLV), have shown even more pronounced moves during that period of time.

However, the Commodity Channel Index indicator (see lower panel in the chart below), shows a subtle bearish divergence in its movement. This suggests that, at least in the short term, the price of gold may hit some resistance to moving higher. This could spill over to the others as well. Such a move would be consistent with sentiment captured in the persistently elevated price of the VIX mentioned above.

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Twitter's Overhead Resistance

If the market is likely to fall victim to signs of resistance in the days ahead, one stock in particular is likely to have a particularly tough time going higher: Twitter (TWTR). The chart below seems to indicate that since last year when TWTR shares fell below 37.50, the stock has had difficulty surmounting that level ever since. In the lower panel of the chart, the Directional Movement Index indicator details how the stock price weakens as it approaches this level.

Experienced chart watchers know that a prolonged resistance zone indicates that institutional funds holding the stock are playing a waiting game, hoping that they can exit the stock once it hits a certain price level. This is intended to limit losses to their funds, while foregoing the opportunity for future gains. It is a way of quietly exiting the party, so to speak. It is possible that investors have diminished expectations for the platform, which has struggled to find an attractive monetization model despite adding new users consistently. In the end, this chart seems to indicate that the social media platform may be suffering a far more serious fundamental problem than user count: its relevance.

The Bottom Line

Volatility pricing for stocks in the S&P 500 continues to rest at subtly elevated levels, even though the VIX is trending lower. Stocks and commodities may experience a pullback to a certain degree over the next couple of weeks. This could mean precious metals might not continue their charge forward. Some stocks that have already shown weakness around resistance may be in for a rough downward trend.