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Volatility Rises On Quad Witching Day

A bad week for the majority of the world’s indices following on from what the market is perceiving to be a Hawkish FOMC meeting. We also have countries like the UK extending lockdown measures having been a leading light of hope in the fight against covid-19.

Market Wrap

When you hear market analysts talking about Quadruple Witching, they are referring to a date on which stock index futures, stock index options, stock options, and single stock futures expire simultaneously. These high-volume days often create a difficult market to trade in as the money managers attempt to manage their position and generally settle each contract. These contracts and options will all settle or rollover at 4 pm EST.

The Volatility Index (VIX) is also known as a market fear gauge. The Cboe Volatility Index (VIX) is a real-time index that represents the market's expectations for the relative strength with the volatility being how fast prices change. The markets can form ranges and the movement between these ranges can be small, so volatility is low and the VIX comes down in price. However, as a range expands with volume, the VIX numerically represents this and the VIX rises. Of late the VIX has been range-bound between 16-18, and today it is trading at a 3-week high around 19.50. In comparison during the market crash in 2020, the VIX was up above 80.00 and the ranges during that time on the Nasdaq were so large that we were limit down several times a day.

The US dollar is still rising, so we may not get a swift return to the $90 level and the pre-FOMC levels. I am glad that I have been cautious in my entries as if this is the start of the new trend, I don’t want to be consistently shorting something that never comes back down. The reality could still be that this is a highly emotional trade rather than a fundamental change. The Fed has raised interest rates, but only on the Overnight Excess Reserves and that is to try and help in the Repo markets. They have signaled that 2023 could be the year for a couple of rate hikes, but a lot can happen between now and then and repricing for that outcome seems a bit early. But we must trade what we see.

The US dollar index has deeply retraced the move from 31st March to 25th May and is finding some resistance from daily balance areas around the $92.00-92.50 range. There has so far been no sign of a bearish reversal and if the price were to keep trading higher and above $93.50 we would have to seriously consider looking for some long trades.

WTI crude has done a good job at finding support and is currently up 0.82% for the day as the US dollar stalls. Oil is a tight market and the supply increases from OPEC+ are being managed well, so any sign of increasing demand sets the bulls to work, and the price of energy rises.

The EURGBP short trade that I was looking for today hasn’t materialized as the US dollar ripped higher, the GBPUSD and EURUSD both fell, and the single currency obviously had a better relative strength than the pound and the EURGBP continued to rise into the old range. Therefore, having a fundamental idea and technical reason is great but making sure you get some sort of trigger confirmation to execute is ideal, rather than just expecting the market to do what you want. Today German PPI doing better than expected and the UK retail sales data was enough to tip the Euro higher. A move on the H4 that takes out a previous candle's low will still be a valid entry, we just may have to wait until next week sometime, or if the price action takes out a swing high, then this trade becomes invalidated.

Yesterday I mentioned that the Dow Jones Industrial Average and the Dow Jones Transportation Index were signaling a bear move. Today we have printed a lower price on the DJIA and have taken the swing low that I had as my confirming signal for lower prices to come. It may be foolish to call a top in the indices, but you must trade what you see and currently, the world's indices are generally struggling to make higher highs. The DJIA is down -3.16% for the week and the board is generally red for the week. Maybe it wasn’t selling in May and go away but sell in June.