In Like a Lamb, Out Like a Lion

The S&P500 closed today at 1997.5 bringing us back to now the 12th day of the S&P 2000 tango. The 1996 level which I pointed out was the critical pivot for this dance was breached again today bringing us less than 3 points from the valuable 2000 level for the index.

Reaching 2000 tomorrow should be no problem should the indexes go up. The point to watch, however, is 2002.5 to 2004. These are critical points of resistance and many bulls have been trapped above that level since the beginning of September.

Let's take a look at the option's skew for $SPY:

Looking at tomorrow's expiration (white curve), we see a nice smirk beckoning us towards this week's close. Traders are seeing one of two possibilities for tomorrow. Puts having outsold calls today nearly 2:1, a majority of traders are seeing downside action with a possibility of a free fall past the current lowest point of support of 1982.5, down to as far as 1970.

Another group is seeing a Hail Mary all the way past 2004. Expect both or none of those scenarios to occur tomorrow. Typically, Friday's see a late day rally around 3:30PM. Also keeping in mind that Fridays are an option expiration day, we also have a tendency to see sideways action to deplete time premiums on contracts.

On the volatility front, we've seen the $VIX range bound between its 50 and 200 day moving averages for the past 3 sessions:

As the S&P has been range bound for the past 12 days, the markets seem unsure of whether to go long into the rally or cash out their positions, which has led to the sideways actions of the past two weeks.

The 10 day realized volatility (white line) has been relatively suppressed since June but has been inching to go up in the past few days. The 30-day forward looking volatility has been flat.

As we all know, volatility is mean reverting. Periods of high volatility dissipate back to low volatility, while periods of low volatility periodically get interrupted with high volatility or as Daniel Davies would say:

“I like this concept of “low volatility, interrupted by occasional periods of high volatility”. I think I will call it volatility."

When volatility will again occur is simply a matter of time but as the old saying goes, "In like a lion, out like a lamb" (and vice versa).

Taking a look at $VXX, or the iPath Short Term Volatility ETF, we've seen lately an upward trending environment in near-term forward-looking market volatility:

The price action has been inching above its moving averages but was slammed down at today's close below its 30-day and with the 60 and 100-day averages acting as support.

Crude Oil futures dipped below the critical $93 support yesterday,which buyers took as an opportunity for bargain-basement prices for contracts.

Prices in crude oil and equity markets are often times inversely related, but not always. If crude oil maintains above $93, look out for a period of market inversion.

As always, good luck tomorrow, and watch for those critical S&P500 levels I pointed out earlier.