A whirlwind of uncertainty swept over the equity, commodity, and currency markets this week, leaving investors speechless while handsomely rewarding volatility traders. Wall Street was hit hard on Tuesday and Wednesday, as fears of a nuclear-crisis in Japan sent investors running for the hills. Investor uncertainty was made apparent following a broad based sell-off in equities across the globe, with traditional safe havens such as gold and the U.S. dollar sinking lower as well. Domestic equities immediately rebounded on Thursday, as a solid fourth-quarter profit coupled with an optimistic outlook from FedEx to ease investor worries over the heavily impacted transportation sector and the economy as a whole. Volatile oil prices are still dampening growth forecasts, and crude settled back above $100 on Thursday.
Uncertainty is still the major theme in the markets and investors should be cautious of buying up securities after a major market sell-off, as often times it could be the beginning of a longer-than-expected correction. Today is also Quadruple Witching, which makes some investors more worried than they really ought to be. Quadruple witching occurs on the third Friday of March, June, September, and December, during which stock options, index options, index futures and single stock futures all simultaneously expire. There is no real cause for concern, and while volatility can magnify market movement, unless there is a real cause for concern, quadruple witching day is nothing too out of the ordinary.
Technical View: SPDR S&P 500 Fund (SPY)
Consider the chart below. SPY, which tracks the S&P 500 Index, bottomed in March of 2009, and since then the index has been relentlessly marching higher. In fact, the last major correction was from May to July in 2010, during which SPY has a correction (decline) of about 16%, shedding around $20 a share. Since then the market has been in a fairly strong uptrend, refusing to trade below its 50-day moving average (blue line) from September 2nd (2010) until March 14th of this week [see Closer Look At S&P 500 ETF Options].
During this time period, the SPY has traded above its 200-day moving average (yellow line) almost continuously, and only briefly during November of 2010 did it slip below its 20-day moving average (green line). Looking at the chart below it’s quite clear that SPY will need to quickly build support at or around current level, otherwise it will drift towards its 200-day moving average as it has in the past, following closes below its 50-day moving average. Also, the 20 and 50 day averages are close to crossing, which would put the 50-day average on top, thus confirming the development of an ongoing correction. If support does not hold above the $125 level, then SPY will likely sink towards its 200-day average near the $120 mark. Investors should monitor the fund as it attempts to regain its footing and close above $130 a share, which would put it right over the pivotal 20 and 50 day moving averages as well.
Technical View: iPath S&P 500 VIX Short-Term Futures ETN (VXX)
Volatility has been remarkable this week; political instability in the Middle East region and the recent earthquake have put tremendous pressure on policy makers and investors alike. VXX, which offers exposure to a daily rolling long position in the first and second month VIX futures contracts, is up 21% for the month of March so far. VXX has been falling lower and lower since inception given the nature of the underlying index [see Guide To Volatility ETFs]. Looking at the chart below, it’s apparent that the last significant spike in volatility occurred during the S&P 500′s last correction (May-July) as mentioned above. Looking back to May of 2010, the VXX was able to advance towards it 200-day moving average, after successfully closing above its 20 and 50 day moving averages.
If we take a closer look at the daily VXX chart above, you can see that the fund has recently closed above its 20 and 50-day moving averages. Also, it appears as though the 20-day moving average has crossed above the 50-day moving average, suggesting that if volatility does not cool off, VXX will likely drift higher. The next technical target for VXX is its 200-day moving average, which comes in at around $63. While it’s unlikely for VXX to hit $60 a share anytime soon, the fund could easily hit the $40 mark if investor’s worries aren’t subdued in the very near future. Until VXX trades below its 20 and 50 day moving averages (near $30 a share), its reasonable to assume for volatility to remain at or exceed current levels [see Nuclear ETF Meltdown: Four Funds Rocked By The Japanese Quake].
As always, investors of all experience levels are advised to use stop-loss orders and practice disciplined profit taking techniques.
Disclosure: No positions at time of writing.