Last week the US stock market was affected by the debt limit issue and negative (worse-than-expected) macroeconomic statistics. As a result, the futures of S&P500 fell below the support at 1300 and tested the 200-day MA level. The debt ceiling problem is likely to be resolved, that is why S&P500 is expected to continue its rally. The current levels of support are the following: the 22-day MA, which coincides with June’s max volume cluster, 1250 (an option barrier). The possible levels of resistance are: the option barriers located at 1300, 1350 and 1400, the 50-day MA (the current value is 1306), 1328 (July’s max volume cluster) and 1373.5 (the high of the year).
As the result of a possible US default both the actual and expected volatility of the futures increased: the weekly range reached 61.75pts. The highest level of volatility was seen on Wednesday (30.5pts). Tuesday was the day of the lowest volatility (14.25pts). The VIX indicator grew throughout the week and on Friday reached the high of 25.94pts, which means the expected volatility is currently a little bit too high.
This week’s calendar:
It should be noted that the key moment determining the market behavior is the solution of the debt limit problem. It is not recommended to buy volatility at this point. Selling volatility through short straddles and strangles or long condors and butterflies is not advisable as well because the volatility may sharply decline after the debt limit problem is solved. Right now the most appropriate way to trade volatility is by utilizing calendar spreads or to abstain from trading for a couple of days. If the volatility of S&P500 declines, the trading tactics of buying volatility will become appropriate once again.
Provided by the Department of Options,
