Chart Advisor: Traders Undeterred


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Friday, 21st January, 2022

1/ Option traders remain calm as indexes fall sharply

2/ Bearish signals not here yet  

3Are airlines more like banks?     

4/ The bottom line

1/ Option Traders Remain Calm as Indexes Fall Sharply    

Stock indexes continued a steep decline begun earlier this week, but option traders were comparatively sanguine. Though the S&P 500 index (SPX) hit new lows this week, the CBOE Volatility Index (VIX) failed to break a new high. 

The chart below compares the price action of the VIX with the stock benchmark index by inverting SPX and showing it underneath VIX candles. Because the VIX is inversely correlated with SPX, it often moves in the opposite direction. For the purposes of comparison, the inverted SPX looks more similar to the VIX price action, except for the way the two indexes diverge when it comes to their breakout. 

Note that the SPX candles (shown in grey and black), clearly broke out above recent highs this week on the chart. That corresponds to the surprising new lows the index hit. Meanwhile, the VIX has yet to do so. When investors are panicked the VIX tends to anticipate the move, so a comparison chart such as the one below should show the VIX making new highs.  

The fact that the VIX has yet to notch new highs implies that traders aren’t highly worried about the unknown. Their concern for now has more to do with what they know for certain: the Fed will raise interest rates soon.

Source: TradingView

2/ Bearish Signals Have Not Arrived…Yet 

Since the indexes pulled back this week, some chart watchers may be eager to look for any technical indication of a bear market, or an indication of a downward trend. Dow Theory, a simple set of rules that attempt to catalog the market’s trend, might be useful for that task. 

The chart below compares the Dow Jones Industrial Average (DJI) with the Dow Jones Transportation Average (DJT). Dow Theory states that if both indexes break below a recent, important low price, then it confirms that the market is in a downtrend. DJI has indeed broken below its trend line, but DJI has not. This implies that the markets have not yet turned bearish, and there may be a chance for a rebound next week. 

Source: TradingView

3/ Are Airlines More Like Banks?

When the airline industry applied for government loans last year as the pandemic broke, they made some information apparent that hadn’t been publicly available before: the financials for the part of their business that handles frequent flyer miles. Turns out it was a big reveal because it led many people to speculate that airlines were managing their business more like financial institutions. 

The chart below certainly supports that argument. It compares the price action of Delta Air Lines (DAL) with State Street’s financial sector ETF (XLF). The technical indicator below the chart (shown in red) is a correlation coefficient between the two using a one-year period.  

It is eye-opening to observe just how correlated these two instruments have been over the past decade or more. While there have been some periods of low correlation, most of the price action shows a strongly positive correlation. This helps explain how airlines have managed to get through the pandemic even as well as they have. 

Source: TradingView

4/ The Bottom Line 

Stocks slid to end the week significantly lower, but the volatility index didn’t register a sense of panic among traders. The Dow Theory signal for a bear market hasn’t shown up just yet, so there may still be a chance for indexes to rebound. 

Originally posted on 21th January, 2022

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