Six months… That’s how long this market has been trading within some relatively tight ranges.
But that appears ready to change.
Over the last week, I’ve noticed that the list of stocks that were experiencing their own volatility squeezes was growing, quickly. For those of you unaware, volatility is two things.
- First, and most importantly, “Volatility is a trader’s best friend.” That’s one of my Ten Commandments of Trading. What I mean by that is, by nature, traders are paid when stocks move quickly – which is just another way of saying “get volatile.”
- Second: Volatility is often a catalyst for new trends. In other words, an increase in volatility often serves as the beginning of a new trend in the market, its sectors, or a stock.
For both of those reasons, I’ve been watching the lack of volatility very closely, as it signals we’re getting ready to enter a fast-moving, trend-forging period for the market. Here are three specific volatility situations that are high on my radar.
SPDR S&P Retail ETF (XRT)
My proprietary Bollinger Band Squeeze Filter identified this retail sector ETF as a breakout candidate after months of quiet trading. The current reading of 0.0% indicates that volatility is at a relative low for the year, meaning the shares are ready for a volatility breakout.
The majority of stocks that make up the XRT are trading below their 50-day moving average (MA50), indicating that momentum in the sector is negative and preparing for an acceleration in the trend lower.
XRT is also threatening to break through the round-numbered $60 level. A break below this price will target the move to $56 in short order. I’ve increased exposure to the June put options in anticipation of that drop.
Consumer Discretionary Select Sector SPDR Fund (XLY)
Like the retail sector, the consumer discretionary sector has been teetering on critical support levels while volatility in the XLY shares has shrunk to its lowest readings in the last year. These two factors turn the XLY into a potentially explosive situation.
From a number perspective, 38 of the 61 companies that make up the XLY shares are trading above their respective MA50s. I’m watching this number daily, as a drop below 34 will tip the sector ETF into the bears’ hands.
The sector’s two largest-weighted stocks, Amazon.com, Inc. (AMZN), and Home Depot Inc (HD), are balancing on their respective MA50s today. Those two stocks alone account for about 35% of the ETF’s weight.
OK, let’s finish the volatility trifecta with a bullish candidate.
The GLD shares represent an alternative to physically held gold in an investor’s portfolio. Shares rise and fall at roughly the same rate as spot gold prices.
At a current reading of 0.0%, my Volatility Squeeze filter is tagging GLD shares for a breakout. From a technical perspective, the volatility should lead prices higher, not lower, as the 20-, 50- and 200-day moving averages are all in bullish trends.
The current signal for GLD is almost identical to the signal formed March 9, 2023, just ahead of a seven-trading-day rally that took GLD shares 10% higher.
I’m playing the September calls for a long trade, and I even just opened the June 16 $188 calls for the short-term trade.
May 02 2023