Last Week, Digest Issue 24"Island Top Reversal [Charts]" focused on an unexpected Island Top Reversal pattern by identifying the responsible gaps. Since they remained open at the end of last week, we zoom in and provide some additional details along with comments on the Invesco QQQ ETF, the most likely key to watch this week.

S&P 500 Index (SPX) 3097.74 gained 56.43 points or +1.86% last week. The 200-day Moving Average at 3018.55 continues supporting pullbacks as the trading ranges narrowed on low volume until Friday as futures and options expired, a quarterly event called quadruple witching when trading volume increases due to position adjusting.

This close-up chart shows the Island Top Reversal pattern with open gaps.

EG, marks the first gap made on Friday, June 5 designated as an Exhaustion Gap, one that develops at the end of a price move that has met measuring objectives, near the end of an uptrend. Last week's chart from March 23 low shows a breach of the upward sloping trendline after advancing well beyond the 61.8% Fibonacci ratio retracement thereby satisfying the measuring objective requirements.

The second, BG for Breakaway Gap, occurs at the beginning of a new price move with no closing requirement. The higher to volume on the day the gap formed the less likely it will be closed. On Thursday, June 1, on day of the gap, the combined volume of the 500 companies in the S&P 500 Index totaled 4.1 bn shares– high, but not as high as June 5, the day of the Exhaustion Gap at 4.8 bn shares compared to normal volume since March 23, about 3 bn. Breakaway gaps typically mark the start of significant moves.

Digest Issue 24"Island Top Reversal [Charts]" showed the two gaps creating an Island Top with the measuring objective as the retracement of the minor price move that preceded it, or the entire move from the March 23 low.

This week watch to see if SPX can close above the low made on June 10 at 3186.49, (the right side of the Island), thereby closing the gap labeled Breakaway. If so, "it's back to the drawing board."

CBOE Volatility Index® (VIX)35.12 declined .97 points or -2.69% last week. Our similar IVolatility Implied Volatility Index Mean, IVXM using four at-the-money options for each expiration period along with our proprietary technique that includes the delta and vega of each option, declined.99 points or -3.29%, slightly more, ending at 29.06.

The spike up to 77.15% on Monday, March 16, the day SPX declined 324.89 points, likely marks the top for this market decline.

VIX Futures Premium

This next chart shows as our calculation of Larry McMillan’s day-weighted average between the first and second-month futures contracts as of last Friday.

With 22 trading days until July expiration, the day-weighted premium between July and August allocated 88% to July and 12% to August for a premium of -.12%, slightly better than -3.08% on June 12, but still in the red bear zone.

The premium measures the amount that futures currently trade above or below the cash VIX, (contango or backwardation) until front month futures contract converges with the VIX at the next monthly futures expiration on Wednesday, July 22.

The relationship of the futures curve to the VIX, as measured by the premium, makes a good real-time sentiment indicator based upon actual commitments of large Asset Managers and Leveraged Funds.

For daily updates, follow our end-of-day volume weighted premium version located about halfway down the home page in the Options Data Analysis section on our website.

Strategy

COVID-19 tops a long list of worries including valuation measures, excessive optimism and signs of silly speculation in low priced stocks, offset by an extremely accommodative Federal Reserve managing many relief programs for most if not all sectors of the economy along with unprecedented massive targeted fiscal measures.

As for economic damage from COVID-19:

"About these matters, there is no scientific basis on which to form calculable probability whatsoever." – John Maynard Keynes, The General Theory of Employment, 1937.

Although odds favor an Island Top Reversal pattern, the S&P 500 Index could continue being supported by the mega-cap NASDAQ stocks representing 21% of the index.

Watch the Invesco QQQ ETF (QQQ) 244.24, up 8.36 point of 3.54% last week as it challenges the June 10 high at 247.81. Now also below the upward sloping trendline from the March 23 low, further advances above the previous high will reduce concerns about a double top formation as it resumes trending higher. If so, it could change the outlook for the S&P 500 Index presuming it closes the open Breakaway Gap. However, should QQQ turn lower, failing at the previous high, then expect another important down leg for all indexes.

Since odds still favor the Island Top Reversal, continue opening new hedges with out-of-the-money SPY put spreads and/or collars for individual long stock and ETF positions while keeping an eye on QQQ the likely decider this week.

Summary

Last week, including Friday's quadruple witching with increased trading volume, resistance at the open Breakaway Gap limited S&P 500 Index advances. While a bearish Island Top Reversal pattern remains active, it could be overridden by additional big cap Nasdaq strength, so focus on the QQQ.