Last week Digest Issue 26 " The 200-Day Snag [Charts]" focused on the 200-day Moving Average after the S&P 500 Index closed below this important level the previous Friday. Several indicators were flashing caution lights. However, supported by the big cap NASDAQ stocks that apparently didn't see the caution signs, the S&P 500 Index advanced every day last week. The Market Review below has more along with an Invesco QQQ ETF call spread idea to consider.

S&P 500 Index (SPX) 3130.01 gained 120.96 points or +4.02% last week after bouncing smartly off the 200-day Moving Average. The Island Top Reversal formed by the June 10 breakaway gap remains the active pattern. However, should it continue advancing into and close the open gap, thereby overcoming resistance, expect the pattern to lose its influence.

CBOE Volatility Index® (VIX) 27.68 declined 7.05 points or -20.30% 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 6.93 points or -23.93%, ending at 22.03%.

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. Based upon regression to the mean theory, its arrival near 20% suggests the SPX will likely continue higher.

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 12 trading days until July expiration, the day-weighted premium between July and August allocated 48% to July and 52% to August for a premium of 7.10% moving into the yellow caution zone; much improved since June 26 at -.87% 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.

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.

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.

Other Indicators

Since the SPX is capitalization-weighted and about 24% are the same big cap tech stocks included the Invesco QQQ ETF that broke out last week. Much of last week's S&P 500 Index advance came from momentum big-cap stocks in both. However, market breadth continues narrowing and will eventually make a difference.

Market breath measured by our preferred McClellan Summation Indicator continued lower last week declining another 88.58 points to end at 737.62. Declining breadth reflects more and more market support comes from fewer and fewer stocks. Any further declines by this reliable leading indicator should be a reason to maintain some hedges.

As noted in Digest Issue 25 "The Gaps [Charts]" the Invesco QQQ ETF (QQQ) made the difference then and did so again last week, but this time to the upside as it broke out taking the SPX with it.

Invesco QQQ ETF (QQQ), called "the decider," gained 11.97 points or +4.98% last week ending at 252.19 after breaking out to the upside creating new upward sloping trendline.

While momentum enthusiasts ignore various caution signs remember the Wall Street adage, "Don't fight the tape."

With that thought in mind, consider this long call spread. First the option details.

With a current Historical Volatility of 22.72 and 19.98 using the Parkinson's range method, the Implied Volatility Index Mean is 24.63 at .19 of the 52-week range having regressed back to the mean. The implied volatility/historical volatility ratio using the range method is 1.23 so option prices are reasonable relative to the recent movement of the ETF.

Friday’s option volume was 1,025,337 contracts with a 5-day average of 819,720 contracts with reasonable bid/ask spreads and plenty of liquidity.

Using the ask price for the buy and mid for the sell, Friday's call spread debit was 1.80, about 36% of the distance between the strike prices. In the event, it opens considerably higher, adjust the strike prices accordingly. Use a close back below the last pivot at 240 as the SU (stop/unwind).

Strategy

For the S&P 500 Index, the last week in June exceeded expectations as it advanced up to overhead resistance at the breakaway gap that formed the Island Top Reversal pattern. However, the Invesco QQQ ETF stole the limelight breaking out the upside and as the decider, it gets the nod.

While maintaining some hedges on specific stocks that may be at risk until market breadth improves, consider adding a QQQ call spread now that option prices based upon implied volatility have returned to the 52-week mean.

Summary

The Invesco QQQ ETF quickly reversed last week and then broke out to the upside taking the S&P 500 Index with it as it bounced off support at the 200-day Moving Average. Contrary to some select indicators such as market breadth, momentum bulls ignored the warnings and charged ahead. Since the Invesco QQQ ETF made a new upward sloping trendline consider adding long call spreads.