Top Advisors Corner

At the Edge of Chaos: Options, Bitcoin & SPX – What's the Connection?

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The stock market has been increasingly volatile of late. But, until proven otherwise, we are witnessing a rotation, not a full market correction. Of course, this scenario could change at any time. Certainly, the biggest problem for stocks right now is that of finding new leadership. However, aside from the crash in tech stocks and the lack of new leadership emerging, there may be more to the stock market's troubles than meets the eye – and much of the recent selling may be related to the recent crash in Bitcoin (BTCUSD) and related margin calls.

It's clear that Bitcoin and the related crypto universe is playing a significant role in the ebb and flow of money in the financial markets these days. And while this isn't the place nor the time to discuss the pros and cons of cryptocurrencies, it's worth noting that, since 2019, major market bottoms, pauses in rallies and the general trend (if not necessarily the intensity of the moves) of both BTC (upper candlestick line, upper panel) and the S&P 500 (SPX, lower linear line, upper panel) have had a clear and still present correlation. This suggests an emerging, albeit difficult to sort out, intermarket relationship.

So now that BTC is testing its 200-day moving average as SPX gyrates in an uncomfortable trading range, it will be interesting to see what happens next. Specifically, BTC is way oversold, with RSI hovering near 30 as it tests its long-term uptrend. These types of technical readings at major turning points for BTC in the past have marked preludes to significant rallies. So, the question is, what will happen to SPX if BTC is able to rebound and embark on a new rally?

At the moment, Accumulation Distribution (ADI) on BTC is ticking up, but On Balance Volume (OBV) is still weak. ROC is also trying to find a bottom. All of this adds up to the pause in BTC being due to short covering. However, if the short covering turns into real buying (as it did during similar episodes in 2019 and 2020), the odds would favor yet another rally in the cryptocurrency.

It is also interesting that, as BTC has crashed, options volatility near key strike prices for the SPDR S&P 500 ETF (SPY) have been equally volatile. Moreover, the presence of these phenomena, combined with the reversal of several key investment themes that have been prominent over the last few months, have increased the market's volatility of late, suggesting a connection between money flows in all these different asset classes.

In other words, it seems that margin calls in BTC may have at least contributed to the selling in leading stocks, and that hedging and jockeying for position in the options market are all par for the course as algos try to manage risk. Thus, it is plausible that, if things straighten out in BTC, we may see a more orderly stock market – i.e. a resumption of the Fed QE fueled rally in stocks.

How can you tell whether the market is in a rotation or a correction? Find out here on my latest Your Daily Five video.

Options Suggest Market Indecision and Market Rotation Not Finished

Last week, I noted that the presence of a large number of "amazing price charts and bullish directional movement in the options of a good number of stocks outside of the mainstream" and decided to "stick my neck out and suggest" that we were seeing "a rotation out of the larger stocks and into smaller and mid-cap niche stocks."

I also noted that I was "still cautious, because options expiration data from the week ending on 5/14/21" suggested "that the 415-420 strike price areas for SPY" still held the key for the market. All of which meant that "if put buyers and stock sellers [took] over again, we could see an acceleration of the selling." Finally, I added that "a sustained and well-supported break above 420 on SPY is likely to lead to higher prices. Meanwhile, a failure at 420 and a break below 415 will likely lead to resumption of the down trend."

In fact, what we saw on the week that ended on 5/21 was more of the same, with SPY ending the week just below 415; it failed to take out the 420 area convincingly while breaking down to the 406 area temporarily. Moreover, as has been the case of late, by week's end, the put buyers again overwhelmed the call buyers at 415, leaving SPY to close at an indecisive 414.94. This type of action suggests that put buyers forced market makers, who sold them the puts, to sell stock index futures and stocks in order to hedge against losses. And, on a cautionary note, the Monday May 24 weekly SPY expirations could be more of the same, as put buyers ended the week well ahead of call buyers.

Incidentally, to learn more about how options may make sense for you, check out my recent presentations: "How to Let Your Stock Charts Lead You to Great Covered Calls" and "Five Things to Know About Covered Calls" on StockCharts TV.

And, if you want more in-depth options analysis that you can put to use in your daily trading, you can catch me live and in-person at The Money Show in Orlando in June. Register here.

Valvoline: Greasing the Skids for New Up Leg

I recommended shares of Valvoline in mid-April when the price was near $27. Since then, the stock has gone up nearly 20%. Moreover, it has shown a good deal of relative strength during a very volatile market period, which suggests that the stock is likely to have some upside left.

Best known for its motor oil, VVV is actually expanding its revenue and earnings base by growing the number of Valvoline Instant Oil changing centers. And the strategy is working.

In fact, the company recently announced a restructuring of its business into a service-oriented division built around its oil-changing centers and its traditional global motor oil and lubricant business. The company's most recent earnings call featured beats of revenues and earnings, as well as delivering a positive outlook based on growing revenues and earnings from its oil-changing centers, which they also recently expanded by the purchase of more oil-changing centers. Altogether, the company expects 18 to 20% sales growth in the current fiscal year.

The stock is a bit overbought now, but is not showing signs of being sold aggressively. In fact, Accumulation Distribution (ADI) and On Balance Volume (OBV) suggest money is moving in as the stock attempts a breakout above the $33 level. There is good support near $31 which can be used to enter the stock on any dips.

For more stocks and options with huge upside potential, check out a FREE trial here. I own shares in VVV as of this writing.

NYAD Recovers After Midweek Rout

The New York Stock Exchange Advance Decline line (NYAD) remains in a volatile consolidation pattern, but the uptrend has not been broken yet.

This is because, as long as NYAD continues to make new highs, remains above its 50- and 200-day moving averages and its corresponding RSI reading remains above 50, the trend remains up. This combined set of observations has been extremely reliable since 2016 and shows no signs of becoming unreliable as of this writing.

The story is slightly different in the Nasdaq 100 index (NDX), which ended the week just below its 50-day moving average. This is very disappointing as the index failed to fully capitalize on the oversold reading of 30 RSI on the prior week. Still, NDX is still trading above the 13,000 area and there is a potential W bottom in place if NDX can move higher without a retest of the recent lows.

The S&P 500 (SPX) showed a bit of resilience during the recent selloff, as it held at its 50-day moving average and the Accumulation Distribution (ADI) and On Balance Volume (OBV) indicators did not break down. The index remains above its 20-, 50- and 200-day moving averages.

Good news! I've made my NYAD-Complexity, Chaos chart (featured on my YD5 videos) and a few other favorites public. You can find them here.


Joe Duarte

In The Money Options


Joe Duarte is a former money manager, an active trader and a widely recognized independent stock market analyst since 1987. He is author of eight investment books, including the best selling Trading Options for Dummies, rated a TOP Options Book for 2018 by Benzinga.com and now in its third edition, plus The Everything Investing in Your 20s and 30s Book and six other trading books.

The Everything Investing in Your 20s and 30s Book is available at Amazon and Barnes and Noble. It has also been recommended as a Washington Post Color of Money Book of the Month.

To receive Joe's exclusive stock, option and ETF recommendations, in your mailbox every week visit https://joeduarteinthemoneyoptions.com/secure/order_email.asp.

Joe Duarte
About the author: is a former money manager, an active trader and a widely recognized independent stock market analyst going back to 1987. His books include the best selling Trading Options for Dummies, a TOP Options Book for 2018, 2019, and 2020 by Benzinga.com, Trading Review.Net 2020 and Market Timing for Dummies. His latest best-selling book, The Everything Investing Guide in your 20's & 30's, is a Washington Post Color of Money Book of the Month. To receive Joe’s exclusive stock, option and ETF recommendations in your mailbox every week, visit the Joe Duarte In The Money Options website. Learn More
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