After making three new closing highs last week, it was Thursday's 10.68 point advance by the S&P 500 Index that created another new upward sloping trendline shown in the chart below. This week's market review considers the possibility that the time may be right to add some downside protection followed by long call spread ideas for The Technology Select Sector SPDR® Fund (XLK) and iShares MSCI Emerging Markets ETF (EEM)

S&P 500 Index (SPX) 2415.82 advanced 34.09 points or +1.43% for the week as the uptrend from the November 4 low at 2083.79 resumed with a new familiar 20° upward sloping trendline USTL. No longer being called the "Trump" trade by some.

As John Train, author of "The Money Masters" said, "Trends tend to go further and longer than anybody imagines."

CBOE Volatility Index® (VIX) 9.81 declined 2.23 or -18.52% for the week while the comparable IVolatility Implied Volatility Index mean, IVXM now 7.18 declined 1.89 or -20.84%.

VIX Futures Premium

With 17 trading days until the June xpiration, the day-weighted premium between June and July allocated 68% to June and 32% to July for for a premium of 24.87%, well into the bullish green zone, about as normal as it can be during an uptrend.

The premium measures the amount the futures currently trade above or below the cash VIX, (contango or backwardation) until front month future converges with the VIX at expiration.

So following a trend requires a method to determine when it ends. For example, a close below the trendline or 50-day moving average, or Andrews Pitchfork, or Elliott Wave counts, including signals from the options and futures markets like the VIX and VIX Futures premium as well as the CBOE SKEW Index.

Although currently bullish, for early signs that the uptrend may be in trouble, here are two indicators to watch.

ProShares UltraShort S&P 500 (SDS) 12.80 at a 52-week low, with a downward bias due to using futures with an implied volatility index of 17.29 and a historical volatility of 10.78 using the Parkinson's range method, while still very bullish, a close above the 50-day moving average could signal the time has come to consider some hedging. See the chart below.

Here is another. Although correlated to the S&P 500 Index it adds bond market liquidity and default risk concerns to the mix making it an ideal early warning signal for any correction that may be interest rate or liquidity related.

iShares iBoxx $ High Yield Corporate Bond ETF (HYG) 88.57 up.39 points or +.44% for the week.

Watch for a close below the upward sloping trendline, USTL followed by a confirming close below the 50-day moving average.

While it may be tempting to consider opening hedges when the major indexes are near their highs and implied volatility measured by the VIX is near the low, it may be more cost effective to wait until ominous signs begin appearing . Consider buying flood insurance when storm clouds are forming on the horizon and confirmed by the weatherman saying a major storm is on the way. For now the forecast is for bright sunny days.

Accordingly, here are two trend continuation ideas to consider.

The Technology Select Sector SPDR® Fund (XLK) 56.38 up 1.14 or +2.06% for the week, technology makes good sense in a slow growth economy when traditional cyclicals are likely to underperform. The declining dollar also favors this group with earnings momentum and international currency exposure compared to domestic companies making it a top ranked sector. Earnings growth and the US Dollar Index (DX) are important variables for this group.

Although market conditions are bullish a call spread with defined and limited risk offers an opportunity to participate in any further upside with limited risk while partially hedging the loss of time decay and implied volatility.

The current Historical Volatility is 10.70 and 6.80 using the Parkinson's range method, with an Implied Volatility Index Mean of 10.64 down from 12.04 the week before. The 52-week high was 21.97 on January 26 while the low was 9.36 on March 20. The implied volatility/historical volatility ratio using the range method is 1.56 so option prices are moderately high right relative to the recent movement of the ETF. Friday’s option volume was 4,581 contracts with the 5-day average of 8,170 contracts with wide bid/ask spreads reflecting Friday's abnormally low volume.

Using the ask price for the buy and mid for the sell the call spread debit would be .71 about 36% of the distance between the strike prices without implied volatility edge. Longer dated options allows more time to reach the short call objective at the cost of some option liquidity. Use a close below the USTL as the first sign of trouble followed by close below the 50-day moving average as the SU (stop/unwind).

iShares MSCI Emerging Markets ETF (EEM) 41.74 up .59 or +1.43% for the week. Featured in Digest Issue 20 "Regression to the Mean [Charts]" staying long this top ranked ETF continues to make sense as long as the US Dollar Index (DX) and longer term US dollar interest rates decline.

The current Historical Volatility is 14.27 and 7.09 using the Parkinson's range method, with an Implied Volatility Index Mean of 14.61 down from 15.36 the week before. The 52-week high was 26.88 on June 24, 2016 while the low was 12.85 on May 1. The implied volatility/historical volatility ratio using the range method is 2.06 so option prices are expensive relative to the recent movement of the ETF. Friday’s option volume was 189,201 contracts with the 5-day average of 218,540 contracts with reasonable bid/ask spreads reflecting high options volume.

Using the ask price for the buy and mid for the sell the call spread debit would be .71 about 36% of the distance between the strike prices without implied volatility edge. Use a close below the USTL and the 50-day moving average shown in the chart below as the SU (stop/unwind).

Summary

For the bulls, market conditions remain favorable without a whisper of "Sell in May and Go Away." Although the Federal Reserve prepared the markets for an interest rate hike at their upcoming June meeting long rates have been declining as the yield curve flattens and the US Dollar Index declines. Until more signs of trouble begin appearing "the uptrend is your friend."