Sunday, June 26, 2016

A Giant Pump and Dump

As I warned last week, bearish sentiment was strong enough to push the SPX back to the 2120 area, but I had no idea it would occur as early as Thur close (actually 2113, but 2127 after hours) as rumors switched from favoring BREXIT to BREMAIN.  I wish I had the cajones to short over 2100, but I probably would have been stopped out.  What this did is set up the probability for a more bearish outcome by using up a lot of buying power even through the result at SPX 2037 is only 13 pts below the previous low at 2050.  Ideally I would like to see an ABC decline down to the low 1900s (1920/30) as the bullish alt then a rally to ATH by Fall, but I still see a 50/50 chance of a "summer swoon" down to mid 1700s.  The more bullish alt short term would then lead to a long term (2000-02) type bear market.

Looking at the intermediate term composite Indicator Scoreboard, we are now at almost identical sentiment readings and SPX level as in July 2015, but barring an all out "do whatever it takes" from the world's central bankers, similar results at these levels seem unlikely.

From the shorter term perspective, it is difficult to tell whether bearishness has reached a sufficient level to halt the current decline.

Conclusion.  Due to the sharp rally thru Thurs, I am lowering my expectations for a meaningful low from the low SPX 2000s to the low 1900s for about a 10% decline.  This could very well happen by early July as there is a meaningful Bradley turn date July 5.  Hopefully, sentiment will paint a clearer picture by that time.  An ABC decline into the low 1900s could very well turn into a 5-wave decline into the 1800s without sufficient bearishness.

Weekly trade alert.  At this point a break of the SPX 200 SMA at 2021 on Monday seems to be a given with follow thru below 2000 highly likely.  Using the scenario for a 10% decline, a possible range for A down is 1980/90, so buy the SPX at 1985 with a stop at 1970, and a target of 2040/50 for a 50% retrace.  At that point short at 2045 with a stop at 2060, and a target of 1920/30.  Trade updates @mrktsignals.

Saturday, June 18, 2016

A Volatility Blowout

After calling for a top in the SPX at 2120 two weeks ago, I said that I expected an expansion of the trading range below 2085 with an estimated low in the 2070/85 range.  But the panic low, I mentioned last week pushed prices down to almost 2050.  There was some warning of higher volatility with very low VIX P/Cs in the 30% range two weeks ago then last week's rise in the SKEW to over 140.  Although I am personally reluctant to be short in Options Exp week and closed my short position early (SPX 2082 from 2120), this does support my theory that high SKEW results in downward price pressure for Options Exp.

The real action was in the volatility products (VXX, UVXY) as the VIX shot up almost doubling to the low 20s which last happened in January when the SPX had dropped to the low 1900s.  The result has pushed the intermediate Indicator Scoreboard to two-thirds the levels of the July 2015 decline in the SPX from 2135 to 2044.

The strong influence of the volatility instruments is seen by the VXX $ Volume where levels have reached the levels of the July 2015 selloff.

While other broader measures, such the CPC Revised (less VIX puts and calls) have shown only a moderate response to the current decline.

Conclusion. There is a disconnect between prices and volatility which is likely to be closed.  Intermediate term it is likely that we see at least SPX 2120 again due to high bearish levels, but it is very possible given the BREXIT vote next week that the SPX drops to the low 2000s before a strong rally,

Weekly trade alert.  Last week's short was closed for a gain of 38 SPX points out of a possible 70.  For this week, flipping a coin is not a valid investment strategy, so not position before the BREXIT vote.  Going long after a bottom is put in or shorting after a top is a much less risky trade.  Updates if needed @mrktsignals.

Monday, June 13, 2016

A Day Late, Two Dollars Short

Sorry to miss the weekend post, but a million things to do.  Also, I wanted to see the Monday open before planning my strategy for the week.  Options expiration week will often see a low late Monday or early Tuesday before short covering kicks in, plus this week we also have the FOMC "no rate hike" meeting.

Let's take a look at the Indicator Scoreboard overall weighted index.  The intermediate term index is looking more and more like the period between Feb and May when short term declines were stopped when the 5 dy EMA (green) moved back over the mean.

The shorter term Indicator scoreboard more clearly highlights the jump in bearish sentiment the last two days of the week (now prior).  A couple more days of high bearishness should be enough to spark an options week rally, but my upside target is limited at SPX 2100/10.  For example, as I write at 1 PM EST VXX volume is over 60 mil shares, greater than everyday last week but Fri (90 mil).

Conclusion.  The decline this week is likely to stop between SPX 2075/80 with confluence of the 50 dy SMA and the TL from the Feb lows (1810) and May lows (2025).  The following options exp rally may be weaker than normal due to the BREXIT vote next week with a target of SPX 2100/10.  I still view the BREXIT vote as 50/50 with out comes skewed to the downside with SPX 2135+ for NO and 2020- for YES.

Weekly trade alert.  The SPX short recommendation from last week at 2120 is still open with the stop moved down to 2100 and a target of 2080.  I expect a strong bounce when/if 2085 is broken as a panic low (probable cover) then a retest the next day with a possible long setup at 2076/7. Updates @mrktsignals.

Sunday, June 5, 2016

Not Down Is Not Up

I'm getting the feeling that the Dark Ages are around the corner.One respected analyst that runs an educational blog has, over the last eight months, gone from claiming a breakout in the SPX targeting 2400 and when that failed, to a breakdown targeting 1200.  The same analyst is now claiming prices were manipulated by mysterious forces preventing accurate forecasts. Another analyst with a pay site that publishes weekly on is starting to sound like Nostradamus claiming to have visions of higher prices.  "While I continue to have visions of the market being much higher than where we currently reside, I still think it is going to take more time for the market to set up to break out and take us to 2500-plus."

What I see is a range bound market where the majority become bullish at the top, providing ammunition for the next decline and then becoming bearish at the bottom setting up a repeat of the cycle.  Admittedly, intervention by the world's central bankers may distort asset valuations, but the effects should not be unanticipated. Japan, which was the initiator of QE and many unorthodox policies since the late 1990's, has seen the Nikkei trade in a range from about 16,000 to 20,000 for almost 20 years.  Thus the somewhat confusing title, i.e., markets may remain on life support to maintain vital functions, but this does not means the patient will get out of bed and start dancing the jig.

Indicators are little changed this week, thus the earlier rant.  The overall Indicator Scoreboard still shows low bearish sentiment in a pattern resembling the April-May 2015 period.

Since I have not done so previously, I decided to do a back test to the 2013-14 period using the Indicator Scoreboard.  Here we see that during periods of strongly rising prices,  very low bearish sentiment such as in Dec 2013 and June 2014 may only result in consolidations or weak declines compared to the volatile periods in 2015 and 2016.

Conclusion.  I am expecting a widening of the trading range of the last week and a half of SPX 2085 to 2105 with a low of 2070/80 and a high of 2115/25.  Most are expecting a continuation of the decline from Friday, so since I rarely follow the crowd, I am looking for a rally early in the week then a decline. I was right about the weak employment numbers based in the initial jobless claims from two weeks ago, but the numbers have already reversed sharply so this may be a one time event.  Click 1 yr here to see.

Weekly trade alert.  The weak job numbers are likely to be read as "no rate hike", so I'm expecting a rally early in the week then a stronger selloff as most of last week looked like distribution.  So for the SPX short at 2120, stop at 2135, cover at 2080 or better. Trade updates @mrktsignals.