Saturday, August 12, 2017

Now is Not the Time to Short

Last week's call for an SPX top at 2490 and a decline to 2450 or lower (options open int) worked out perfectly.  However, many EW analysts are now calling for a wave 4 decline to SPX 2300 or lower, and as a result bearish sentiment has again skyrocketed to levels that are warning of a 50 pt SPX rally back to 2480 or higher.

I. Sentiment Indicators

Using normal time periods and EMAs, the overall Indicator Scoreboard moved straight up over the last week similar to what happened in June 2016 after the SPX fell 60 pts  What happened next was a 50 pt rally before an even sharper decline.  Also in March 2017 a similar pattern evolved.

The Short Term Indicator (VXX $ volume and Smart Beta P/C) also shows extreme bearish levels similar to the June and Sept 2016 lows which produced 50 and 60 pt rallies before the decline resumed.  Referring back to last week's long term view of the ST indicator duplicating May 2015, we could be setting up for 3 to 4 month trading range between 2500 and 2400 before a more serious breakdown similar to the mid-2015 range of 2130-2040.

For the NDX, bearish sentiment first declined to the same level as previous rallies since June early in the week, and has now risen back to another weak Buy with the recent selloff.

I haven't looked at small cap stocks (RUT) for a while, but the extremely low bearish sentiment is likely dampen any rallies in this sector.

For bonds (TNX), sentiment remains below neutral as bonds are catching a safe haven bid.

For gold stocks (HUI), the safe haven demand is also holding up prices, but sentiment remains at neutral.

II. Options & Open Interest

I don't really have a section for the VIX Call Indicator, but after showing a SELL with a 1 to 3 week lead 3 weeks ago, the indicator came thru last week.  Now after the selloff, the signal has now reversed to a BUY after rising more than 50% of the avg from the lows.  The same rise was seen at the Mar, Apr and May lows that each rallied SPX 50 pts or more.

Moving on to the put/call open interest, Wed is very small relative to expiration Fri, but the pressure should be upward early in the week with a target of SPY 246-7 once the hurdle at 245 is overcome.  There is an outside chance that weakness can cause delta hedging for puts pushing prices as low as 241.

For Fri, this is one of the more complicated patters I have seen, but it looks like puts and calls cancel out between 245-7, with a weak most likely close at 246.  Possible delta hedging can go either way to 241 or 248.

Open interest is very low the following week of the 25th, but there is strong put support at 240 with moderate support up to 247 and little call resistance up to 250. so prices are likely to be 247 or over.

Conclusions.  Last week's decline was reminiscent of the mid-May decline, but this time happened a week before expiration.  Congrats to the new VIX Call Indicator as smart money shows why its smart, buying VIX calls around 10 when Fri the VIX hit 17.  Even the timing fell in the 1 to 3 week expected period on week 3.  All indicators are now pointing to the dumb money being loaded for bear, but they are likely to find skunks instead.

Weekly Trade Alert.  We may still see a selloff Mon-Tues AM, but a mid week rally to SPY 246-7 seems likely with an end of week pullback to 246.   The following week looks more promising and may turn into a three week rally into Labor Day weekend.  Lower target is 2480, upper target is 2500.  Updates @mrktsignals.

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Saturday, August 5, 2017

The Long and Short of It

Today I want to step back and take a longer term view of the normal sentiment measures while reserving the short term view for the options open interest and technical indicators.

I. Sentiment Indicators

For the long term view, I want to go back to 2015 and use the 2x EMAs.  Starting with the overall Indicator Scoreboard we have seen very low bearish sentiment that appears to be a mirror image of the high bearish sentiment between mid-2015 and early 2016.  The reason I am pointing this out is that the bear/bull cycle may be nearing completion.  Just as two year consolidation between SPX 1800 and 2150 has lead to a breakout of the same size range pointing to SPX 2500, sentiment now appears to be balanced.

The Short Term Indicator (VXX $ volume and Smart Beta P/C) has shown less extreme low bearishness and has been a more accurate timing tool, only recently falling to the levels last seen in late April - early May of 2015, so we are likely very near a significant longer term top.

Looking at the Short Term Indicator components on a normal time frame, the VXX $ volume has again fallen to levels that has shown some short term pullback in a bull market, even if only a 20 pt drop for two hours in the SPX.

The Smart Beta P/C is continuing to fall, but not yet at a level where I would call a top.

Taking a look at the longer term NDX, we can see the same symmetry in sentiment where a breakout from the two year range of 4000 to 5000 was followed by a rally of 1000 pts, meeting the breakout projection.  The DJIA is, however, an anomaly where a two year range of 15400 to 18400, or 3000 pts, did not stop the DJIA at 21,400.

Looking at bonds longer term (TNX) where a BUY in bonds means lower rates are expected, and the opposite for a SELL, there usually seems to be a lag of several months between sentiment and rates changes, but currently points to higher rates.

Finally, the longer term view of sentiment for gold stocks (HUI) is not favorable.

II. Options Open Interest

Last week showed that the SPY was caught between high call open interest at 246 and 248 with delta hedging pushing upward and resulted in a tight range of 15 pts on the SPX.  Wed shows high resistance at 248, but the low interest at 246 and the low put support could see a drop in SPY below 246.

Friday is much the same for put support, but resistance moves up to 250.  Although I don't expect it, this would allow for a pullback early in the week followed by a move up later in the week that may top early expiration week.  The reason I am considering this is that it would be a repeat of the May 2017 expiry setup where the market topped on Tues then fell sharply Wed-Thur.

The Aug 18 monthly would normally indicate a close between SPY 244-6, but given the pin last week at 247, a pin between the puts at 241/2 or even a move over 248 seems possible.

III. Technical Indicators

This week I am going to try to use technical analysis to better pin point a top in the SPX.  Starting with the bear flag in the SPX from Mar-Apr (purple), it looks like we are completing 5 waves up.  Waves 1 and 3 up moved up sharply, then consolidated for 2-3 weeks with a final pop higher of 5-10 pts before a larger move down.  The previous top (pink) provided support, so any pullback should be limited to 2455.  Wave 1 (2329-2406) was 77 pts and wave 5 so far was 76 pts (2408-2484), so I am looking for 2485-95 as a top.

Conclusions.  Normal pre-option expiration week would be a pullback as a setup for a move up through expiration, but markets have been anything but normal lately.  Option open interest shows the possibility for new highs next week that could extend into expiry week, so I am focusing more on the target range of SPX 2485-95.  A down move similar to the NDX in June of 5-6% over a three week period to about SPX 2350 seems likely.

Weekly Trade Alert.  Short at SPX ~2490, stop 2500. Target 1 ~ 2400, target 2 ~2350.   Updates @mrktsignals.

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Saturday, July 29, 2017

The Dollar is the Key

Many of the recent trends in the markets do not seem to make sense except in consideration of the effects of the US dollar which rallied about 10% the last few months of 2016 based on increased growth expectations of the Trump agenda, but began to falter with Trump's support in Q1 and has been in a waterfall decline since.  The DJIA, which is made of of multinationals with much of their sales overseas, has particularly benefited as products priced in dollars are now discounted.  A strong example is Boeing whose planes sell for $50 million or more and whose stock is up over 40% this year.  Unfortunately after dropping from 104 down to 93 in a little over six months and two points in July, the US dollar may bottom soon around 90 and rebound.  So tailwinds for the DJIA, oil and gold may soon become headwinds.

I. Sentiment Indicators

The overall Indicator Scoreboard rebounded slightly with Thursday's mini flash crash, but remains in the near SELL area.

The Short Term Indicator (VXX $ volume and Smart Beta P/C) dropped to the SELL level Tues as posted on Twitter, but I rated this as a warning only since most of the decline was due to very low VXX $ volume as shown below.

Based on what appears to be a washout of VXX volume, the lows are probably in for the VIX (8.84) and VXX volume.

However, the Smart Beta P/C still looks like it should go lower for a top.

The NDX/QQQ ETFs nearly reached my target at NDX 6000 (5995) with sentiment falling to recent lows before the last two day selloff that has given only a weak BUY.  It is hard to tell if the highs are now in.

Bearish sentiment for bonds (TNX) moved toward neutral with the sideways movement likely to continue.

Gold stocks (HUI) are pushing up against the upper bounds of the recent trading range at the 200 SMA and it is surprising that given the weakness of the US $ that gold stocks have not been stronger.

II. Options Open Interest

This week I am going to look at the weekly setup through to the Aug 18 expiration.  For Aug 4, normally prices should drop below the SPY 246 level, but since 246 was successfully tested with a rebound to 247 to close the week, the more likely outcome seems to be a tight range around 247 unless 248 is exceeded.

For Aug 11, this week shows a possible range of SPY 246 to 248 with strong resistance over 248.

For Aug 18, huge levels of put support have built up over the past couple of weeks in the 243 to 247 area that seem to indicate the best chance for a push to 248 or higher as long as the 243 support level holds.

Looking ahead to Sept 15, the put levels at 240 have doubled while calls have remained constant, reducing the chance for a decline below 240.

Conclusions.  A top is approaching but it hard to tell when.  Last weeks minor pullback increased bearishness that may elevate markets for another two or three weeks.  Another factor is the US $ which seems to be supporting the DJIA even as other sectors struggle.  An analyst at B of A discusses his outlook of the US $ influence at ZH last week.

Weekly Trade Alert.  None.  More consolidation short term seems likely.   Updates @mrktsignals.

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Saturday, July 22, 2017

Heisenburg's Uncertainty

A market top may finally be approaching, but what kind of top and when.  Today, I will show a graphical version of the VIX call volume indicator that I have been discussing for several weeks that indicates a top in 2 to 3 weeks, but the continued persistence of the NDX/QQQ high bearish sentiment shows that higher prices are still likely in the intermediate term.

I. Sentiment Indicators

The overall Indicator Scoreboard has now dropped to the SELL level but does have a tendency to lead any pullback by one or two weeks,

The Short Term Indicator (VXX $ volume and Smart Beta P/C) continues to show measurable hedging somewhat similar to the 2015 periods of Apr-May and July-Nov, so this may be "smart money" hedging.

Another possibility is that the Smart Beta P/C is effected by QQQ puts.  Shown below is the SQQQ/TQQQ $ ratio which shows that the NDX is still heavily shorted even though ATHs have been made.  I would not be surprised by a continued push over 6000.  Comparing this to the SPX chart shown above for the 2015 declines, a move down to the neutral level is likely before further meaningful declines.

Another sentiment indicator that shows bearish potential is the Level of VIX calls. I've been watching VIX P/C and particularly VIX call buying as a "smart money" short indicator at market tops for some time, while "dumb money" piles in at bottoms, and finally figured out how to quantify it (via graph).

To setup a chart, I compared the SPX as a % (green) over/under the 20 day SMA (zero line), and for the VIX calls, the 10 day SMA (red) is divided by the daily avg since 2014 (zero line) so that 0.5 equals 50% above avg.  On the chart, "smart money" Sell levels are the VIX SMA of 50% above avg and occurred 1 to 3 weeks prior to Mar and May tops.  For the "dumb money" Buys occurred at the late March and mid-May bottoms with no delay also at the VIX SMA of 50% above avg.  April was unusual because the Buy produced a two week sharp rally that increased the VIX call SMA to 1.0 with a Sell adding .5 to the starting level.  As of Friday the VIX call SMA reached .5, so a top is expected in 1 to 3 weeks.

Bearish sentiment for bonds (TNX) dropped sharply as rates fell, indicating that a trading range is likely.

Sentiment for the gold stocks (HUI) seemed to be correct last week as prices moved up about 2% due to weakness in the USD helping gold prices, but were also accompanied by a sharp rise in bearishness as the 200 day SMA is overhead resistance.  This one is just too hard to call.

II. Options Open Interest

Since we just had the July monthly expiration I want to do a 3 month look a head for the SPY and VIX.  To tell you the truth the SPY open int is so low for the next two weeks that it is hard to make much sense of it, so I am going to take the bigger picture view of combining the next two weeks with the Aug monthlies.  There is very strong call resistance at 245 and above, but since we closed at 247, a move to 248 or higher is possible short term.  Put support is high at 244/5 but drops off sharply below that down to 240.  Most likely is 244/5, but there is a lot more risk than reward.

For Sept 15, I have expanded the range and there is little put support above 240, with major support at 230, for call resistance 245 is minor while 250 is huge.  This looks like a recipe for wild price swings.

For Oct 20, there is fairly strong put support all the way up to 242 with little call resistance until 249. If there is a strong decline into mid Sept down to 235 or lower, Oct looks like it should rally back to near ATH levels fairly quickly.

Moving on the the VIX for Aug 16, a modest increase in the 12-14 range seems likely with large call resistance above.

For Sept 20, put support is likely to push the VIX up to the 14/5 range and possibly above 18.

For Oct 18, huge call resistance is likely to push the VIX down to 14 or lower.

Conclusions.  Last week the SPY pushed up to the 147 resistance level and stopped.  Both the overall Indicator Scoreboard and VIX call levels indicate that a pullback is likely to start in the next two or three weeks.  SPY and VIX options open int indicate that a drop to SPX 2350 or lower is likely by mid Sept, but a very sharp rebound is likely to the upper SPX 2400s by mid Oct.  NDX sentiment indicates that there may be more short term upside to 6000 or higher.

Weekly Trade Alert.  None.  One characteristic of a bubble is to cause panic buying by bypassing normal pullbacks.  Opportunity for a good short is ahead.   Updates @mrktsignals.

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Saturday, July 15, 2017

Delayed Fireworks

Last week provided the excitement promised by the SPY options interest with the NDZ/QQQ reaching my target for mid August.  ZH earlier this week reported that a supercomputer researching global stock markets in Zurich has identified a Sornette bubble in US stocks.

I. Sentiment Indicators

The overall Indicator Scoreboard showed a fairly large drop in bearish sentiment levels this week, but no SELL yet.  For this week I am again showing the last 18 months with INT EMAs.

But the Short Term Indicator (VXX $ volume and Smart Beta P/C) showed only a muted response.

The NDX has show a very persistent high level of bearishness, even with a new recovery closing high, indicating that a continued rally to new highs is likely.

Bearish sentiment for bonds (TNX) moved back to neutral as rates consolidated between 2.3 and 2.4%.

The gold stocks (HUI) showed a decrease in bullishness as the compression or "coil" seems to continue.  Many times this type of pattern will begin with one or more false moves as the GDX options seem to indicate a fall to 20 (-10%) before a rally to 24.

The BKX chart last week indicating a SELL ST proved accurate as Friday's EPS were disappointing with a 2% opening drop, but recovered with the overall market.

II. Options Open Interest

This week I want to look at the SPY, QQQ and VIX out to August.

For the SPY, last weeks "the bulls were free to roam" was prescient with a close at 245.5, but is unlikely to be repeated this week.  A move down to 242 to fill the SPX gap at 2426 looks likely, with a close at 243.5 most likely.

For the last week of the month, the outlook is somewhat confusing where 242-3 is the "max pain" zone, but call resistance is light if the bulls decide to run.

The August monthly shows strong put support at 235, 240 and 244-5, with strong call resistance at 244-5. The overlap from 244-5 will probably be a strong area of contention with the potential of whipsaws from one side to another.  A low at 241-3 is most likely.  Given the VIX forecast range of 12-14 as a higher range than we've seen recently, possible wild swings seem likely.

For the VIX in August, a range of 12-14 seems likely, with a short term move to 18 possible if 15 is exceeded.

For the QQQ, next week looks tough for a continued move higher from the close at 142.2, while a whipsaw back to the gap at 139 is possible.

For August, call resistance is somewhat lower, but if the SPY overcomes the put/call overlap peak at 245 similar to how the QQQ did this week, a move to 145 or higher seems likely.

Conclusions.  A surprise to the upside brings us back to the 2014 scenario, but the path from here is unclear.  NDX sentiment clearly supports higher prices, while other sentiment is not overly bullish.  One scenario that seems to make sense is a ST pullback to fill gaps next week at SPX 2426, QQQ 139 then a move up into late July/early Aug.  Another strong jobs number may bring into question the "low rates forever" mantra, but would probably be first welcomed.  The last two months divergence between ADP and NFP were very unusual.

Weekly Trade Alert.  Tues AM was so boring I took a 20 min break and missed the mini "flash crash" which filled the DJIA gap and almost the SPX one.   Next week a pullback to SPX 2426, QQQ 139 may provide a second opportunity.  Updates @mrktsignals.

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