Saturday, March 25, 2017

The Next Big Move is Likely to be Up

Prelude: Why Businessmen Don't Make Good Presidents
Watching the melodrama this week over the Republican health care plan reminds me of the effectiveness of dirty politics as displayed by Kevin Spacey in Netflix's House of Cards.  One thing that Trump is not is a politician and what the House of Cards shows is that the art of manipulation is the secret of success for a politician.  If the Republican tax plan suffers the same fate, we could see a repeat of the August 2015 meltdown.

This week I want to start with the short term view (2.5, 5, 10 day EMA) using the Short Term Indicator (VXX $ volume and Smart Beta P/C) as it correctly gave a SELL on Monday's close and may provide some insight on what to expect going forward.  All charts this week will start Jan 2015.

Specifically, I want to focus on the two periods circled in the chart shown below.  Last week, I showed that bearish sentiment with a spike in the Skew preceded several large declines over the past 3 years.  The June-July 2015 period is starting to look like the current period, where an SPX top (2400) was followed by a second top (2390), several days of small declines then a 40 pt drop, a weak rally of about 25 pts, then a lower bottom.  What followed over the next two weeks was a very strong rally, slightly exceeding the lower top.

The significance comparing this period to today is the similarity in sentiment using the Short Term Sentiment Indicator shown below.  Both the early July and December 2015 declines of about 80 and 100 SPX pts, respectively, were enough to excite the bears into generating a strong short term sentiment BUY that lead to strong short covering rallies prior to the real decline.  The three days following the Tues selloff were enough to bring the ST EMA (green) to a BUY and next week I expect the LT (blue) to follow,  Finally, ST SELLs were generated later by the rally before the larger decline.

Using the June-July 2015 period as an analog (closeup) to the current period (closeup), this would mean a lower low mid-week with a break of the 50 DMA similar to a break of the 200 DMA in 2015, some whip sawing, then a two week rally into mid-April.  My conservative target for the low is 2325ish for the low and SPX 2380-90 with a possible ATH for the high.

Regular Analysis

The overall Indicator Scoreboard has also moved up sharply as bearish sentiment, especially put/call ratios, are showing high levels of fear.  Given the low starting levels only ST (green) and IT (red) may reach the BUY zone.

To support the view that only a ST short covering rally is expected, I'm including one of the money flow (ETF) measures for the 3x SPX ETFs SPXU/UPRO.  Here, you can see that bearish sentiment is well below the levels of either of the 2015 declines mentioned above.

Additionally, one of the MISC indicators, the TRIN, continues to spike, now approaching the levels of Nov-Dec 2015.  This shows declining volume support as a measure of net advances/net advancing volume.

Bond sentiment (TNX) remains little changed, making me wonder if potential problems in the stock market may be more politically than interest rate driven.  Next week, for instance, Article 50 for the BREXIT is set to be triggered, which may cause some turmoil for a couple of days.  Next on May 7, France has their presidential election, and although Le Pen is considered an underdog (like Trump), her support for FREXIT may also cause some turmoil.  Then of course in the US, we face the debt limit and tax cut agenda.

Finally, bearish sentiment for gold stocks (HUI) has dropped sharply, leaving little support for higher prices.

Conclusion.  It did not take long for the $SKEW to show its effect last week, and it still remains at very elevated levels.  I was distracted by the intermediate view of the Short Term Indicator not reaching the SELL level, so have now switched to the shorter EMAs which have been more accurate short term.  More and more evidence is lining up for the beginning of a strong decline and the early May period still appears to be a point of high risk.

Weekly Trade Alert.  Looking for a BUY signal for a short term rally to SPX 2380-90 or higher with the ST indicator.  I will be posting premarket updates for next week starting Tues on Twitter, @mrktsignals.  Long SPX 2325ish, stop 2315, target SPX 2380+.

No comments:

Post a Comment