All Eyes on the French Election

Last week, I was looking for a top in the SPX around 2400, near the Friday close, but on Twitter warned to wait for a "pump and dump" after the French election.  At SPX 2380 early in the week, I thought we might each 2405, but after the Wed debate favoring Macron moved the SPX to 2390, 2410 seemed more likely, and finally the Friday close near 2400 has me looking for 2415.  I've noticed in the past that moves in Europe result in about half the percentage change for the US markets, so SPX 2415 may result from a 1.5 to 2.0% change in Europe.   Obviously, the move late in the week has reflected part of the change.

Moving on to sentiment the biggest change was Monday's 13% drop in the SKEW from 147 to 128, which lowered the expectations for large price moves as we saw in the weekly range of 2379-2399.  So the expected drop of 3-4% may take from mid-May to mid-June.

Looking next at the SPX sentiment indicators from Jan 2015, the Indicator Scoreboard since last Oct has repeated the sentiment pattern from Jan to July and Nov-Dec 2015, but the TRIN is not as excessive and the recent drop in the SKEW points to less volatile declines than from the 2015 tops.

The Short Term Indicator (VXX $ volume and Smart Beta P/C) with intermediate EMAs has now fully reached the SELL level, last seen in Nov 2015.  This plus the Indicator Scoreboard reading indicate that an initial 3-4% decline may not be sufficient for a strong bottom.

The additional chart for the SDS/SSO ETFs seems to support this idea with low bearish sentiment since July 2015.

Sentiment for bonds (TNX) has stabilized near the mean so rates may stabilize until mid-June if the SPX corrects.

Gold stock sentiment (HUI) remains low even after the HUI testing the recent lows, so it's unclear whether the HUI can bounce to the 200 SMA (200-205) if stocks correct, then crash, or whether it just continues downward.

Conclusion.  Stocks (SPX) are likely to move lower after making an ATH next week and may be making a final top depending on how sentiment looks after a decline.  If the SKEW remains low and the decline is gradual, we may only get a big yawn from the bears and stocks may find themselves in a situation similar to the HUI.

Weekly Trade Alert.  Ideally, I will be looking for a SHORT at SPX 2415 (range 2410-2420) based on Europe's reaction to the French election.  Target is SPX 2320-2330, Stop 2430.  Based on Friday's symbolic levels (DJIA 21K, SPX 2400) the top may carry over into Wed-Thur. Updates @mrktsignals.

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