Consolidation, then What

After first tackling the SPX 2400 area in early Mar, the market finally hurdled over last week to reach my LT objective of 2415.  Sufficient bearishness remains for a consolidation between 2400 and 2420 for a couple of weeks, but an INT decline of 7-8% should still start by early July.  Rising TRIN and falling VIX P/C may also trigger a High Risk warning by June expiry, even though the last one only resulted in a disappointing 2% drop. This week will also include an update of the option open interest.

I. Sentiment Indicators

The overall Indicator Scoreboard has moved back to a less supportive neutral position and may not reach a full SELL before an INT decline.

The Short Term Indicator (VXX $ volume and Smart Beta P/C) using S/T EMAs after giving a ST BUY is now approaching the SELL region, although the rate of decline is likely to slow as prices stall out.

The biggest surprise in sentiment for the week was probably in bonds (TNX) as bearish sentiment levels has now fallen to levels where a significant rise in rates has occurred in the past   A continuation of this trend while stocks consolidate is consistent with a rise in rates from Jul-Sep as stocks are expected to fall.

A second surprise was with gold stocks (HUI) as bearish sentiment rose as prices consolidated in a similar b-wave flat to the Mar period.  It's beginning to look as if prices will rise to about the 205-210 (GDX 24) area as stocks and bonds fall from Jul-Sep.

II. Options Open Interest

This is probably the last time I will take a detailed look at this area as I was just looking for a shorter time view sentiment measure and have decided to rely on the combined monthly and weekly since the weekly contain too much noise for my purpose.  If you wish to view the weekly commentary, please visit SassyOptions.

This is the chart of the combined monthly and weekly for June.  This clearly shows why SPY 240 was such a big deal and why 240 to 242 may be a resting zone, where puts provided strong support up to 240, while calls showed very strong resistance at 240 and strong at 242.

The June monthly currently shows declining put support above SPY 235 that may allow prices to move lower as option expiry approaches.

For the coming week, Wed OI looks like prices could jump all over the place which is why at first I thought shorting might be a good idea, but concluded that volumes were so low that the effects would likely be minimal.

SPY Fri OI makes more sense and together seem to indicate that prices would remain in the 241-242 range for the first part of the week but fall to the 240 level by the end of the week.

Looking at some of the other indices, the NDX/QQQ easily ran over resistance at 140 and looks like it could continue higher.

GDX looks like it will still remain in the 22-24 range.

Finally, VIX is somewhat hard to interpret since it easily fell below 10 and appears on its way to 9.

Conclusions.  A number of indicators suggest a return to the SPX 2350 area may be likely by mid or late June but more consolidation is likely first to reduce the level of bearishness.  This may take one or two weeks.

Weekly Trade Alert.  We made it to the SPX 2415 shorting area and I even posted a trade on Twitter, but stopped for a small gain (SPY ATM put in/out 1.84/2.01).  With the SKEW at 123, I would rather wait for a SELL than try to top tick.   Updates @mrktsignals.

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