Bubble Trouble

All week I had been thinking of a chart I saw a few years ago posted by John Hussman which symbolizes something called a Sornette bubble.  The primary characteristic is that as prices move toward a top pullbacks become shallower, but more frequent.  Since the mid-May pullback in the SPX of 2% that lasted only two days, all ST SELL setups seems to evaporate as prices continue to melt up.  Friday may have been the extreme example where a 30 pt SPX pullback occurred in a matter of hours and just as quickly reversed. Just to be clear, I am not predicting a crash.

This week, I will continue to look at sentiment indicators as well as options open interest to gauge sentiment for forward months.

I. Sentiment Signals

The overall Indicator Scoreboard saw a sharp drop last week, mostly with the collapse of the P/C ratios all week and especially Thur when the CPC reached 70%, giving an INT SELL on Thur.  This is usually an early indicator with a two to four week lead.

The Short Term Indicator (VXX $ volume and Smart Beta P/C) using INT EMAs reached a pseudo SELL level, but the Smart Beta P/C refuses to decline so I am somewhat skeptical at this point.

The Short Term Indicator (VXX $ volume and Smart Beta P/C) using S/T EMAs gave a ST SELL Mon as posted on Twitter and came close to a retest on Thur.

Bearish sentiment for bonds (TNX) has continued to fall to a full SELL even as rates rose slightly.  Some are saying that the FED is likely to start reducing its balance sheet by selling bonds by the EOY so this may place a floor on rates.

Gold stocks (HUI) had the move I had been expecting to test the 200 SMA on Tues then started to sell of sharply, but the reaction shown by sentiment was unexpected.  There was no SELL at the high, but as prices pulled back, bearish sentiment continue to fall (BTFD) now matching the levels of the previous small pullbacks.  This leads me to believe that the HUI may be starting a megaphone pattern of lower lows (GDX 20-1) then breakout highs (GDX 25-7), then a larger collapse.  This pattern is explained in the options open interest section.

II. Options Open Interest

Last week, I showed that a large number of Wed calls at SPY 244 would likely put a lid on the market (actual range 243-44), but that by Fri prices could move higher but could also move down to the 241 level (actual range 242-45).  The way it happened was a surprise but the SPX moved almost identical to the May 17 performance of the QQQ as reported two weeks ago where the QQQ went from the upper call resistance at 140, then down to just above put support at 135.  The QQQ then zoomed to 2% above former resistance then had a bigger collapse, can the same happen to the SPX?

This week I want to look at some of the forward months to see if there are any clues to market direction.  June is triple witch EOQ option expiry so may be volatile.  Even though Fri low was 242, the close at 243.4 makes delta hedging a possibility to push prices higher, but 245 is a big hurdle.  The FED may add "data dependent" to its notes for future hikes which will be a green light for the bulls.

Looking forward to July and Aug are tenuous as changes are made each month as rollover occurs, but as of now July shows a huge block of resistance at SPY 247 and below that the 242-3 level looks likely.

In August resistance moves down to SPY 245 with a likely pin at 240, but with possible delta hedging lower below 240.  The lowest price possible seems to be 235.  So overall, consistent with a pullback, but no crash.

Just to take a quick look at the QQQ, Fri saw a drop from 144 to 138 then a close at 140.  We may see something like this in the future for the SPX.

Next I want to do the same for the GDX open interest using July and Sept.  For June, we still have the 22-24 support/resistance levels with even more resistance above, so not likely to go over 24.

For July, the big thing here is that resistance moves down to 21 with strong support at 20.  So given the DUST/NUGT sentiment this points to a likely move to 20-1 by mid July.

For Sept, there is strong support at 23 and below with a likely target of 25 and over that delta hedging is possible.

Conclusion.  Occasional bouts of volatility aside, a top in the SPX the next two or three weeks followed by an 8-10% (revised) pullback seems likely.

Weekly Trade Alert.  None, any sentiment changes will be posted one hour before the open when relevant.   Updates @mrktsignals.

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