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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