Saturday, August 12, 2017

Now is Not the Time to Short

Last week's call for an SPX top at 2490 and a decline to 2450 or lower (options open int) worked out perfectly.  However, many EW analysts are now calling for a wave 4 decline to SPX 2300 or lower, and as a result bearish sentiment has again skyrocketed to levels that are warning of a 50 pt SPX rally back to 2480 or higher.

I. Sentiment Indicators

Using normal time periods and EMAs, the overall Indicator Scoreboard moved straight up over the last week similar to what happened in June 2016 after the SPX fell 60 pts  What happened next was a 50 pt rally before an even sharper decline.  Also in March 2017 a similar pattern evolved.

The Short Term Indicator (VXX $ volume and Smart Beta P/C) also shows extreme bearish levels similar to the June and Sept 2016 lows which produced 50 and 60 pt rallies before the decline resumed.  Referring back to last week's long term view of the ST indicator duplicating May 2015, we could be setting up for 3 to 4 month trading range between 2500 and 2400 before a more serious breakdown similar to the mid-2015 range of 2130-2040.

For the NDX, bearish sentiment first declined to the same level as previous rallies since June early in the week, and has now risen back to another weak Buy with the recent selloff.

I haven't looked at small cap stocks (RUT) for a while, but the extremely low bearish sentiment is likely dampen any rallies in this sector.

For bonds (TNX), sentiment remains below neutral as bonds are catching a safe haven bid.

For gold stocks (HUI), the safe haven demand is also holding up prices, but sentiment remains at neutral.

II. Options & Open Interest

I don't really have a section for the VIX Call Indicator, but after showing a SELL with a 1 to 3 week lead 3 weeks ago, the indicator came thru last week.  Now after the selloff, the signal has now reversed to a BUY after rising more than 50% of the avg from the lows.  The same rise was seen at the Mar, Apr and May lows that each rallied SPX 50 pts or more.

Moving on to the put/call open interest, Wed is very small relative to expiration Fri, but the pressure should be upward early in the week with a target of SPY 246-7 once the hurdle at 245 is overcome.  There is an outside chance that weakness can cause delta hedging for puts pushing prices as low as 241.

For Fri, this is one of the more complicated patters I have seen, but it looks like puts and calls cancel out between 245-7, with a weak most likely close at 246.  Possible delta hedging can go either way to 241 or 248.

Open interest is very low the following week of the 25th, but there is strong put support at 240 with moderate support up to 247 and little call resistance up to 250. so prices are likely to be 247 or over.

Conclusions.  Last week's decline was reminiscent of the mid-May decline, but this time happened a week before expiration.  Congrats to the new VIX Call Indicator as smart money shows why its smart, buying VIX calls around 10 when Fri the VIX hit 17.  Even the timing fell in the 1 to 3 week expected period on week 3.  All indicators are now pointing to the dumb money being loaded for bear, but they are likely to find skunks instead.

Weekly Trade Alert.  We may still see a selloff Mon-Tues AM, but a mid week rally to SPY 246-7 seems likely with an end of week pullback to 246.   The following week looks more promising and may turn into a three week rally into Labor Day weekend.  Lower target is 2480, upper target is 2500.  Updates @mrktsignals.

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Saturday, August 5, 2017

The Long and Short of It

Today I want to step back and take a longer term view of the normal sentiment measures while reserving the short term view for the options open interest and technical indicators.

I. Sentiment Indicators

For the long term view, I want to go back to 2015 and use the 2x EMAs.  Starting with the overall Indicator Scoreboard we have seen very low bearish sentiment that appears to be a mirror image of the high bearish sentiment between mid-2015 and early 2016.  The reason I am pointing this out is that the bear/bull cycle may be nearing completion.  Just as two year consolidation between SPX 1800 and 2150 has lead to a breakout of the same size range pointing to SPX 2500, sentiment now appears to be balanced.

The Short Term Indicator (VXX $ volume and Smart Beta P/C) has shown less extreme low bearishness and has been a more accurate timing tool, only recently falling to the levels last seen in late April - early May of 2015, so we are likely very near a significant longer term top.

Looking at the Short Term Indicator components on a normal time frame, the VXX $ volume has again fallen to levels that has shown some short term pullback in a bull market, even if only a 20 pt drop for two hours in the SPX.

The Smart Beta P/C is continuing to fall, but not yet at a level where I would call a top.

Taking a look at the longer term NDX, we can see the same symmetry in sentiment where a breakout from the two year range of 4000 to 5000 was followed by a rally of 1000 pts, meeting the breakout projection.  The DJIA is, however, an anomaly where a two year range of 15400 to 18400, or 3000 pts, did not stop the DJIA at 21,400.

Looking at bonds longer term (TNX) where a BUY in bonds means lower rates are expected, and the opposite for a SELL, there usually seems to be a lag of several months between sentiment and rates changes, but currently points to higher rates.

Finally, the longer term view of sentiment for gold stocks (HUI) is not favorable.

II. Options Open Interest

Last week showed that the SPY was caught between high call open interest at 246 and 248 with delta hedging pushing upward and resulted in a tight range of 15 pts on the SPX.  Wed shows high resistance at 248, but the low interest at 246 and the low put support could see a drop in SPY below 246.

Friday is much the same for put support, but resistance moves up to 250.  Although I don't expect it, this would allow for a pullback early in the week followed by a move up later in the week that may top early expiration week.  The reason I am considering this is that it would be a repeat of the May 2017 expiry setup where the market topped on Tues then fell sharply Wed-Thur.

The Aug 18 monthly would normally indicate a close between SPY 244-6, but given the pin last week at 247, a pin between the puts at 241/2 or even a move over 248 seems possible.

III. Technical Indicators

This week I am going to try to use technical analysis to better pin point a top in the SPX.  Starting with the bear flag in the SPX from Mar-Apr (purple), it looks like we are completing 5 waves up.  Waves 1 and 3 up moved up sharply, then consolidated for 2-3 weeks with a final pop higher of 5-10 pts before a larger move down.  The previous top (pink) provided support, so any pullback should be limited to 2455.  Wave 1 (2329-2406) was 77 pts and wave 5 so far was 76 pts (2408-2484), so I am looking for 2485-95 as a top.

Conclusions.  Normal pre-option expiration week would be a pullback as a setup for a move up through expiration, but markets have been anything but normal lately.  Option open interest shows the possibility for new highs next week that could extend into expiry week, so I am focusing more on the target range of SPX 2485-95.  A down move similar to the NDX in June of 5-6% over a three week period to about SPX 2350 seems likely.

Weekly Trade Alert.  Short at SPX ~2490, stop 2500. Target 1 ~ 2400, target 2 ~2350.   Updates @mrktsignals.

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