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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1 comment:

  1. Great update as always Arthur but I don't think we'll make it all the way into October in such a small trading range. I think at some point you're going to see "smart money" show up on the "put" side of the market and it will tank without much warning.