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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