Saturday, October 14, 2017

Cerberus vs Hydra

No, I am not referring to Greek mythology, but to two of the indicators I follow that currently show conflicting results.  One one hand the VIX Call Indicator, which gave a SELL signal on Sept 23, has not had a false signal this year, but last week was its third week.  Next week is opt exp with Wed the exp of VIX options as well as the second NK holiday which may show some unexpected fireworks.  On the other hand the ST Indicator has been warning of a move to SPX 2500 or higher since Aug 12 when I first warned "not to short" even as most EW analysts were projecting much lower SPX prices.  The ST Indicator still remains in neutral territory.

I. Sentiment Indicators

The overall Indicator Scoreboard remains in the SELL area indicating that the upside is at most very limited.

The Short Term Indicator (VXX $ volume and Smart Beta P/C) has declined slightly and the next couple of charts will take a closer look at what to expect in the event of a repeat of year-end 2015.  Last week I incorrectly identified the Aug 2015 decline as SPX 130 pts when actually it was 230 pts.

First, I want to look at a comparison of the VIX Call Indicator (VCI) and the ST Indicator (STI) over 2017.  For the first four SELLs (red vertical bars), the VCI tended to be early and the SPX decline did not start until the STI dropped down to the -0.6 level or lower.  BUYs (green bars) were mostly the same.

Looking at the 2017 STI through last week (st EMAs), we have barely made it to the -0.2 level and nowhere near a SELL.

Going back to 2015 for the STI, you can see that mid-Oct was also about -0.2, but by the top early in Nov the level did reach -0.6.  So again early Nov 2017 may prove to be a significant top if the STI drops to -0.6 or lower by that time.

Moving on to bonds (TNX), both rates and bearish sentiment fell slightly.

For the gold miners (HUI), sentiment rose slightly as prices consolidated.

II. Options Open Interest

There is not much change to the options open int for next week.  The market struggled at SPY 255 all last week (close 254.95), and for Wed with delta hedging from calls at 254 providing support and little overhead resistance.  A move to 252.5 is possible to the downside if 254 is beached.

For Fri opt exp, the "batman" (puts and calls peaking in the middle with supporting wings on either side) is even more tilted to the right indicating a more bullish outcome is likely, but again we also saw this at the May exp.  Delta hedging over SPY 255 would push to 256 or higher, while a decline is likely to stop at 253.

Conclusions.  The VIX Indicator SELL now has only three days to the Oct VIX options expire, and the ST Indicator is still saying "not yet".  Overall the outlook remains the same.  Looking to the 2015 period for comparison, slightly higher highs in the SPX 2560-70 range thru early Nov seems to be the likely outcome.

Weekly Trade Alert.  Nothing this week, will be watching the "new options" for clues to any turn.  Updates @mrktsignals.

Investment Diary, update 2017.10.xx, (in progress) Indicator Primer
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