Saturday, November 25, 2017

Gobble Gobble

The last two weeks I had been expecting a rally in SPX up to 2600+ based on a short term burst of bearish sentiment, but the rally is now running out of steam.  Next week could see a top in the SPX 2010-15 area before a Dec pullback to the mid 2500s.  Looking forward using options open interest a topping process similar to the first half of 2015 may be forming as SPX 2550-2600 seems to be the most likely range through Mar 2018.

I. Sentiment Indicators

The overall Indicator Scoreboard seems to be stair-stepping its way higher similar to the pattern seen the first half of 2015, but appears to need to reach lower levels yet before a pullback.

The Short Term Indicator (VXX $ volume and Smart Beta P/C) is still a ways from reaching a SELL and seems to be following a stair step decline lower, with lower levels needed before a pullback.

The Smart Beta P/C (ETF puts/Equity calls) is hovering at extremely low levels similar to the Apr and Nov 2015 topping patterns, leading me to believe that additional upside will be very limited.

The VXX $ volume has barely receded to the mean and should go lower before any pullback.  Undoubtedly the continued insistence that a major crash is just around the corner by many Wall Street "gurus" is the probable cause of volatility plays, but it is unlikely that Mr. Market will play friendly with such sentiment.

The other indicator which has supported higher prices is the NDX ETF ratio SQQQ/TQQQ and we see that it now approaching prior lower levels that were seen before pullbacks.

Bond sentiment (TNX) remains above the mean, but the rounded bottom still looks a lot like that of mid-2016 before rates raced higher.

For the gold miners (HUI), the change from last week is barely noticeable as sentiment and prices ticked slightly higher.

II. Options Open Interest

Last week started strong as expected, but the rally held thru Fri with the SPY slightly over the "most likely" at 259.  At the peak call resistance of 260, the SPY could go either way early in the week.

But later in the week, larger put position should push prices higher with moderate call resistance at SPY 260 and 261.  The "most likely" close is 259.

The week after, the "most likely" drops to SPY 258, but little call resistance above could indicate higher interim prices.

Next opt exp, call resistance is strong over SPY 255 and should push prices lower with the "most likely" at 255.  The drop off in puts below 255 could result in lower prices.

Farther out in Jan 2018, prices look likely to be range bound between SPY 255 and 260 with a slight downward bias to 255 and a "most likely" at 258.

Even as far out as Mar 2018, the most likely trading range is SPY 255 to 260.

Conclusions.  The combination of relatively low overall bearish sentiment, combined with the extremely low Smart Beta PC supports very limited upside in SPX prices as indicated by the options OI, while the neutral VXX $ volume indicates low volatility supporting the trading range of SPY 255 to 260 as indicated by the options OI.

Weekly Trade Alert.  Guidelines from here are very tricky, but I am looking for a little more upside thru Fri.  Ideal target to short is SPX 2610-15 with a mid Dec target of 2550 or lower.  Updates @mrktsignals.

Investment Diary, update 2017.10.28, Indicator Primer
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