Saturday, December 9, 2017

Naughty or Nice

Two weeks ago my view was that we would see a short term top with the Senate passage of a tax plan in the SPX over 2600 (est 2610-15, act 2665) followed by a pullback into mid-Dec probably due to the Fed raising rates at the next FOMC (Dec 12-13).  Last week I gave a downside target of SPX 2605-10, but it now looks like a higher low is probable.  I do not recommend shorting, however, due to positive sentiment.

I. Sentiment Indicators

The overall Indicator Scoreboard improved slightly by mid-week then fell back as the market rallied thru Fri, but still consistent with the July-Aug 2016 consolidation phase.

The Short Term Indicator (VXX $ volume and Smart Beta P/C) has just fallen to neutral, so there is no clear market direction indicated.  Combined with the overall Indicator Scoreboard, it raises a question concerning additional downside or indicates that any downside will be quickly reversed.

The NDX sentiment remains strongly bullish as all EMAs hover around the 1.20 BUY level.  I wonder how much of the tech advance is fueled by the BitCoin mania.

Bond sentiment (TNX) saw a fairly sharp rise as rates rose back to 2.4% level and seem to be forming a triangle of sorts, but it is hard to tell if this will lead to a breakout to higher rates.  Stocks are likely to be effected by rates rising to the 2.7-2.8% level.

For the gold miners (HUI), bearish sentiment has started to rise as price fell to the 180 level, but remain far short of the late 2016 level before for the year-end rally began.  A continued fall to the 160 level or lower is probably needed before a sharp rally is possible.

II. Options Open Interest

Options open int has proven pretty ineffective the last couple of weeks as high call levels have provided little resistance to higher prices in the SPY (current 265.5).  This week I will look out to Dec 29 which shows a surprising level of calls.

For Wed, there is strong call resistance for SPY at 266-7 and little put support until 260, so 261 is a reasonable target if there is any surprise at the FOMC.  However, given the departure of Queen Yellen next month, coupled with benign inflation and jobs data, no surprises are likely other than the expected rate hike.

For the monthly/qtrly opt exp, the chart indicates a "most likely" range of 259-262 with strong resistance at 265-7.  Again, past resistance has been futile, so it's really hard to argue for a strong pullback.

The year-end Dec 29 open int is very interesting simply due to the HUGE open int at SPY 266-7 (ex-div = SPX 2670-80).  This is over 3x the Dec qtrly and probably represents smart money (Soros or GS) betting on a House/Senate tax compromise.

Conclusions.  Next week could be very interesting if we see a continuation of the current decline as an abc which could peak in the SPX 2655-60 range with a second 40 pt pullback to SPX 2615-20.  The normal indicators are not very bearish ST, however, so any pullback could be reversed quickly.  Options OI indicates the strong potential for a rally into year-end if the Dec 29 OI are smart money.

Weekly Trade Alert.  I have not recommended shorting lately since the rally is likely to continue for now, so the low risk trade is to go long on a potential pullback sometime next week, hopefully in the SPX 2615-20 range with a target near SPX 2700 by year-end.  Updates @mrktsignals.

Investment Diary, update 2017.10.28, Indicator Primer
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