What Crash?

Overall last week went pretty much as expected with a retest of the prior weeks lows and a strong rally afterwards, but the retest came much earlier in the week than anticipated and at somewhat higher levels.  Friday was clearly a short covering rally as a repeat of the crash after the Feb jobs report did not happen.  There are signs that the rally may be nearing completion with upside targets next week of SPX 2800-2820.  The following week (FOMC) may see a return of volatility with a sharp increase in VIX call buying Thu/Fri pushing the VIX Call Indicator to a 25% increase of the mean from recent lows (50% is SELL) with a sell signal likely next week.

I. Sentiment Indicators

For the next few months I plan on looking at the normal indicators for short term changes (2017-18 and st EMAs) as I expect a topping pattern similar to mid-2015 that saw several 4-5% declines.  The overall Indicator Scoreboard has now dropped to the level of the Feb high of SPX 2789 before a three day drop of about 140 pts.

The Short Term Indicator (VXX $ volume and Smart Beta P/C) still remains somewhat higher than the Feb top, so I expect the SPX to increase at a slower rate than last week into options exp.

Bearish bond sentiment (TNX) short term continues to fall but the risk of higher rates will remain small until sentiment reaches the mean or lower.

The gold miners (HUI) bearish sentiment has risen to the point that a small bounce is expected, but the main trend is still down.

Next I want to look at the ETF sentiment using long term EMAs for the SPX and NDX to show why the intermediate trend (months) is still higher, but not likely to carry over to the long term (years).  First, looking at the SPX 2x SDS/SSO ETF ratio, the level of bearishness is much lower than what was seen during the 2015 flash crash or the early 2016 selloff.

The SPX 3x shorter term SPXU/UPRO ETFs are also lower than the earlier 10% selloffs.

A couple of weeks ago when the NDX was at 6850, I mentioned that high bearish ETF sentiment could push the NDX up 300 to 500 pts and now at 7100, it is nearing the first target.  The NDX 2x ETFs QID/QLD, similar to the SPX 2x ETFs, is nowhere near the levels of the 2015 and 2016 selloffs.

While the NDX 3x ETFs SQQQ/TQQQ actually exceeded the levels of the earlier selloffs and remains at extremely high levels, indicating that more rally is expected short term, probably an additional 250 pts or more over the next few months.

II. Options Open Interest & Other

The last few months I have been disappointed with the SPY options, particularly last week, while the SPX options open Int that I presented last week were much more informative.  Last Wed, while many were expecting a sharp selloff after the Gary Cohn resignation, I posted on Twitter that a close between SPX 2720-30 was likely using SPX options.  For Fri close, SPY indicated a 273 close, while the SPX showed the possibility of SPX 2750 or higher if 2730 was exceeded, and indeed pushed over the 2780 puts.

For next week, Mon the 12th, the range between SPX 2750 and 2800 looks wide open if the calls maintain positive delta hedging, the most likely close is 2770-80.

For Wed the 14th, the outlook is more ominous as there is little put support until SPX 2730, but as long as the SPX remains over 2760 positive delta hedging may maintain an upward bias with strong resistance at 2800.

For Fri opt exp the 16th, the outlook is much the same as Wed where strong call resistance at 2800 is likely to cause a close below that level, and a break of the 2750 level does not find support until 2720-30 with strong support at 2690.

Last week's increase in VIX call volume was concentrated in the Mar 21 monthly opt exp that shows a push up to the 18-19 level and possibly to 23-24.  Given that this is also the time for the FOMC outlook on short term rates we could possibly see another 3 day selloff week after next on Mon-Wed of SPX 100-150 pts.

The VIX Call Indicator has yet to show a SELL at a 50% increase of the mean from a recent low, but is half the way there as of Fri.  Note the extreme high (BUY) at the Feb crash market low.

III. Technical Indicators

This week I just want to add two possible charts that may convey where the market is going.  Note that the May and Nov 2018 tops were rounded tops so this may evolve differently.  First a possible bear flag may be forming that could top in May near the ATH with a slope of SPX +30 pts/mn.  This would put in a top next week at SPX 2800-10 with a potential decline into the EOM to 2660-80.

The second is an ending ED that could top next week around SPX 2820 with a potential correction to only 2700.

Conclusions.  The crash never happened, or at least that is what the stock market is indicating, but sentiment is telling us that short sellers are forced to cover once again as the tales of doom and gloom don't pan out.  As I've said before the eagerness of the bears is their own undoing.  Everything still seems to point to higher levels ahead over the next few months, but the June-July period still looms as a strong possibility for a trip to the SPX 2450ish level.  The VIX Call Indicator is warning that the current upswing may be coming to an end soon.

Weekly Trade Alert.  Week after next is looking interesting as a shorting opportunity.  The Indicator Scoreboard and ST Indicator is showing that bearish sentiment is likely to keep the market afloat one more week, but the VIX Call Indicator is showing that volatility may pick up FOMC week.  Look for a high to short at SPX 2800-20.  A lower high will probably lead to sub 2700, while a higher high may only pull back to 2700.  If the VIX Call Indicator triggers a SELL, an update will be posted the next AM.  Updates @mrktsignals.

Investment Diary,  Indicator Primer,  update 2018.02.23 ETF Sentiment Revision
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