Whipsaw Likely Ahead

The "news" supporting a possible rally last week was lacking with a standoff in the China trade agreement and a cancellation/delay of the N. Korea denuclearization talks for June 12.  The options open interest, Risk Aversion and DM/SM Indicators remain slightly negative for next week with a decline to SPX 2675-2700 likely by NFP Friday June 1, but the short/INT term ST/LT ETF Indicators for both SPX and NDX are approaching two to four week BUYs.  Conversely, the INT Indicator Scoreboard and ST Indicator are approaching two to four month SELLs.  The conclusion seems to be an end to the current pullback next week, then a rally into mid-late June before a multi-month pullback into the Fall.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) stalled out last week around -8.0 with longer EMAs continuing to decline.

The INT view of the Short Term Indicator (VXX $ volume and Smart Beta P/C, outlook two to four months) continued to fall sharply last week nearing the level of late 2017.

Here the Smart Beta P/C is leading the way as the VXX $ volume lags which leads me to believe that the next sizable pullback will be a lower volatility water torture rather than a waterfall as seen in Jan-Feb.

Bearish bond sentiment (TNX) fell sharply last week as the TNX fell from 3.1% back to 2.9% and rates are likely to level off for the next couple of weeks to allow sentiment to drop further.  It still seems highly coincidental the sharp rate rises seem to coincide with confrontations with China, while declines follow any appeasement.

The gold miners (HUI) bearish sentiment leveled off around the short term neutral level as strength in the dollar seemed to offset lower interest rates.

II. Dumb Money/Smart Money Indicators

The Risk Aversion/Risk Preference Indicator (SPX 2x ETF sentiment/NDX ETF sentiment, outlook 2 to 4 days/hours) as a very ST indicator has declined to a moderate a SELL last week, indicating that somewhat lower prices are likely next week.  As a note for both SPX and NDX ETFs, splits occurred last week in the SPX SPXU and UPRO as well as the NDX QID and TQQQ, so there may be some distortion for the next couple of weeks, but nothing was apparent in the ETF data.

The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 days/weeks) dropped sharply on Mondays rally to a weak SELL but by Fri moved back to neutral.

The INT term SPX Long Term/Short Term ETFs (outlook two to four weeks) reversed from a low level last week to a moderate positive level during the week as Smart Money sentiment (ST) improved relative to Dumb Money (LT). 

The INT term NDX Long Term/Short Term ETF Indicator (outlook two to four weeks) rose even more sharply that the SPX ETF Indicator which probably means a run to new ATHs for the NDX (assuming no distortion from the splits).

III. Options Open Interest

The large call open int at SPX 2725 for Fri did provide too much resistance as expected with the puts at 2700 providing support and a close at 2721.  Next week is interesting with Memorial Day as a Holiday, we have exp for Tu/W/Th/F with Thur (EOM) and Fri (NFP) large open int.

For Tues, there's moderate call resistance starting at SPX 2725 and little support until 2700 which is the likely range.  Tue/Wed have small open int so may not have much effect on prices.

For Wed, the outlook is much the same although large call positions at 2745-50 and 2770 distort the graph.

For Thur (EOM), calls and puts offset each other at SPX 2675 and 2700 so there should be no net resistance/support between 2650 and 2725 which could contribute to volatility.

For June 1 (NFP), the large call position at SPX 2675 is likely to act like the 2725 position last Fri, pushing prices below that level for the close.  With next significant put support at 2660 prices could fall to 2650-60 with an expected close 2665-70.

The following Fri Jun 8 also has large open int with strong support at SPX 2700 and resistance at 2725, so a jump back to the current range is likely the following week.

Conclusions.  Two steps forward, two steps back seems to be the mantra of Trump's trade/foreign policy as very little was accomplished last week and the SPX responded by trading within the range of of the prior week losing 7 pts for the week.  Friday's option open int did predict the closing price for the week, and if next week follows, the SPX should close just below 2675 by Fri and rebound over 2700 the following week.  Sentiment is pointing to a possible double whipsaw, the first to fakeout the second version of the "triangle" shown here with a drop below SPX 2700 then a rally to the 2750-75 area in June and finally followed by a more serious decline to 2450-2550 by the Fall.  Avi Gilbert labels this as his red "alt" scenario.

Weekly Trade Alert.  The "news" rally appears to on hold with the best reward/risk oppty next week a long (with sentiment support) in the SPX 2660-70 area with a potential 100 pt upside by mid-late June.  A good momentum trade would be to short a break below SPX 2700 targeting 2665-75 Thu/ Fri.  Updates @mrktsignals.

Investment Diary,  Indicator Primer,  update 2018.03.28  Dumb Money/Smart Money Indicators
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