Saturday, June 17, 2017

No One Can Predict the Future

..., but we all try.  This week, I am going to add a special section in addition to the sentiment indicators and option open interest.  Last week I spent several hours looking at historical charts and also discovered a simpler, but just as effective, high risk indicator that just fired last week.  These technical indicators as well as last week's GDX analysis point to a top for SPX in July.

I. Sentiment Indicators

The overall Indicator Scoreboard showed that bearish sentiment rose steadily due to fallout from the tech decline even though prices were mostly flat outside of intra day declines.  Similar trends in August 2016 was followed by lower prices, but in January by higher prices, so likely no imminent top.

The Short Term Indicator (VXX $ volume and Smart Beta P/C) using INT EMAs likewise rose with similar comparisons and conclusions.

Bearish sentiment for bonds (TNX) has moved back to the neutral range even though rates were flat which seems to indicate less demand for safety.

Sentiment for gold stocks (HUI) with ST EMAs provided the biggest surprise of the week, dropping to the recent SELL level,  as BTFDers seem to expect the trading range (GDX 22-24) to hold up even though the options open interest shown last week showed that the range into July expiry (7/21) was likely to be GDX 21-23 or lower (HUI 160).

II. Options Open Interest

I did receive a question about the monthlies last week, so for those unfamiliar with options, the original monthly options expire the third Friday of the month.  I will in the future try to use specific dates for clarity.

This week I will look at the Wed/Fri options as well as the June EOM (6/30).  The Wed options show a surprisingly tight range between 243-4 with previous close at 242.6 and most likely Wed close at 243.5.  Fri options show more bullish potential up to about the 246-7 level.  Put resistance is fairly low, however, so downside surprises are possible.

The next (EOQ), shows more call resistance that is likely to push prices back down to SPY 243-4 level.

Looking forward to the July monthlies, there is a fairly flat range between SPY 240 and 246 with very stiff resistance at 247.

III. Technical Indicators

About a month ago, I revised my outlook upward based on a study of several bear market tops that showed rallies of 18-20% in the final six to eight months as a way to run in the shorts or "strangle the bear" as I called it last week,  In particular, since I am looking for a 1970s outcome long term as a result of the QE quagmire, the first step would be a 1970-72 type bear market that was surprisingly mild, down only 20% after 2.5 years, before a final collapse that totaled 33%.  The final 1960s rallies were 18 and 19% depending on which top you chose so the result from the 2016 election lows is SPX 2470-90.

The second item which I also noticed comparing 2017 price behavior to the past was the amazing similarity to 2014.  Starting in Feb of both years, the SPX rallied strongly into early Mar, then started a trading range for three months of about 1900 to 1820 in 2014 and 2400 to 2320 in 2017.  More amazing is that the numbers are off by an almost exact 500 pts.  Both rallied out of the trading range in late May into early June to 1950 in 2014 and 2446 in 2017 with mid June pullbacks.  In 2014, the SPX then rallied to 1960 late June before an EOM pullback to 1945, and early July hit 1985 with a larger pullback before a final July high of 1991.  Will the SPX reach the same targets by adding 500 in 2017?  Note prices eventually continued higher in 2014, but the sentiment picture was vastly different than today as shown by the LT SDS/SSO chart below.

The final technical indicator I want to cover today is a simplified version of the high risk composite I discussed several weeks ago as a measure of declining volume support for advancing issues shown using the TRIN, this indicator is the $NYAD:$NYUD which gives a warning about a month before an important top with a spike over 6.0.  The five readings over the past two years included Oct 2015, Mar-Apr 2016, July 2016, Apr-May 2017, and last week.  This may be due to the smart money (high volume traders) pulling out leaving the dumb money to pick up the crumbs.

Conclusions.  Normally, I don't place a lot of confidence on historical analogs, but continued moderately high bearish sentiment seems to align with the 2014 analog so it may be worth a close watch.  I may take a couple of short term trades off book where the options OI align with the 2014 analog.

Weekly Trade Alert.  None, any sentiment changes will be posted one hour before the open when relevant.   Updates @mrktsignals.

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Saturday, June 10, 2017

Bubble Trouble

All week I had been thinking of a chart I saw a few years ago posted by John Hussman which symbolizes something called a Sornette bubble.  The primary characteristic is that as prices move toward a top pullbacks become shallower, but more frequent.  Since the mid-May pullback in the SPX of 2% that lasted only two days, all ST SELL setups seems to evaporate as prices continue to melt up.  Friday may have been the extreme example where a 30 pt SPX pullback occurred in a matter of hours and just as quickly reversed. Just to be clear, I am not predicting a crash.

This week, I will continue to look at sentiment indicators as well as options open interest to gauge sentiment for forward months.

I. Sentiment Signals

The overall Indicator Scoreboard saw a sharp drop last week, mostly with the collapse of the P/C ratios all week and especially Thur when the CPC reached 70%, giving an INT SELL on Thur.  This is usually an early indicator with a two to four week lead.

The Short Term Indicator (VXX $ volume and Smart Beta P/C) using INT EMAs reached a pseudo SELL level, but the Smart Beta P/C refuses to decline so I am somewhat skeptical at this point.

The Short Term Indicator (VXX $ volume and Smart Beta P/C) using S/T EMAs gave a ST SELL Mon as posted on Twitter and came close to a retest on Thur.

Bearish sentiment for bonds (TNX) has continued to fall to a full SELL even as rates rose slightly.  Some are saying that the FED is likely to start reducing its balance sheet by selling bonds by the EOY so this may place a floor on rates.

Gold stocks (HUI) had the move I had been expecting to test the 200 SMA on Tues then started to sell of sharply, but the reaction shown by sentiment was unexpected.  There was no SELL at the high, but as prices pulled back, bearish sentiment continue to fall (BTFD) now matching the levels of the previous small pullbacks.  This leads me to believe that the HUI may be starting a megaphone pattern of lower lows (GDX 20-1) then breakout highs (GDX 25-7), then a larger collapse.  This pattern is explained in the options open interest section.

II. Options Open Interest

Last week, I showed that a large number of Wed calls at SPY 244 would likely put a lid on the market (actual range 243-44), but that by Fri prices could move higher but could also move down to the 241 level (actual range 242-45).  The way it happened was a surprise but the SPX moved almost identical to the May 17 performance of the QQQ as reported two weeks ago where the QQQ went from the upper call resistance at 140, then down to just above put support at 135.  The QQQ then zoomed to 2% above former resistance then had a bigger collapse, can the same happen to the SPX?

This week I want to look at some of the forward months to see if there are any clues to market direction.  June is triple witch EOQ option expiry so may be volatile.  Even though Fri low was 242, the close at 243.4 makes delta hedging a possibility to push prices higher, but 245 is a big hurdle.  The FED may add "data dependent" to its notes for future hikes which will be a green light for the bulls.

Looking forward to July and Aug are tenuous as changes are made each month as rollover occurs, but as of now July shows a huge block of resistance at SPY 247 and below that the 242-3 level looks likely.

In August resistance moves down to SPY 245 with a likely pin at 240, but with possible delta hedging lower below 240.  The lowest price possible seems to be 235.  So overall, consistent with a pullback, but no crash.

Just to take a quick look at the QQQ, Fri saw a drop from 144 to 138 then a close at 140.  We may see something like this in the future for the SPX.

Next I want to do the same for the GDX open interest using July and Sept.  For June, we still have the 22-24 support/resistance levels with even more resistance above, so not likely to go over 24.

For July, the big thing here is that resistance moves down to 21 with strong support at 20.  So given the DUST/NUGT sentiment this points to a likely move to 20-1 by mid July.

For Sept, there is strong support at 23 and below with a likely target of 25 and over that delta hedging is possible.

Conclusion.  Occasional bouts of volatility aside, a top in the SPX the next two or three weeks followed by an 8-10% (revised) pullback seems likely.

Weekly Trade Alert.  None, any sentiment changes will be posted one hour before the open when relevant.   Updates @mrktsignals.

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Saturday, June 3, 2017

Strangling the Bear

Another exciting week, especially for the reaction to economic releases.  Tuesday's small pullback produced a ST SELL using the ST Indicator (posted on @mrktsignals) and the next day weak Chicago PMI data (later reversed) sent the SPX down to fill the 2405 gap, then ramped up after hours.  The late surge anticipated the strong ADP jobs numbers and the SPY surged up to the 242-3 resistance, but by mid-day the bears were dancing shown by the high P/C on CBOE intra day listings so a warning was posted not to short and that SPY 245 might be seen with delta hedging from call writers having to buy futures.  Friday's release of the official jobs numbers were only 50% of the ADP numbers, but the markets seemed unfazed and closed on the SPY 244 level.  So it looks like the expected July-Sept pullback will occur from higher levels as SPX 2500 is in sight by the end of June.

I. Sentiment Signals

The overall Indicator Scoreboard declined only slightly and, considering that the last INT SELL only produced a two day pullback of 2%, it is unlikely to produce a significant SELL next week.

The Short Term Indicator (VXX $ volume and Smart Beta P/C) using INT EMAs is in much the same situation.

The Short Term Indicator (VXX $ volume and Smart Beta P/C) using S/T EMAs is shows the Tue SELL signal which was only good for 15 SPX pts.  A SELL may be produced next week but is unlikely to result in a significant pullback

Bonds (TNX) continued to show strength and are almost at an INT SELL level for the TBT/TLT.  Given the weak jobs numbers, it appears the CEOs are delaying investments and hiring until the Trump troubles are cleared up.

Sentiment for gold stocks (HUI) is about as neutral as it gets, juggling the weak USD vs lower inflation expectations from a weaker economy.

II. Options Open Interest

The resistance for the SPY at the 242-3 level did not prove to be as important as expected.  I wondered if this might happen given the ease the NDX/QQQ, shown last week, blew thru the 140 level (now 143.5) after failing at that level May 16-17.

Looking at the weeklies for next week, the Wed call resistance (6/7) may prevent a rise over 244-5, but Fri (6/9) resistance rises to 246 so a late week advance is more likely.  A pin Fri at 240 is the conventional interpretation but seems unlikely in the current market

The combined Weekly+Monthly is about the same as last week and shows lower resistance at higher prices with possible delta hedging from call writers forcing prices higher.  It is possible if a SELL is generated by Wed that a short term pullback as low as SPY 241 could happen by Fri that may coincide with the Comey testimony, but like the QQQ action in mid May this would be a BTFD.

The June EOM/EOQ OI clearly shows that the most significant resistance to higher prices is at the SPY 250 level (SPX 2500), so it seems likely that we move toward that level before a significant correction.

Conclusions.  The bears persistence to short every new high is their own undoing.  This is easily seen by the high intra day P/Cs and the explosion of VXX volume the last hour of trading.  Although still learning to the options open interest, it has helped me to see the markets zones of resistance. Next week, I will take a look at the July and August OI charts that point to lower prices.

Weekly Trade Alert.  None really other than the BTFD possibility later this week.  I have been posting any sentiment changes one hour before the open when relevant.   Updates @mrktsignals.

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Saturday, May 27, 2017

Consolidation, then What

After first tackling the SPX 2400 area in early Mar, the market finally hurdled over last week to reach my LT objective of 2415.  Sufficient bearishness remains for a consolidation between 2400 and 2420 for a couple of weeks, but an INT decline of 7-8% should still start by early July.  Rising TRIN and falling VIX P/C may also trigger a High Risk warning by June expiry, even though the last one only resulted in a disappointing 2% drop. This week will also include an update of the option open interest.

I. Sentiment Indicators

The overall Indicator Scoreboard has moved back to a less supportive neutral position and may not reach a full SELL before an INT decline.

The Short Term Indicator (VXX $ volume and Smart Beta P/C) using S/T EMAs after giving a ST BUY is now approaching the SELL region, although the rate of decline is likely to slow as prices stall out.

The biggest surprise in sentiment for the week was probably in bonds (TNX) as bearish sentiment levels has now fallen to levels where a significant rise in rates has occurred in the past   A continuation of this trend while stocks consolidate is consistent with a rise in rates from Jul-Sep as stocks are expected to fall.

A second surprise was with gold stocks (HUI) as bearish sentiment rose as prices consolidated in a similar b-wave flat to the Mar period.  It's beginning to look as if prices will rise to about the 205-210 (GDX 24) area as stocks and bonds fall from Jul-Sep.

II. Options Open Interest

This is probably the last time I will take a detailed look at this area as I was just looking for a shorter time view sentiment measure and have decided to rely on the combined monthly and weekly since the weekly contain too much noise for my purpose.  If you wish to view the weekly commentary, please visit SassyOptions.

This is the chart of the combined monthly and weekly for June.  This clearly shows why SPY 240 was such a big deal and why 240 to 242 may be a resting zone, where puts provided strong support up to 240, while calls showed very strong resistance at 240 and strong at 242.

The June monthly currently shows declining put support above SPY 235 that may allow prices to move lower as option expiry approaches.

For the coming week, Wed OI looks like prices could jump all over the place which is why at first I thought shorting might be a good idea, but concluded that volumes were so low that the effects would likely be minimal.

SPY Fri OI makes more sense and together seem to indicate that prices would remain in the 241-242 range for the first part of the week but fall to the 240 level by the end of the week.

Looking at some of the other indices, the NDX/QQQ easily ran over resistance at 140 and looks like it could continue higher.

GDX looks like it will still remain in the 22-24 range.

Finally, VIX is somewhat hard to interpret since it easily fell below 10 and appears on its way to 9.

Conclusions.  A number of indicators suggest a return to the SPX 2350 area may be likely by mid or late June but more consolidation is likely first to reduce the level of bearishness.  This may take one or two weeks.

Weekly Trade Alert.  We made it to the SPX 2415 shorting area and I even posted a trade on Twitter, but stopped for a small gain (SPY ATM put in/out 1.84/2.01).  With the SKEW at 123, I would rather wait for a SELL than try to top tick.   Updates @mrktsignals.

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Saturday, May 20, 2017

Which Way Wanda

What a week, my outlook for the next month was compressed into three days with a drop from SPX 2405 down to the 2320-50 range and back towards 2400.  I was somewhat distracted Mon & Tue working on an option open interest model which in the long run helped me to understand what happened, but in the short term contributed to missing the trade.  Several posts were made on Twitter indicating that the huge jump in VXX volume was likely to truncate the decline and cause a sharp rally in a few days. This weeks article is divided into three sections with sentiment indicators, using options open interest and conclusions.

I. Sentiment Indicators

Tuesday saw a sharp drop in bearish sentiment putting both the overall Indicator Scoreboard and the Short Term Indicator in the SELL position, but the action of the next few days resulted in a sharp reversal in sentiment.

The Short Term Indicator (VXX $ volume and Smart Beta P/C) using S/T EMAs has also given a short term BUY, with the huge spike in VXX volume, which recently has resulted in new highs.

To make matters more interesting, the very short term outlook for the BKX which had been leading the DJIA down and last week saw many analysts project short term lows in the 74-5 range now shows a BUY. Opposite to the Feb-Mar period which was mostly in the SELL range, the multiple BUYs now could indicate continued strength.

pre-Conclusion for SPX.  Admittedly my personal bias is bearish longer term and a longer topping period with the semblance of a H&S is my hope, but I rely on sentiment for shorter direction.  That being said, I weight the immediate drop to SPX 2300ish at only 10% with a move to 2400 before dropping at 45% and to 2415 also at 45%.

Looking at bonds (TNX) a drop in rates to the bottom of the recent trading range has only resulted in a small reduction in bearish sentiment, so still neutral in direction.

For the gold miners (HUI), it looks like higher prices are still ahead as sentiment has not yet dropped to the SELL level.

II. Using Option Open Interest (OI)

For over a year I had been reading the free weekend updates of SassyOptions so I am not sure why this week I decided to try my own, but after recommending the weekend report on Twitter, I set up a spreadsheet version in Excel posting several updates online Mon & Tue.

The first chart I set up was for the May monthly (wrong in title) option interest for the SPY.  The chart indicates the puts (red) were pushing upwards to 240 while the calls (green) were pushing downward with convergence at 240.  These act much like the EW pivot points or as support/resistance zones.  As prices continued to hold around 240 on Tue, I noticed a put/call imbalance for Wed/Fri with p/cs at .76 and 1.1 respectively, so I expected a 5-10 pt drop for SPX Wed then a rally back to 2400 (SPY 240) Fri.  At 8am EST on Wed futures were down 6-7 pts and held there to 8.30, so I thought I had guessed right, but when the east coast banks opened at 8.30am futures started dropping and quickly fell to down 20.  What I had failed to realize was that there was no support below SPY 240 and after opening quickly dropped to 237 with the SPX closing at 2357.  What happened was something called "delta hedging" which is simply a form of portfolio insurance, aka 1987, where a drop below a certain range that seemed to be 8-10 SPX pts forced the put writers to sell SPX futures to cover their losses which started a downward spiral in prices.

Why did it stop at SPX 2353 on Tue?  This is an updated chart of the one posted on Twitter for June that shows strong support at the SPY 235 (SPX 2350) level.  However, there is virtually no put support above 235 and below that no support until 230, so for June expy the expected range is 235-240, but a break below 235 could quickly fall to 230.

Next I want to look at next weeks Wed/Fri OI, remembering that contract size for Fri is about 50% of monthly and Wed is about 50% of Fri so influence is probably relative to contract size.

For Wed, convergence is at 239 with stronger call resistance above and less put support below so most likely range thru Wed is 238-39.

Fri tells a completely different story with strong put support at 237 and 239 while call resistance actually declines between 240.5 and 241.5, indicating that this is the best chance for a move higher to SPX 2405-2415 range.

pre-Conclusion for SPX.  OK, so there is no guarantee this will actually work, but it does look like there is a good possibility for a short entry Fri at a new ATH with a good chance of a decline to 2350 or if broken 2300 by June expy.

Application for the NDX using QQQ ETF.  This is an interesting example of "delta hedging" both ways.  Using the May OI, the QQQ should have been pegged to 138, but once it broke to the upside, there appeared to be no limit.  I began to think the NDX would continue rising until Musk announced plans to build a solar powered escalator to the moon.

The June OI tells a different story, as the Wed drop sent the QQQ all the way from the above call resistance down to the below put resistance.

I also tried a couple of others including the TNX, VIX and GDX.  There were no options for TNX, VIX was interesting with a medium size hump at 12 and a larger one at 15 which turned out to be key levels, but somehow the chart disappeared.  So the following is for the GDX June.  There is strong resistance at 24 and above with max put support at 22, so most likely range 22-24.  Watch out for delta hedging below 20.

III. Conclusions.

So we covered two sentiment approaches this week, my normal approach does not show a clear path with a short term BUY and an intermediate stronger SELL.  One resolution which I posted on Twitter is an analog to mid-June 2016 when we had a similar sharp rise in VXX volume.  What is shown is the EW preferred scenario where sentiment spiked high enough on the second decline (now SPX 2300 or below) to support a rally to ATH.  Possible, but I prefer a more bearish LT resolution which would probably mean alternation (we had sharp decline, so next phase more gradual) or an ATH and consolidation to work off bearish sentiment then decline.

The use of option open interest supports the bearish outcome as a possibility with a possible rally late next week over SPX 2400 with more decline later into June.

Weekly Trade Alert.  This even harder than last week which did turn out to be the correct path.  Assuming SPX consolidates between 2380-90 Mon-Wed, a run above 2400 Thu-Fri seems likely as bears get antsy. Short SPX 2415ish, Stop 2425.  Target ST 2350, IT 2300. Updates @mrktsignals.

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