Saturday, May 19, 2018

Death by 1000 Cuts

Last weeks guideline of little progress with a test of the triangle breakout at SPX 2700-10 was followed closely after a Mon rally to the possible topping zone of 2740-60.  A Risk Aversion Indicator SELL Mon (Twitter) was followed by a drop to 2702 Tue and the rest of the week was spent trading between 2710 and 2730, closing at SPX 2712.  Options open int shows the potential for a rally to SPX 2750+ by Wed but afterwards the direction is likely to be down through June 1 targeting SPX 2650-75.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) continued to hang around the -8 level 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) also continued to level out, this time around the zero level.  As mentioned last week, we may not see much lower levels if the pattern of rising bottoms holds.


Bearish bond sentiment (TNX) spiked last week as rates briefly rose to the 3.1% level before pulling back.  Rates seem to be stair-stepping higher with each pullback in sentiment, but overall sentiment is still considerably lower than the 2015 move in rates from 1.7% to 2.4%.


The gold miners (HUI) bearish sentiment surprisingly fell last week even as the HUI dropped from 182 to 178.  Remembering that the long term mean (from 2015-18) is 0.94, this has negative implications for the miners.


With the RUT being the only major index hitting ATHs, I thought it might be a good idea to take a look at the TZA/TNA ETF ratio.  Predictability has been somewhat erratic over the past year, but sentiment is similar to Oct 2017 so a ST top may be near.


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 gave a SELL Mon (on Twitter late AM at SPX 2635) that was followed by a SPX 30+ pt decline the next day and has moved back to a TL neutral position.


The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 days/weeks) moved up sharply on Fri as a lot of options players seem to be looking for disappointing news over the weekend.  More likely the wink between China and Trump will be viewed as a positive (a wink is "do nothing but claim victory" vs a blink which is a tacit but unenforceable agreement) and the markets will rally early in the week.


The INT term SPX Long Term/Short Term ETFs (outlook two to four months) reversed from a very low level on Mon and rebounded during the week.  It's difficult to draw any conclusion, but the most likely outcome is limited upside / possible correction ahead.


The INT term NDX Long Term/Short Term ETF Indicator (outlook two to four months) remains below the mean showing a slight negative bias.


III. Options Open Interest

Last week's open int correctly indicated limited upside, but looking forward for the next two weeks lower prices are likely.  For Mon, there is very little net open int below SPX 2720 so the SPX could fall hard with most notable upside resistance at 2750.  Expected close is 2700.  Based on other sentiment I expect a move up to SPX 2730-50.


For Wed, the outlook is much the same with modest support at SPX 2600 and strong resistance at 2765 and 2775.  Expected close is 2720, but news could push prices as high as 2765-75.


For Fri with large open int, there is very large call resistance at SPX 2725 so it's unlikely the SPX closes higher that 2725 by Fri, so any news events Mon/Wed that push the SPX over 2750 would be a "sell the news" by Fri.


For the following Fri, Jun 01 (NFP), strong resistance at SPX 2675 indicates that prices should continue to fall thru the following week to the 2675 area.


Conclusions.  After a ho-hum week last week, the next couple of weeks are likely to be more exciting.  Depending on news events, likely China trade sanctions and N Korea nuclear disarmament, Mon thru Wed of next week could rally to SPX 2750-2775, but afterwards should target 2675 by June 1.  I hope to see a Risk Aversion SELL if there is a top.  This could be the breakdown from the triangle breakout to start a summer decline to SPX 2450-2550 by Sept following the Presidential cycle.  This would imply a strong year-end rally.  I expect the summer decline to be slow and painful as rising rates provide "1000 cuts" to bring the market down.  If markets do not rally next week then the top may be in at SPX 2742 for the summer.

Weekly Trade Alert.  Looking for a top SPX 2750-75 to short next week with a target of 2725 by Fri and 2675 a week from Fri.  There is a Gartley pattern suggesting SPX 2775 as a high.   Updates @mrktsignals.

Investment DiaryIndicator Primer,  update 2018.03.28  Dumb Money/Smart Money Indicators
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Saturday, May 12, 2018

Triangle Fakeout or Breakout?

A couple of weeks ago I showed the SPX consolidation formation (w4) as a Bermuda triangle because there were several interpretations.  One which was expected to be a fakeout breakout where the top descending line was drawn through the Jan SPX top at 2873 and the mid-Mar top at 2802 (simple triangle).  The breakout pt was near the SPX 100 SMA at 2706 and the break over that level saw the public (dumb money) panic into the market as sentiment indicators plummeted across the board.  The smart money seems to be looking at the EW interpretation as illustrated by Avi Gilbert  which is looking for a top around SPX 2740-50 as a W4 d-wave with an expected drop to SPX 2450-2550 to follow.  The latter is shown clearly this week with the SPX ST/LT Term ETFs as the 2x ETF sentiment fell much more than the 3x sentiment.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) plunged from modestly bullish last week to neutral across the three time periods to moderately bearish very short term.  For an INT top (prior to 10%+ decline), I at least expect the green 5 dy EMA to reach -10 and the blue 20 dy to reach -8.  SPX is expected to work its way higher into late May.


The INT view of the Short Term Indicator (VXX $ volume and Smart Beta P/C, outlook two to four months) also declined, but not as drastically.  Looking over the past year, the previous bottoming periods for sentiment were at higher levels so sentiment may not drop much further.  This may mean that the next couple of weeks could be bumpy with an upward bias.


The ST view of the Short Term Indicator (VXX $ volume and Smart Beta P/C, outlook two to four weeks) shows sentiment levels at the lowest of the year outside of early Jan, we may see a very short term pullback early next week to test the simple triangle breakout at SPX 2700-10.


Bearish bond sentiment (TNX) has dropped over the last two weeks as rates consolidated just below the 3.0% levels as rates continue to track the 2 year notes since Oct 2017.


The gold miners (HUI) bearish sentiment remains elevated compared to the last year, but the 50% rise in rates (TNX) since late 2017 is providing strong headwinds to any advance.


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) continues to be the best very ST indicator as the reversal of the modest SELLs of two weeks ago saw a strong move up prior to last weeks rally as posted on Twitter.  Now at the end of last week we've seen sentiment pullback again, warning of a modest pullback over the next few days, possibly to test the simple triangle breakout.


I have revamped the Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 days/weeks) which showed the bottoming potential of the last two weeks, but dropped sharply last week and may be repeating the sequence leading up to the Jan top.


The INT term SPX Long Term/Short Term ETFs (outlook two to four months) saw a sharp drop last week when the SPX 2x ETF (dumb money) bearish sentiment fell sharply while the 3x ETF sentiment (smart money) remained unchanged.  This looks a lot like the late July 2017 sentiment which consolidated for two/three weeks before the Aug pullback.


The INT term NDX Long Term/Short Term ETF Indicator (outlook two to four months) also fell but not as much as a couple of weeks ago before the sharp drop in the NDX, so more upside/consolidation is likely.


III. Technical Indicators/Other

Just as a followup to the Bermuda triangle.  Here the purple TL top is what the public is looking at while the red TL top is what the EW community is looking at.


IV. Options Open Interest

SPX options open interest was not very effective last week as I have noted that days where there is high OI tend to have a stronger influence similar to M/W/F two weeks ago where we had EOM/FOMC/NFP coinciding with high OI.  The next sequence with high OI is May 25 (?), May 31 (EOM), and June 1 (NFP).  Possibly we will have a May 25 top, drop into EOM then rally thru NFP.

For next week OI is light even this is optn exp week.  Mon, since the SPX is at 2728 positive delta hedging could push prices as high as 2750, or if the 2710 calls act as resistance they may push prices down to 2700.


For Wed, the story is much the same where calls control the action between 2655 and 2750, and the effect of the 2700 calls are likely to determine whether prices are higher or lower.


For Fri PM, strong overhead resistance moves up to SPX 2780, but given other sentiment indicators and DM/SM Indicators, most of the week may be spent consolidating around the SPX 2700 area with a move to higher levels delayed to the next week after bearish sentiment has a chance to reset.



Conclusions.  Instead of an early week rally to SPX 2700 followed by a pullback, the SPX pulled back to the 2650's Mon/Tue generating a positive outlook with the Risk Aversion Indicator as posted on Twitter, then rallied to breakout of the simple triangle that produced a sharp drop in bearish sentiment across the board.  Another modest pullback to test the simple triangle breakout over the next few days may reset sentiment before the next rally toward the SPX 2740-60 level.  Check for updates intra week on Twitter.

Weekly Trade Alert.  None at this time.   Updates @mrktsignals.

Investment DiaryIndicator Primer,  update 2018.03.28  Dumb Money/Smart Money Indicators
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Saturday, May 5, 2018

An Apple a Day

Last week's SPX trading pattern did not reach my upside shorting target of 2715ish, turning down from a Mon high of 2683 to a Wed low of 2595 (target 2575-2600), then back up to the options OI Fri target of 2670.  The story of the week was AAPL and although I was expecting an EPS upside surprise, did not anticipate the $100 billion buyback or the Buffet announcement of a $75 billion investment that pushed AAPL to new highs.  Tech enthusiasm has again pushed the Risk Aversion Indicator to an extreme were a sharp downturn might occur.

I. Sentiment Indicators

This week in general, I want to step back and longer term look at what might be expected in May and beyond.  The overall Indicator Scoreboard (outlook two to four months) is little changed for the week with a modestly positive outlook.


However, looking at the long term view (3 yrs, 5x EMAs) of the overall Indicator Scoreboard has failed to reach the bearish sentiment extremes of the Aug 2015 or Jan 2016 declines with the implications that the markets are still at the beginning of a longer term decline.


Switching to the INT view of the Short Term Indicator (VXX $ volume and Smart Beta P/C, outlook two to four months) bearish sentiment has continued to decline, but I expect a drop closer to the SELL area of -0.4 to -0.6 before high risk of the next 10+% decline occurring.


Looking at the LT view of bond sentiment (3 yrs, 1x EMAs), we have seen higher bearish sentiment as in mid-2015 before the top in a move up in rates.  The Fed has been talking about normalizing rates by moving the Fed funds rate to 3.0-3.5% and the TNX to 4% by 2020 and this may very well happen. The two and ten year continue to move in close fashion since late 2017.


Looking at the LT view of HUI sentiment (3 yrs, 1x EMAs), the last bull market did not start until the TNX started it's rate decline in Dec 2015, so even though short term sentiment looks positive, long term sentiment is only neutral.  Conclusion, the gold miners are not likely to outperform until the interest rate cycle reverses.


II. Dumb Money/Smart Money Indicators

The Risk Aversion/Risk Preference Indicator (SPX 2x ETF sentiment/NDX ETF sentiment, INT outlook) has continued to perform well on the very short term ending on a modest SELL last week before this weeks decline and has now moved into a modestly positive reading, indicating more upside is likely very short term.  The longer term shows a definite trend (yellow) that is pointing to a longer down trend.


The ST term SPX Long Term/Short Term ETFs (outlook two to four weeks) has moved back to neutral with diminished risk of a large decline, but no large rally expected either.


The ST term NDX Long Term/Short Term ETFs (outlook two to four weeks) saw a swift decline from the positive outlook early last week and is now warning of another pullback likely to start the next few days, but not as severe as the decline two weeks ago based on current sentiment.  Again we see a longer term trend, likely the source of the SPX/NDX ETF trend.


The options-based Dumb Money/Smart Money Indicator (outlook 2 to 4 days/hours) has not been as effective lately as the modest SELL has only resulted in opening declines that were reversed, but it is still warning of weakness ahead.


III. Options Open Interest

Last week's outlook worked like a champ with Mon slightly weaker than expected with a close slightly below SPX 2660 support, while Wed possible drop to 2600 occurred after hours and the Thur open, and Fri rallied back to the 2670 target.  Next week open interest is light so is likely to effect prices less. On Mon there's strong resistance at SPX 2700 and support at 2625 with an expected range of 2660-80, close 2670.


On Wed, the setup is very similar to last Wed with strong resistance at SPX 2700 and not much support until 2580, so another mid-week pullback may be in the cards.


On Fri, there is strong put support at SPX 2625 and below (2x M/W size) there is some call resistance between 2650 and 2700 and strong resistance at 2700 and above, expected close is overlap at 2650.


Conclusions.  Next week may end up similar to last week with less fireworks.  An upside continuation is likely Mon/Tue to SPX 2680-2700, followed by another test of the lower triangle boundary with options OI for Wed showing 2580 possible.  Size of pullback likely will depend on updated sentiment now pointing to only 2610-20, see Twitter for updates.  Rally into Fri is likely to be weak to the 2650 range.  My outlook had been for a continued rally into the end of month to SPX 2740-60 before a larger decline, but current sentiment seems to point to more consolidation.

Weekly Trade Alert.  Looking for early week rally to SPX 2690 +/- 10 to short, first target 2610-20, lower target possible 2580.   Updates @mrktsignals.

Investment DiaryIndicator Primer,  update 2018.03.28  Dumb Money/Smart Money Indicators
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Saturday, April 28, 2018

The Bermuda Triangle

Last week followed my outline with minor exceptions starting with an early rally to the SPX 2680-85 area on both Mon and Tues before a selloff and a rally back toward the 2680 area by the end of the week.  The selloff was intensified by even stronger SELLs by the Risk Aversion Indicator Mon and Tues AM as well as a near SELL from the VIX Call Indicator on Tue 4/17 (up 47% of mean from low vs 50% official).  Next week I will start posting updates of the DM/SM Indicators on Twitter when appropriate as most should have adequate exposure to interpret their meaning by then.

I. Sentiment Indicators

The overall Indicator Scoreboard (outlook two to four months) has moved back to a more positive reading within a positive INT outlook.


The Short Term Indicator (VXX $ volume and Smart Beta P/C, outlook two to four weeks) has, however, moved to a more negative outlook, indicating that the downturn started last week has more to go before an INT upturn.  As discussed later, this is likely pointing to a retest of the SPX triangle lows below 2600 over the next several weeks.



Bearish bond sentiment (TNX) saw a sharp spike higher last week as the TNX briefly tested 3.0%, but I have been wondering about the runup in rates over the last few weeks.  The runup started right after Trump announced the second round of tariffs with China, so when China did not respond in kind perhaps they sold US bonds instead.  Now we have Treasury Secretary Mnuchin scheduled to go to China to discuss trade.  Will a solution bring rates back down?


The gold miners (HUI) bearish sentiment continued to climb as gold miners dropped with the rise in rates and the longer sentiment (blue) has the reached the mid-Dec 2017 level which was followed by a 25 pt jump in the HUI.


II. Dumb Money/Smart Money Indicators

This week I want to start with a blow by blow followup of the The Risk Aversion/Risk Preference Indicator (SPX 2x ETF sentiment/NDX ETF sentiment, outlook 2 to 4 days/hours).  Even though Fri close was at a SELL, I indicated last week that a move up to SPX 2680-85 was likely before a downturn and Mon saw a move up to 2683 before closing at 2670.  A hour before the close sentiment looked like this.


Tues AM the SPX again tested the upper range at 2684 before dropping to a low at 2617 and closing at 2635.  An hour after the open with the SPX at 2667  the sentiment looked like this.


But by an hour before the close sentiment looked like this, and the result was an end to a sharp one day decline followed by a rally into Fri AM.


The strong open in the NDX on Fri (up 100 pts) again resulted in a strong SELL 20 min after the open as shown below.  This time the result was only a 0.5% drop in the SPX (but 2% in the NDX) over the next two hours.


The end of week result is shown below.  As sexy as the above reults may seen there is a potential problem with the Risk Aversion Indicator due to cyclicality where the yellow lines represent a possible trend.  So the current SELL similar to last Fri may be weaker than it seems.


Here is the Risk Aversion Indicator INT look from early 2017, so we may be doing something similar to May of 2017.


This is why I rely on the regular Dumb Money/Smart Money Indicator as it is more stable on the INT time frame.


Moving on to the short term Dumb Money/Smart Money Indicator (outlook 2 to 4 days/hours) the two weak SELLs near SPX 2700 two weeks ago were followed by two weak BUYs last week.  The first BUY at the Wed close was followed by a gap open of SPX 15 pts with a high of +40 pts before a drop into the close.  The second was Fri at the close, so we are likely to start the week on a strong note, where a 40 pt up move from SPX 2670 targets the 2710 area.


The DM/SM cyclical component (outlook 2 to 4 days/hours) improved slightly with the pullback last week.


The INT term SPX Long Term/Short Term ETFs (outlook two to four months) improved last week but has not begun the sharp move up seen in Aug 2017 that should proceed an INT rally.


The INT  NDX Long Term/Short Term ETF Indicator (outlook two to four months) has moved back to the neutral level seen in Aug 2017 so the lows for the NDX may not be much lower.


III. Technical Indicators/Other

I had been paying so much attention to the new indicators that I forgot to check on the VIX Call Indicator, but on Apr 17 it did increase by 47% of the mean from a recent low where 50% is a SELL.  So higher volatility may be expected for three weeks following Apr 17.  (Due to Jan drop scale is actually SPX %/3).


The triangle in SPX since January has held up much better than I expected and a near term conclusion may be indicated by sentiment.  The DM/SM Indicator weak BUY is indicating a retest of the SPX previous high near 2717 close to the upper trend line over the next few days, while the ST Indicator, VIX Call Indicator, and Risk Aversion Indicator are pointing to a test of the lower TL near 2575 over the next two weeks.  The hourly charts also suggest an inverse H&S also pointing to SPX 2717 over the next few days.


IV. Options Open Interest

I did not post an update of the Fri SPX OI, but for those who follow on their own, a large number of calls were added Thur at 2675 that pushed the expected close down to the 2665-70 range (act 2670).


For next week M/W/F all have large positions (10k contracts x 100 sh x 2650 price = $2.65B).  Mon Apr 30 EOM, puts dominate below SPX 2660 with not much call resistance until 2725 with puts and calls mostly cancelling each other out at 2675 and 2700, so a move over 2690 is likely to run to 2720.  No estimate for expected close.


For Wed May 2 FOMC Day, there's not a lot of put support until SPX 2600 with strong call resistance at 2680, so a move below 2680 could drop to 2600.  Expected close 2680.


For Fri May 4 NFP Day, there's strong resistance at SPX 2700 and above, strong support between 2600 and 2650, but little below until 2560.  Expected close 2670.


I also wanted to take a look at AAPL since EPS after Tues close may set the tune for NDX short term.  Current price $162.  AAPL faces a lot af resistance at $165 and higher but little support except at $150, bad news could send the stock reeling while good news may only have a temporary effect.


Finally, a look at GDX which does not look promising.  Currently $22.7, there is stiff resistance at $23 but a move over $23-4 could create some serious delta hedging upward pressure.



Conclusions.  Next week could prove to be a very interesting week with a DM/SM Indicator BUY and SPX options indicating the potential for an early week run toward SPX 2720.  Then we have Tues close AAPL results and Wed aft FOMC results which are expected to be hawkish and a brewing Risk Aversion SELL setup similar to last week.  Finally, to end the week we have the Apr non-farm payroll release coupled with a VIX Call Indicator SELL entering its third week.  Most likely results seem to be a test of the SPX 2017 level Mon/Tue (or possibly Wed AM with good AAPL results), followed by a sharp reversal that tests the lower boundary of the SPX triangle at the 2575 area.  Sharpness of decline may depend on updated Risk Aversion readings.

Weekly Trade Alert.  Possible 1-2 day SPX long targeting 2710+ area.  Short SPX 2715ish with target next two weeks below 2600.   Updates @mrktsignals.

Investment DiaryIndicator Primer,  update 2018.03.28  Dumb Money/Smart Money Indicators
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