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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Saturday, May 13, 2017

Running Out of Time

For several weeks I have been looking for at least an intermediate term top around mid-May and next week is it.  Previously, I thought a moderate push over SPX 2400 was possible, but we are now running out of time given current sentiment.  Next week could see a push up to 2405, but I will be shorting SPX 2400 if not breached early in the week.

Bearish sentiment has continued to fall even as prices retreated last week.  Looking first at the overall Indicator Scoreboard, bearish sentiment has almost reached the official SELL region, lower than it was in the July and Dec 2015 periods.


The Short Term Indicator (VXX $ volume and Smart Beta P/C) with intermediate EMAs reached the SELL level again after a short bounce early in the week.


Next, I want to look at the Short Term Indicator components for a clearer picture of what to expect.  First, the VXX $ volume has been very low now for several months similar to the mid-2015 period, which may indicate a spike in volatility is near.


Second, the Smart Beta P/C (ETF puts/equity calls) has been one of the most reliable indicators, remaining at warning levels since the first of the year, but refusing to decline to the SELL level.  The last two weeks have seen a breakdown from that range with more decline likely before a SELL is reached.  One scenario that seems to fit the two components is a short, but sharp drop down to the SPX 2320-50 area, possibly by early June, then a rally back to 2400, possibly thru EOM June, then a 7-8% correction down to 2200 by late Sept.


Moving on to bonds (TNX), as rates have risen and are now consolidating in the 2.3-2.4% area, bearish sentiment for bonds continues to fall indicating that higher rates are likely ahead at some time.


Finally with gold stocks (HUI), bearish sentiment has fallen sharply with the most recent rally.  I want to inspect this more closely using a shorter term chart.


Using shorter term EMAs from Jan 2016, one can see that a continued rally towards the 210 level, possibly as a safe haven if stocks decline, is likely to set up a SELL with a decline at least as strong as the Feb decline and maybe more given the longer term view.


Conclusion.  Stocks appear to be struggling, so next week I am looking for a high in the range of 2398-2405 if not exceeded by Wed.  Intraday for clues I watch CBOE intraday put/call here, as you can see very low AM but higher in PM supported strong close, as well as VXX real time $ volume, which dropped to 40% of avg Wed before the Thur flush, then more than doubled Thur with about half in late trading.

Weekly Trade Alert.  One by one the indices seem to be rolling over with the DJTA leading the way, followed by the BKX that is pulling the DJIA down, so that last weeks high by the NDX and SPX looks like a non-confirmation.  Tough making a call here, but I think a top may be in by Wed between SPX 2398-2405.  If P/Cs are weak market may not hold up thru Friday.  Tenatively, Short 2398-2405, Stop 2420, Target 2320-50. Updates @mrktsignals.

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Saturday, May 6, 2017

All Eyes on the French Election

Last week, I was looking for a top in the SPX around 2400, near the Friday close, but on Twitter warned to wait for a "pump and dump" after the French election.  At SPX 2380 early in the week, I thought we might each 2405, but after the Wed debate favoring Macron moved the SPX to 2390, 2410 seemed more likely, and finally the Friday close near 2400 has me looking for 2415.  I've noticed in the past that moves in Europe result in about half the percentage change for the US markets, so SPX 2415 may result from a 1.5 to 2.0% change in Europe.   Obviously, the move late in the week has reflected part of the change.

Moving on to sentiment the biggest change was Monday's 13% drop in the SKEW from 147 to 128, which lowered the expectations for large price moves as we saw in the weekly range of 2379-2399.  So the expected drop of 3-4% may take from mid-May to mid-June.

Looking next at the SPX sentiment indicators from Jan 2015, the Indicator Scoreboard since last Oct has repeated the sentiment pattern from Jan to July and Nov-Dec 2015, but the TRIN is not as excessive and the recent drop in the SKEW points to less volatile declines than from the 2015 tops.


The Short Term Indicator (VXX $ volume and Smart Beta P/C) with intermediate EMAs has now fully reached the SELL level, last seen in Nov 2015.  This plus the Indicator Scoreboard reading indicate that an initial 3-4% decline may not be sufficient for a strong bottom.


The additional chart for the SDS/SSO ETFs seems to support this idea with low bearish sentiment since July 2015.



Sentiment for bonds (TNX) has stabilized near the mean so rates may stabilize until mid-June if the SPX corrects.


Gold stock sentiment (HUI) remains low even after the HUI testing the recent lows, so it's unclear whether the HUI can bounce to the 200 SMA (200-205) if stocks correct, then crash, or whether it just continues downward.


Conclusion.  Stocks (SPX) are likely to move lower after making an ATH next week and may be making a final top depending on how sentiment looks after a decline.  If the SKEW remains low and the decline is gradual, we may only get a big yawn from the bears and stocks may find themselves in a situation similar to the HUI.

Weekly Trade Alert.  Ideally, I will be looking for a SHORT at SPX 2415 (range 2410-2420) based on Europe's reaction to the French election.  Target is SPX 2320-2330, Stop 2430.  Based on Friday's symbolic levels (DJIA 21K, SPX 2400) the top may carry over into Wed-Thur. Updates @mrktsignals.

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Article Index, 2017 by Topic

2017.01 #1 Expecting strong start to year, weakness later with higher s/t rates. Start BKX FAS/FAZ.
2017.01 #2 Indicator Scoreboard at SELL as DJIA crosses 20K. S/T Indicator holds above SELL.
2017.01 #3 Not expecting reflation rally until mid-2018. HUI nears SELL.
2017.01 #4 SPX and NDX ETFs bearish sentiment at lowest level in several years.
2017.01 #5 Looking at TRIN and VIX P/C do not see signs of significant top yet.
2017.02 #1 SPX topping pricess may continue. Gold stocks and bonds nearing SELL.
2017.02 #2 SPX may top out at 2390. Gold stocks on SELL HUI at 220.
2017.02 #3 L/T Indicator Scoreboard very bearish, but S/T Indicator refusing to show SELL.
2017.02 #4 Trump reforms delayed. VIX P/C and TRIN moving to bearish.
2017.03 #1 SPX bubble continues. HUI crushed as rates rise.
2017.03 #2 Market pressure may appear by mid-May. Bonds and HUI may bottom S/T.
2017.03 #3 Using the SKEW as indicator of large price moves, up and down,
2017.03 #4 Buy on S/T Composite & high SKEW indicate large move up for SPX likely.
2017.04 #1 EOQ windiw dressing starts rally, but sharp drop in bearishness.
2017.04 #2 Overall long term view of ETFs contradict consensus growth/inflation views.
2017.04 #3 BUY for Indicator Scoreboard and high TRIN point to final rally. Inverse HUI and TNX moves continue.
2017.04 #4 Using VIX P/C and TRIN composite shows high risk of >= 3% decline in SPX.
2017.04 #5 Nearing a SELL on SPX, possible SPX 2400+ at FOMC for top.
2017.05 #1 Possible top after French election, but lower SKEW indicates slow drop.
2017.05 #2 Very low VXX $ volume warns of probable drop SPX 2320-50 w/retest ATH by EOM June.

Saturday, April 29, 2017

Nearing a Sell Signal

Last week, I pointed out that a combination of a BUY on the Indicator Scoreboard and high SKEW were likely to provide a large move up and it was followed by a 50 pt jump in the SPX, exceeding my expectation.  This week the SKEW remains high as the indicators are close to a SELL, so a top similar to June 2015 is likely by the Wed FOMC result.

The Indicator Scoreboard last week dropped to the -6.0 level, but a move to -8.0 matching the June and Dec 2015 levels is expected to signal a top.  It remains to be seen whether the next drop will produce a new BUY and possible higher high or low bearishness as has been seen in the gold stock sector and a weaker rally.


The Short Term Indicator (VXX $ volume and Smart Beta P/C) has moved down strongly and is likely to reach a SELL on a rally back to the SPX ATH.


Since the RUT last week broke out of a potential H&S pattern, I wanted to compare the sentiment for that index to the SPX using the 3x ETFs.  Higher levels of bearishness for the TZA/TNA compared to the SPXU/UPRO does support out performance for the RUT compared to the SPX.



Moving on to bonds (TNX), the rise in bearishness with rates last week does support a leveling out or even a move lower in rates.


Gold stocks (HUI) got the negative surprise I mentioned last week and still seems to be moving inversely to the TNX.  It's possible that a stabilization in rates may be setting up TA triangle formation for a bigger move up or down.  Sentiment points to the downside.


Conclusion.  Last week's volatility was to the upside but that may be ready to reverse.  Given the similarity in sentiment to the May-July 2015 period and the High Risk Composite SELL mentioned last week a top near SPX 2400 should produce a 3-4% short term correction over the next couple of weeks.

Weekly Trade Alert.  I am expecting an intra day move over SPX 2400 that should be shorted, so SHORT at SPX 2400 or better, STOP at 2415, with a target of 2300-20.  Updates @mrktsignals.

Saturday, April 22, 2017

More Volatility Ahead

Last weeks S/T BUY did not reach the strong level expected due to Monday's gap up and therefore produced a weaker rally than expected.  With indicators still in the BUY zone, any weakness from the French election results will likely be bought, but a new indicator introduced this week indicates that rallies should be sold. This week's discussion will be broken into two parts with the second half covering the risk measures Skew, Trin, and Vix P/C and a new composite, the High Risk Composite.

Part I.

There is only a minor change in the overall Indicator Scoreboard as high intra day volatility kept the bears salivating and is why I expect any pullback to be bought.  A gap down Monday to the SPX 2320-30 level is possible, but would present the same setup expected last week.


The Short Term Indicator (VXX $ volume and Smart Beta P/C) has pulled back closer to the mean, so it's unlikely that last weeks SPX 30 pt rally is duplicated.  My new upside target is only about SPX 2370.


One of the largest changes in sentiment last week was in bonds (TNX).  The last several weeks, I pointed out that rising bearish sentiment was likely to lead to lower rates, and last weeks drop to 2.2% sent the bears running for cover.  Any further drop in rates is likely to setup a SELL, so stabilization or increase in rates is likely, and long term pressure is still up.


Gold stocks (HUI) seem to have stabilized in a trading range, but with bearish sentiment so low downside surprises are likely.


Part II. Risk Measures

Several weeks ago in March, here, I pointed that the high SKEW readings have generally led to large price moves, up or down, and combined with the overall Indicator Scoreboard indicated a down move was likely.  We now have another spike in the SKEW, but the Indicator Scoreboard is now pointing upward.  The overall pattern is similar to the Nov-Dec 2016 period.


Earlier in the year, I noted that low VIX P/Cs were common prior to sharp market declines as in June and Dec 2015, as well as Oct of 2016.  But the low readings in Feb 2017 saw no declines, and I noticed that this may be due to the low TRIN.  We again saw near record lows in the VIX P/C last week as Wed saw VIX calls equal to half of all CBOE daily call volume.


The past several weeks, I have been following the TRIN (net advances/net volume, rising as volume declines), noting that rising TRIN indicated rising risk with a spike higher two weeks ago duplicating the Dec 2015 levels.


Trying to combine the effects of the TRIN and VIX P/C, I added the inverse TRIN and the VIX P/C to create a High Risk Composite.  It may sound a little weird, but since Jan 2015, I identified seven SELLs and the first six ALL produced declines of 3% or greater in the SPX in the following six to eight weeks, including the 10%+ declines of Aug 2015 and Jan 2016.  Multiple signals over a short period were counted as one.  The sixth signal was at the March top, and the seventh signal occurred last week.  BUYs don't seem to be significant. There also seems to be an average lag of about two weeks before the bulk of the decline.


Conclusion.  More volatility.  One potential price pattern that seems to fit the current sentiment patterns is the May-July 2015 topping pattern.  Here we saw a six week decline of 3% from the May top, followed by a three week rally (now, SPX 2370-80 by May 2017), then an even sharper decline of about 4% (now, debt ceiling panic), concluded by a final rally to test ATH (now, EW fifth wave).



Weekly Trade Alert.  I would be inclined to go LONG a retest of the SPX 2320s, but prefer to play it safe to see if there is a rally into May 3 FOMC as many are starting to hope for slow down in rate hikes.  This fits the High Risk Composite time frame for a SHORT if S/T Indicator drops to SELL.  Updates @mrktsignals.

Saturday, April 15, 2017

Expecting a Final Rally

Last week's market action was pretty much as expected as my overall outlook was a downward continuation for the SPX with a target in the 2300-30 area and the close was 2328 Thurs.  Sentiment continues to mirror the behavior of the 2015 tops in July-Aug and Nov-Dec.  Overall and Short term sentiment has now moved into the BUY area, indicating that a short term, but sharp, short covering rally is likely to shake out the bears before the real decline begins.  The TRIN as an inverse indicator of advancing volume support has now spiked to the level of Dec 2015.

The overall Indicator Scoreboard has now reached a BUY level equal to the mid-Dec decline before the last short covering rally that dropped sentiment back to the -8.0 area.


The Short Term Indicator (VXX $ volume and Smart Beta P/C) has also reached the BUY level with the 2.5 EMA, but is likely to spike higher to reach the Dec 2015 level early next week.  With earnings releases next week providing a possible excuse for a rally, a late Monday/early Tuesday plunge to the low SPX 2300s may be the setup for a "turnaround Tuesday" seen often in options expiration week.  For both July and Dec 2015 the market then rallied until a SELL was reached before a larger decline.


For those questioning whether this may be the elusive "fifth wave" that EWers are looking for, the TRIN (net advances/net volume, rising as volume declines) has now spiked to a slightly higher level than seen in Dec 2015, indicating that the bull phase is likely over..


Bonds (TNX) continue to see rising bearish sentiment even as rates fall as predicted in last week's post and point to more of the same, although a pause is likely if the SPX rallies.


Gold stocks (HUI) continued their inverse relationship with interest rates, ie, falling rates lead to higher gold and gold stock prices, but falling bearish sentiment indicates a trading range is likely with a decline to recent lows when a SELL is reached.


Conclusion.  A short covering rally is expected to start next week that may last to the EOM/early May.  If the SPX follows the same scenario as July and Dec of 2015 a rally is likely to a slightly higher level than the last one at 2378, but lower than the previous highs at 2390 and 2400.  May and June may see a decline to the SPX 2200 level.

Weekly Trade Alert.  Mon-Tue should see a tradeable bottom.  Looking for SPX 2310 as a LONG with a target of 2380+.  Cover at 2295.  Updates if necessary at @mrktsignals.