Sunday, May 8, 2016

Unlikely to be a Bottom

Thanks to all who have followed me through the development process and hopefully understand the assumptions so that no further explanation is necessary.

The sentiment picture this week is mixed with an interesting dichotomy.  First looking at the intermediate Indicator Scoreboard, there has been some improvement (higher bearish sentiment), but comparing the current pullback to those of Mar and Nov of 2015 I would expect the 5 day EMA to reach 0 and the 10 day to reach the mean before a bottom.

Looking at the shorter term Indicator Scoreboard (3,5, and 10 day EMA), the 3 day is expected to reach the BUY level before a short term bottom is in.

Closer examination of the indicator components short term shows an interesting twist between the put/call ratios (CPC Revised) and volatility (VXX $ volume).  The put/call ratios are very close to generating a BUY, but notice that spikes tend to occur a few days before tops/bottoms and much of the rally resulting from high put/call ratios occurs during options expiration week.

The volatility measure, however, peaks and troughs much closer to actual bottoms and tops. After giving a sell the end of April, the initial decline caused a spike in sentiment but has since moved back closer to a SELL even as put/call ratios continued to rise. 

Conclusions.  The most likely outcome comparing put/call ratios and volatility is more downside this coming week with a sharp rally to follow option expiration week.  Given the positive follow through to the Friday jobs number, a 1-2 day rally to SPX 2075/80 appears likely before a sharp decline to SPX 2020/30 or lower to cause a spike in volatility and set up a later rally.

Weekly trade alert.  Short SPX at 2075 if reached, stop at 2085, target 2035 for 4/1 R/R.

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