Sunday, October 9, 2016

Markets Direction Starting to Clarify

A myriad of forces are starting the clarify the market(s) direction.  On the political front in the land of Oz, the wicked witch from the East is pulling ahead of the tin man with no heart.  On the currency front, the inclusion of the RMB in the IMFs currency basket did not cause the crash in the US dollar that many had anticipated and instead caused a crash in the precious metals. Rising interest rates and a rising dollar are hurting the S&P but making the DJIA more attractive to foreign buyers.

Today, I am going to follow the bottom up approach, looking at several indicators and concluding with the composites.  First up the precious metals.  Goldman Sachs is recommending buying gold at 1250, but the gold miner's sentiment, using the DUST/NUGT ETF ratio is much closer to a Sell than a Buy.  In fact, last weeks sharp selloff was met with weaker bearish sentiment, indicating that the decline may have much further to go.

Looking at interest rates using the TBT/TLT ratio for 10 year bonds, there is not really any breakout until TNX rises above 2.0%.  But remember the long forecasting model I mentioned several weeks ago where since 1980 a 50% drop in rates equated to a 100% rise in equity fair value.  The result if interest rates rise is that a 100% rise in rates (1.4% to 2.8%) equates to a 50% drop in equity fair value.

I have also been following the VIX P/C ratio closely since it tends to decline at major tops develop with spikes higher at short term tops.  So no spike yet.

The Short Term Indicator remains in neutral territory as the equity market consolidates.

The overall Indicator Scoreboard is dropping at a faster rate, but still in neutral territory.

Conclusion.  Last week I incorrectly pointed to an options week setup which as it turns out should happen this week.  There is an interesting pattern developing especially in the DJIA using the 50 and 125 SMAs.  The 125 day SMA is popularized by the Fear&Greed index of CNN Money and provided support for the SPX for almost two years for 2013 and 2014. A good setup for a long into options expiration on Oct 21 would be if both SPX and DJIA decline to the 125 SMA with a stop just below.

Weekly Trade Alert.  Long the SPX at 2130 with DJIA at 18100 with a stop at DJIA 18000 and a target of SPX 2180-85.

No comments:

Post a Comment