Sunday, October 16, 2016

Setup for Options Expiration Nearly Complete

The last two weeks I have been expecting a tradeable low for the SPX prior to the October options expiration.  Last week I outlined a possible trading setup that was nullified by the strong decline early in the week ( that seems to be following the early September decline (sharp initial, consolidate, then rally).  Sentiment indicators are also comparable to the September bottom.

Starting with the Indicator Scoreboard (overall wtd average), the EMAs are close to those a month ago and overall seem to be following a similar pattern to Feb-Jun of 2015, but it is difficult to tell if a stronger selloff is needed to see a buy spike prior to a July 2015 type top.  One possible scenario could be a rally to the SPX 2180s into the election, an even sharper selloff after the election that sets up a buy spike to a final top late November-early December.  It is clear that SPX 2200 is as important a resistance zone as the 2130s was in mid-2015.

Looking at the Short Term Indicator (VXX $ Volume and Smart Beta P/C), we are seeing a double buy spike that has occurred several times over the last year where a lower sentiment reading was followed by a stronger rally due to a cumulative build up in bearish sentiment.

Finally, the VIX P/C has little to add this week, but we seem to be at or near a low that may last several months.  As I have mentioned, the VIX P/C is difficult to interpret because smart money buys VIX calls at market tops, while dumb money piles in at market bottoms.  The latest dip seems to mark a bottom with dumb money buying calls.  A spike upwards (more put buying by dumb money) is likely to mark a market top.

Conclusion.  I would like to see one more dip to SPX 2120+/- Monday afternoon or Tuesday AM to complete the setup for a rally into expiration and beyond.

Weekly Trade Alert.  Last week, I forgot to mention that updates are posted on my Twitter account when appropriate  (  It's hard to identify an exact entry point other than SPX 2120+/- with a target by the election of 2180+.

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