Sunday, November 6, 2016

Setup for a Bounce or More?

First, I want to thank the loyal readers since I first started this journey a year ago October.  Many thought my contrarian approach was too left field, but the last few weeks have seen over 3,000 page views a week, so I must be doing something right.  I was also able to provide some timely updates last week at

The past week saw a fairly strong rise in some of the bearish sentiment indicators, especially those related to options as the VIX has risen to the highest level since the BREXIT in June (22 now vs 26 then) and so have put/call ratios.  Oddly other measures, especially the money flow measures (SPXU/UPRO) have barely budged.  This leads me to believe that we are likely to see what John Hussman called several years ago, "a fast and furious short-covering rally that is prone to fail", rather than the 5th wave blowoff to SPX 2300 or 2500 that many EWers are looking for.

So let's start by looking at an update of two of the short term measures I mentioned last week. The Short Term Indicator (VXX $ volume and Smart Beta P/C) is not at levels seen during BREXIT but has reached the levels of early Feb and Oct.

The 3x SPX etf ratio SPXU/UPRO has struggled to reach the mean, showing that outside the options market, investors remain unconcerned about the current pullback.  This leads me to believe that a sharp post-election rally is likely but it is not likely to have much follow through and may not make it above the SPX 2160-2180 level.

The tech sector which I mentioned two weeks ago as having extremely low intermediate term bearish sentiment has almost gone into crash mode with even less concern by investors as measured by the short term SQQQ/TQQQ ratio.

Finally, switching to the intermediate term view, the overall Indicator Scoreboard has almost reached levels seen at the June 2015 lows before the final rally of mid-2015.

One other thing I should cover for those looking for a safe have in gold stocks is an update of the HUI etf ratio DUST/NUGT.  Other than for very short term plays, the sentiment picture here is not much better than for the NDX.

Conclusion.  Short term rally but not much more.  I want to enter a long position Mon-Tues around SPX 2080 with a target of 2160.  If the H&S pattern in the NDX holds, the SPX should top out in two to four weeks and be in full decline by late December.

Weekly Trade Alert.  Long SPX around 2080, stop 2065, target 2160.

1 comment:

  1. Wow... I've not seen a big decline in the month of December for a very long time Arthur. That would certainly be a surprise to a lot of traders I bet. But, that's how they catch everyone sleeping so they will be trapped long and/or miss the opportunity to short it. Great update again. Thanks.