Saturday, July 15, 2017

Delayed Fireworks

Last week provided the excitement promised by the SPY options interest with the NDZ/QQQ reaching my target for mid August.  ZH earlier this week reported that a supercomputer researching global stock markets in Zurich has identified a Sornette bubble in US stocks.

I. Sentiment Indicators

The overall Indicator Scoreboard showed a fairly large drop in bearish sentiment levels this week, but no SELL yet.  For this week I am again showing the last 18 months with INT EMAs.

But the Short Term Indicator (VXX $ volume and Smart Beta P/C) showed only a muted response.

The NDX has show a very persistent high level of bearishness, even with a new recovery closing high, indicating that a continued rally to new highs is likely.

Bearish sentiment for bonds (TNX) moved back to neutral as rates consolidated between 2.3 and 2.4%.

The gold stocks (HUI) showed a decrease in bullishness as the compression or "coil" seems to continue.  Many times this type of pattern will begin with one or more false moves as the GDX options seem to indicate a fall to 20 (-10%) before a rally to 24.

The BKX chart last week indicating a SELL ST proved accurate as Friday's EPS were disappointing with a 2% opening drop, but recovered with the overall market.

II. Options Open Interest

This week I want to look at the SPY, QQQ and VIX out to August.

For the SPY, last weeks "the bulls were free to roam" was prescient with a close at 245.5, but is unlikely to be repeated this week.  A move down to 242 to fill the SPX gap at 2426 looks likely, with a close at 243.5 most likely.

For the last week of the month, the outlook is somewhat confusing where 242-3 is the "max pain" zone, but call resistance is light if the bulls decide to run.

The August monthly shows strong put support at 235, 240 and 244-5, with strong call resistance at 244-5. The overlap from 244-5 will probably be a strong area of contention with the potential of whipsaws from one side to another.  A low at 241-3 is most likely.  Given the VIX forecast range of 12-14 as a higher range than we've seen recently, possible wild swings seem likely.

For the VIX in August, a range of 12-14 seems likely, with a short term move to 18 possible if 15 is exceeded.

For the QQQ, next week looks tough for a continued move higher from the close at 142.2, while a whipsaw back to the gap at 139 is possible.

For August, call resistance is somewhat lower, but if the SPY overcomes the put/call overlap peak at 245 similar to how the QQQ did this week, a move to 145 or higher seems likely.

Conclusions.  A surprise to the upside brings us back to the 2014 scenario, but the path from here is unclear.  NDX sentiment clearly supports higher prices, while other sentiment is not overly bullish.  One scenario that seems to make sense is a ST pullback to fill gaps next week at SPX 2426, QQQ 139 then a move up into late July/early Aug.  Another strong jobs number may bring into question the "low rates forever" mantra, but would probably be first welcomed.  The last two months divergence between ADP and NFP were very unusual.

Weekly Trade Alert.  Tues AM was so boring I took a 20 min break and missed the mini "flash crash" which filled the DJIA gap and almost the SPX one.   Next week a pullback to SPX 2426, QQQ 139 may provide a second opportunity.  Updates @mrktsignals.

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