A Rosh Hashanah Setup

Last week, I was looking for a relatively strong rally of 3-4%, and the result by Wed was a 3.5% rally with the NDX missing the lower target by 5 pts at 11,495 (11,500-900) and the SPX by 22 pts at 3428 (3450-500). Much closer than the SPX 3200 area many were calling for. Wed's update late AM warned of a ST top Wed/Thu, but I did not expect a retest of the SPX 50 day SMA so soon. The Wed/Fri selloff was net Negative for the week from SPX 3341 to 3319.  Vol products (VXX, UVXY) got crushed as expected, but did comeback with the late Fri SPX/QQQ selloff.

Next week is traditionally weak due to the Jewish holidays and is likely to be the low for this pullback, and a lower low, SPX 3250-75 is possible. However, SPX and QQQ options OI present a different story where strong put support around current levels (SPX 3290-50, NDX 10,800-11,200) may hold for this coming week, but allow a sharp EOQ decline the following week. Additionally, the second option would mean a continued selloff in the vol products, moving that sentiment closer to a SELL by EOW.

Last week Biden unveiled part of his tax plan that includes raising the cap gains and div rates to the orinary tax rate and may be part of the decline in high flyers for this year.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment declined sharply during the week, even with a lower close.

The INT view of the Short Term Indicator (VXX $ volume and Smart Beta P/C [ETF Puts/Equity Calls], outlook two to four months) bearish sentiment had rallied more strongly (due to VXX $ Vol below) but has fallen more swiftly with the collapse in the vol products.

The VXX $ Vol rose sharply,   but last week's collapse in vol prices (VXX down -4%, as low as -7% Fri) has moved this indicator into negative territory and a repeat next week could generate a SELL.

Bonds (TNX).  Bearish sentiment in bonds remains near the lows as int rates remain stable.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment remains below neutral as prices mirror int rates.

II. Dumb Money/Smart Money Indicators

The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 mns/weeks) bearish sentiment also turned down and remains near record terriory.

And the sister options Hedge Ratio bearish sentiment is only slightly higher.

The INT term SPX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment remains above neutral which may indicate another rally attempt after the Sept lows.

The INT term NDX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment remains high.

(no chart. see QQQ OI).


III. Options Open Interest

Using Thur closing OI, remember that further out time frames are more likely to change over time, and that closing prices are more likely to be effected. Delta hedging may occur as reinforcement, negative when put support is broken or positive when call resistance is exceeded.  This week I will look out thru Sept 25, plus EOM. Also, this week includes a look at the GDX for Oct exp.  Fri's downturn likely increased put support over what is shown.

With Fri close at SPX 3339, options OI for Mon is somewhat distorted due to the 12k puts at 3200 (ie, unlikely below this level) with small put support (1k) up to 3350.

Wed has somewhat larger OI where SPX put support is moderate at 3320 (2k) and almost no call resistance until 3450 (1k) .

For Fri put support is much stronger as most put buyers seem to be expecting an overall negative week due to the Jewish holidays where strong support is at 3300 (4k) and small support (1-1.5k) extends up to 3360.  The contrarian position is rangebound 3300-400.

For SPX EOM, there is an unusual configuration where strong put support at 3300 (10k net) may be challenged by a huge ITM call position at 3225 (30k net) and could draw prices lower with a significant break of 3300.

For the QQQ (NDX/41), currently at 267 (Fri low 262), the large put position at 270 could easily result an additional 4 to 5 pt jump to 271-2.  Again, seems to be a Jewish holiday bet.

For QQQ EOM, we see that below 271, moderate put support drops to 260 (10k) and strong (30k) at 255.  Is everyone expecting a rally after next weeks lows?

Using the GDX as a gold miner proxy closing at 41.36, Oct shows that strong call resistance levels have moved up from the 40-42 levels to 45-46 with only minimal net resistance at 42.  Perhaps another stimulus package will push inflation expectations higher.

Currently the TLT is 163.6 with the TNX at 0.69%, as put support did keep prices over 163. 


IV. Technical / Other - N/A


Conclusions.   This week's outlook is highly contrarian as put option buyers and vol players are clearly betting on a down week next week based on the typical patterns seen during the Jewish holidays.  So, the contrarian outlook is for a rangeboud week next week, possibly SPX 3300-3360 with continued volatility compression, only to be followed by a breakdown the EOQ, EOM Sept, possibly to SPX 3225 or lower.  The end of quarter window dressing could get ugly when you consider that many of the high flying mega-tech stocks like AAPL amd AMZN are already down 20% or more just during Sept and that recent gains could be taxed at a much higher tax rate if Biden wins.

Rumors are flying that the GOP may be more will to do a larger stimulus closer to the election.  So the potential for a late Oct blowoff are not out of the question.

Weekly Trade Alert.  Will it be the calm before the storm?  A mild downturn followed by a rally to the SPX mid-3350s by EOW could be a setup for a sharp EOM decline to the low 3200s.  Updates @mrktsignals.

Investment Diary,  Indicator Primer,
 update 2020.02.07 Data Mining Indicators,
 update 2019.04.27 Stock Buybacks,
 update 2018.03.28 Dumb Money/Smart Money Indicators