Will the Game Go into Overtime?

The recent decline has many EWers calling for SPX lows in the 2800-3000 area with the recent decline a wave A as a diagonal of an ABC. My feeling is still that slightly higher highs are likely before a much larger decline of about 40%. Recent price action reminds me of the SPX 10% decline that occurred in Jul-Aug 2007, the decline was about a month long and was followed by a two month rally to a slightly higher high by 1.5% in Oct.  Today this implies about a six week lag (top late Nov-early Dec), but more interesting is that the recovery was initially strong, then became flattish for a month in a 100+ pt range before the final blowoff.  The Oct EOM options OI indicates something similar for this Oct.  A final blowoff may be due to the approval of a Covid-19 vaccine.

Overall sentiment still resembles early 2020 with little change for the week.  Even with the sharp drop to test the SPX 3225 area indicated as a target due to the huge call position Sept 30 (3230) a total of three times, the SPX closed down only 21 pts from 3319 to 3298.  Tech/Other includes links for SKEW and VIX term structure updates and an updated look at gold relative to TNX and SSEC.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment rose slightly for the week.

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 also rose slightly for the week.

The VXX $ Vol fell  slightly for the week.

Bonds (TNX).  Bearish sentiment in bonds is relatively unchanged.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment is also relatively unchanged which is unusual with the 8% drop for the week.  More declines are likely until bearish sentiment increases.

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 is unchanged.

And the sister options Hedge Ratio bearish sentiment saw a very slight rise.

The INT term SPX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment rose slightly back to neutral.

The INT term NDX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment (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 Oct 2. Also, this week includes a look at the TLT for Oct exp. 

With Fri close at SPX 3298, options OI for Mon shows mild put support from 3250 to 3295, but strong support above current prices at 3310.  Some weakness may be expected early in the day but a close at 3310 or better is likely.

Wed (EOM) has large OI with 36k+ calls at SPX 3230.  As pointed out last week, this was likely to be a magnet drawing prices toward SPX 3225 and that level was tested three times last week.  With the first Trump/Biden debate scheduled the 29th, the lows may be in.  Higher puts show the potential for an early spike to above 3300 (max 3350-75), but calls at 3230 may cause a fade at the close.

On doing some research last week, I noticed that the origin of the calls was early July with the SPX at 3000 after the June swoon from a top of 3233.  At an original price of $100 and value of $300M for 30k contracts, I wonder if this was a Fed front running ploy to goose the markets higher from the June lows (aka Softbank equity calls), especially since there was no profit taking at the highs of $350 early Sept and the price has since dropped to a low of $40 early Fri.  Something to watch for in the future.

For Fri, there is strong support up to SPX 3300 and if the SPX can make it over the straddle at 3350, there is put support up to 3375 and no call resistance until 3400.  Possibly a strong start to Oct.

For the SPX EOM Oct, strong put support is present at 3300 and below while call resistance shows up at 3425 and above.  Other than a possible strong start to the month, most of Oct is likely to be flat between 3300 and 3450.

For the QQQ (NDX/41, 11k=268), closing at 271.6 after a low of 264.3 Fri, the QQQ had a target close for the week at 271-2 supported by large put positions.  Next week shows modest call resistance at 275 and 279, but little resistance above.  Gains are likely to be limited to 2-3%, but over 279 prices could see sharp gains.

Using the GDX as a gold miner proxy closing at 38.5 after a low at 37, the break I has been expecting finally came as the hype over the Fed's new inflation targeting seemed to be a "sell the news" event

Currently the TLT is 165.1 with the TNX at 0.66%, and call resistance starts at 165.5.  However, what really stands out here are the 82k puts at 160.5 and 92k at 155 since this means someone with deep pockets are betting on a sharp rise in rates.  Early Mar when the TNX was 1.0% the TLT was at 156, so a 20-30 BP jump in TNX may be expected.  This is likely due to an expected large stimulus package causing an increased pressure on rates.  Sept two weeks ago saw about 50k puts at 160 and 25k at 155, so no guarantees.  How will inflation expectations effect gold/miners?  See Tech/Other for charts.

IV. Technical / Other

Just a quick look at the SPX indicators (links only).  Both the SKEW and VIX term structure are in similar positions as Jan 2020.

Several weeks ago, I pointed some INT relationships between gold and both the TNX inverse and the China stock exchange SSEC.  Below is the 1/TNX chart with gold in black.  This estimates that fair value for gold at current rates is about 1850, but a spike in rates is likely to put downward pressure on gold.  In early Mar when the TNX was 1%, gold was 1700.

For the SSEC, the relationship is less reliable, and with SSEC down 7%, gold is down 10%..

 

Conclusions.   The stock market appears to be in the final innings, but it's likely that the recent decline (larger than initially expected) will extend the topping process longer than expected.  The large SPX volume on Sept qtrly optn exp was likely accumulation and could mean that the next oppty for large distribution is Dec 18 optn exp, and should be near the top.  Comparison to the last half of 2007, indicates a late Nov top which may coincide with an apparent Trump re-election.  What happens next?  Election reversal, or possibly China refuses to allow US firms access to China's rare earth supply in retaliation to Trumps cutting China off from access to US markets in high tech areas.

Weekly Trade Alert.   The first week in Oct is likely to be strong with an upside potential of SPX 3425.  Wed may start strong to 3350+, but could close lower due to large call OI at 3230.  A a close of 3330 the unknown buyer of the 3230 calls would be made whole for a $100 price.  Fri could be close to 3400.  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