Bezos Takes the SPX into Orbit

As has happened many times before my target for a pullback of SPX 4240 (50 SMA) was reached much faster than expected (naughty algos), breaking many of the EW support zones, thereby forcing many swing traders to switch to short with many expecting 4160 or the 23% retrace at 4060.  As often happens, however, once everyone goes short the smallest spark can set off a wildfire of short covering with the result of new highs by the EOW.  From here the direction is unclear, options OI is indicating the potential for a pullback into EOM toward 4300, while the options Hedge Spread is showing strong hedging that may cushion any fall.  In the Tech/Other I will look at two charts, the daily shows channel highs around 4412, supporting a pullback, while the 4 hr still shows the potential of an expanding wedge with a possible breakout to 4430-40 to complete w4.

I apologize for the lack of updates last week but Mon aft I got an unsolicited letter to sell my house for "all cash, as is" as the rental conglomerates are gobbling up my neighborhood.  The biggest surprise was that it was 25% above the tax assessors appraised value received a few weeks before.  After checking for alternative housing on Zillow, I saw that all the prices were crazy within an hours drive of where I live and when I told the offering broker my lack of succes they upped the offer by 5% to 30% over the appraised value. 

The remainder of my spare time was spent preparing a new ST/INT composite indicator shown below for what I am calling call option FOMO Indicators by comparing the level of call option buying to the level of the NYADV/NYDEC, ie, stronger option buying in a strong market indicates chasing prices higher or FOMO.  A new section was added to the Investment Diary  for this indicator with component charts and price correlations.

I. Sentiment Indicators

The INT/LT Composite indicator (outlook 3 to 6+ months) has three separate components. 1st is the SPX and ETF put-call indicators (30%), 2nd the SPX 2X ETF INT ratio (40%), and 3rd a volatility indicator (30%) which combines the options volatility ratio of the ST SPX (VIX) to the ST VIX (VVIX) with the VXX $ volume.

The sharp pullback to the SPX 4240 area into the Mon low was not long enough to appreciably improve bearish sentiment and a retest or lower is possible.  This could be due to a rise in int rates after mid-Aug looking at the TLT options OI.

The ST Composite as a ST (1-4 week) indicator includes the NYSE volume ratio indicator (NYDNV/NYUPV & NYDNV/NYDEC) and the VXX $ Vol/SPX Trend. Weights are 80%/20%.

A ST Buy was generated on Mon, then fell sharply during the week only to rebound to slightly above neutral by Fri close.  Currently, no directional bias.

The ST/INT Composite indicator (outlook 1 to 3 months) is based on the Hedge Spread (48%) and includes ST Composite (12%) and three options FOMO indicators using SPX (12%), ETF (12%), and Equity (12%) calls compared to the NY ADV/DEC issues (inverted). FOMO is shown when strong call volume is combined with strong NY ADV/DEC. See Investment Diary addition for full discussion.

This chart is somewhat busy, but what stands out is that for most of the significant pullbacks over the last year at least one of the components had previously reached the Sell level with last weeks pullback to SPX 4240 preceded by extreme FOMO for SPX calls (lt blue).  Currently slightly above neutral.

For the shorter term view using EMAs, Mon decline created a weak Buy, consistent with a move to ATHs, but not likely enough for a sustained rally.  Currently near neutral.

Bonds (TNX).  Bearish sentiment in bonds continued to fall, although the TLT was flat for the week.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment is presented in a new format using the data mining software to add the inverse TNX rate to the ETF ratio.

ETF sentiment remains near recent lows although the int rate pullback has increased combined sentiment.  Support at HUI 260 continues to hold.

II. Dumb Money/Smart Money Indicators

This is a new hybrid option/ETF Dumb Money/Smart Money Indicator as a INT/LT term (outlook 2-6 mns) bearish sentiment indicator. The use of ETFs increases the duration (term).

Similar to the INT Composite the swiftness of the turnaround from last weeks lows only resulted in a small increase in bearish sentiment.

The sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns) did, however, see a sharp increase in hedging similar to the sharp drop in June of 2020 which was eventually followed by a retest a few weeks later.

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 July 30.

With Fri close at SPX 4412, options OI for Mon is small, but is showing call resisance above 4400 ro 4425 with put support beginning at 4375.  A small pullback toward 4375 is probable.

Wed has even smaller OI where SPX shows call resistance above 4350 with put support beginning at 4300.  A pullback toward 4300 is possible.

For Fri strong put support at SPX 4100 is likely irrevelant, therefore lowering the P/C and call resistance at 4300 and above still makes 4300 a target,.

Currently the TLT is 148.5 with the TNX at 1.29%, compared to Aug P/C of 248%, Sept is showing a sharp drop, indicating that int rates may support stocks thru mid-Aug at current rates, but by mid-Sept rates could rise back over 1.5% (TNX) where put support at TLT 140 is about TNX 1.6%.

IV. Technical / Other

This chart since May shows the SPX following a clearly defined channel (possibly bear flag) with Fri high at 4412 stopping right at resistance with a slight selloff A/H.  As I pointed out last week, however, it can be dangerous to expect much of a decline with AAPLs EPS out last week after what happened after the July 2020 EPS.  So this may be a false flag.

On the 4-hr chart the expanding wedge may still be in play.  In this case a breakout of he above channel may be seen after AAPLs EPS that could target the 4430-40 area by mid-Aug and if the couns as a 4th wave, the w5 could go below 4200 into mid-Sept.  This seems to align better with current sentiment and the TLT options OI outlook for an up move in int rates.

Conclusions.  Last weeks sudden moves were enough to catch everyone off guard.  My price targets of a low near SPX 4240 then back to test the ATH were correct but I was not expecting a completed journey in the time it Bezos and Musk to travel into outer space.  Things are likely to slow down with the increase in hedging and the most likely scenario is for a high the next two weeks.  Continued high inflation may begin to take its toll on the bond market if the TLT options OI is correct.  Currently both yields on the TNX and SPX are about 1.3%, but if TNX yields rise over 1.5% this may start to pressure markets, especially NDX.  Next week I hope to do a special section on int rate sensitivity similar to the HUI across other markets.

Weekly Trade Alert.  It all depends on APPL.  Some weakness is possible early Mon/Tue but APPLs EPS late Wed will likely determine the larger direction.  Updates @mrktsignals.

Investment Diary,  Indicator Primer,
 update 2021.07.xx  Data Mining Indicators - Update, Summer 2021 (in progress),
 update 2020.02.07 Data Mining Indicators,
 update 2019.04.27 Stock Buybacks,
 update 2018.03.28 Dumb Money/Smart Money Indicators

Article Index 2019 by Topic, completed thru EOY 2020.02.04
Article Index 2018 by Topic
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