Saturday, January 15, 2022

Eye of the Hurricane

Eye of the Hurricane

Last week started out like gangbusters as the washout warned about in Mon options OI sent prices down to the SPX 4582 before a sharp reversal begain reaching the upside target of 4725-50 (act 4749) on Wed. Mon large put position at SPX 4615 seemed like a possible target for algos as that would force negative delta hedging pushing prices down further before a reversal. A Sun/Mon article by Avi G. before the open did not help as he setup support at SPX 4630 for a continuation rally, while below made 4400 probable.

This weeks sentiment outlook shows considerable improvement, but not enough to support a sustainable rally just yet. The ST Composite remains a problem and indicates that more sudden selloffs are likely. Overall, next week is likely to see a rise back to the SPX 4700-50 area, but a move back down to 4650 or lower is likely before EOM to setup a sustainable rally. Possibly a down Jan makes everyone turn bearish before a final rally into late Feb-early Mar.

The markets seem to be in a rotational correction between tech/cyclicals. In Nov 2021, the DJIA fell about 9%, but strength in the NDX resulted in only a 3.5% correction in the SPX. This week seems to have completed a 9% correction in the NDX, while the SPX only fell 4.5%. Those looking for a larger drop in SPX may be disappointed due to rotational strength.


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.

Update.  The INT/LT Composite saw a strong bounce in ST sentiment (EMA), but a sustainable rally is unlikely until INT sentiment reaches -.5 to -1.

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%.

Update.  The ST Composite remains stuck at low levels at there has been little down volume (capitulation) and may be the source of the recent sudden selloffs.  Expect more choppiness.

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.

Update.  The ST/INT Composite sentiment has finally risen over neutral, but compared to the Sept lows more work to the downside is likely.


Update.  The ST/INT Composite EMAs show that for the very ST sentiment is similar to the Sept lows, so higher prices may be seen next week into optn exp before further retests of the lows.
Bonds (TNX).  Bearish sentiment in bonds remains unchanged,  Still working on TNX Close.
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.

Update.  Bearish sentiment continues to drop as the HUI 240-60 range 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).

Update.  Options bearish levels have increased considerably over the last week with sentiment at/above the levels of the Sept price lows and may indicate that last Mon washout may be the lows for the Jan pullback (4582).

And the sister options Hedge Spread bearish sentiment as a ST/INT indicator (outlook 1-3 mns) also rose considerably nearing the Sept levels, indicating that bottom may be close. 
Taking a look at the ETF ratio of the INT term SPX INT (2X) ETFs (outlook 2 to 4 mns) as bearish sentiment, we see that SPX ETF sentiment rose sharply last week, but may need further to go (blue EMA) before a sustained rally.
The INT term NDX ST 3x ETFs (outlook 2 to 4 mns) bearish sentiment  has finally started to rise with a sharp jump last week although LT EMAs show more work is needed to sustain a rally


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 Jan 21 plus EOM.

With Fri close at SPX 4663, options OI for Tue is small with a probable trading range of 4650 to 4685 and a likely close 4675+..
Wed also has small OI where SPX has strong put support at 4650 and little call resistance until 4750 with a move over 4700 and 4725 likely.
For Fri strong call resistance at 4725 and above will likely push prices back toward 4700 or lower.

For EOM strong call resistance at 4725 & above should limit gains and likely pressure prices toward 4650-75.  Strong put support falls to 4600.


IV. Technical / Other - N/A

Conclusions.   INT bearish sentiment is now rising, particularly in options and ETFs, which seems to support the ED scenario for a top in the next couple of months.  SPX options OI for next week (Tue-Fri) optn exp seems to support another move over 4700, possibly to the 4750 area.  The ST Composite, however, shows little signs of capitulation, so sudden selloffs as we saw on Thur may be the norm for a couple of more weeks and may indicate another test of the Jan lows, possibly around the next FOMC Jan 25-26.

Weekly Trade Alert.  Next week may see the eye of the hurricane that has been Jan 2022.  Increasing bearish sentiment is expected to push the SPX higher and may test last Wed high around 4750, but more downside is expected post exp.  Updates @mrktsignals.

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1 comment:

  1. CronomJanuary 18, 2022 at 4:55 AM

    This Avi G. guy is quite hilarious. Although he made some great long term calls, his shorter term track record is a coin flip at best. He's almost blindstaring at certain patterns he expects, but if he's wrong Avi always has a endless stream of alternative counts to make his life easier. He also sounds almost weirdly annoyed in his interviews. What I also don't like about him is that he's just too widely followed nowadays, especially by money managers. Arthur, you're short term track record is a hell of a lot better.

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