Thursday, July 28, 2016

Quiet On The Trading Front - Some Longer Term Commentary Based on Commitment of Trader's Positions

I have been quiet here on the blog because there has been nothing compelling that I have seen in regards to initiating any new trades.  The last studies I ran which had any compelling back test were the bearish studies from July 11 and 12.  Prices have basically traded sideways since then.  The forward outlook from those studies was negative on average from the 2 week mark all the way to 2 months ahead.  So maybe we will see some level of selloff occur within the next several weeks, but I really don't have an opinion here.

On a longer term basis I have a few points of observation.

Since July 12, commercial traders in the CoT report have made a substantial increase in short positions in combined Dow, SP, Nasdaq futures.  They are now holding the largest net short position in about 16 months (since before the May 2015 highs).  While this doesn't mean the market will stop rising, it shows the "smart" money is betting on lower prices and/or that the market is "overvalued" here.  This type of signal is significant, but further price highs could actually add fuel to the bullish run because the smart money may cover short positions if they don't hold prices down here.

Gold futures have hit a new record net long position in large speculator contracts on this move up the last several months.  And the commercials hit record net short.  Multiplied by the $ value of each contract they may not be quite at a new $ record holding ( I havent tried to calculate this).  On the surface this occurrence seems to suggest that gold's bullish run/bull market may not run much higher before a major correction (and possibly move to new lows) occurs.  Right now I feel there is no other legit interpretation other than to exit any long gold positions on a trading basis.  Don't be caught up in the hurrah and yesterday's trend.

Oil futures made a rebound into this spring with no net new long positions in the futures market.  And interestingly, the long positions have remained near record net long levels which in the past few years have coincided with major price peaks in oil.  The only net change in positions of significance on the rally in oil was declining net short positions.  So the oil market rose on short covering only.  That is not what a textbook bottom/new bull market is "supposed" to look like.  Think of the underlying psychology there, or even the pragmatic monetary dynamic of this.  If no new long positions were added on the substantial run up, it may be that there is no funding/ability to collectively increase longs in the speculative camp.  All the bets may be cast already.  If that is so, and oil has already turned down substantially from its recent rally high, prices may have way further to go down with very little capacity for new funding to come in on the long side and support prices.  My take is that what I have just described is the approximate actual scenario.  It seems to me that oil will get crushed further in this bear market.

These dynamics would be suggestive of further US Dollar Index gains based upon intermarket relationships.  Also the futures positions of the US Dollar Index showed heavy smart/commercial interest at the lows this spring.  So a major base may have formed setting the stage for another move to new highs in the US Dollar Index in coming months.

So back to the stock market....does this mean?  I think it portends a deflationary (continuing) back drop, which in the past has been a negative environment for stocks.

That being said, my only real interest in the stock market is the shorter term moves which I can speculate on based on quantifiable past market action.  So I will continue to attempt to provide timely trading analysis whatever unfolds in future trends.


Tuesday, July 12, 2016

More Bearish Studies Triggering Today

I will relink to a post made in April which had the same set-up as occurring today.  An additional set up is also occurring which triggered in April.
Also I added the condition of the day's high exceeding the bollinger band, and the results had an even greater bearish skew.

Also we saw the study which triggered yesterday regarding the VIX and SPY both being up with a low VIX/VXV.  Today the VIX was up slightly even though SPY was up more than 0.7%.  That combination had a negative skew looking forward as well over quite a number of instances.

So my take here based on the objective past history of SPY is that after this little break to new highs on the SP500, there is a strong chance of at least a sell off back into the previous range before the rally continues.

At this time I don't have much perspective on whether the recent break to new highs is necessarily a bullish signal.  Given that other indexes (QQQ, IWM, NYSE) are still below their highs, I think that calls into question the long term strength.

But from a trading standpoint, all we really need is to have solid info that gives an edge and then manage the trade and the risk amounts well to profit all along the way in little bits and pieces.

Let me know if there are questions on specifics of the trade here for your situation.


Monday, July 11, 2016

VIX Up and SPY Up With Low VIX/VXV - New Put Option Trade Indicated

Today's action in SPY triggered a study that I showed back in the first week of June suggesting a short-term bearish skew in the market.  We did indeed see that.

So the basic set-up here is that SPY is up today, but so is the VIX.  And the VIX/VXV ratio is pretty low at the same time.

So the study is:

  • VIX/VXV less than 0.86
  • VIX up more than 2%
  • SPY up more than 0.1%
There are now 10 instances which have occurred in the past which meet this set-up.  And 9 out of the ten showed gains of 40% or more over the next 2 weeks when purchasing an ATM put option with 2 weeks until expiration.

9 out of the 10 instances SPY showed MAX losses of at least 1.25% over the next 2 weeks.

So the trade here is to buy a July 22nd expiration SPY put either 213 or 214 strike.  I would use a limit order equivalent to today's closing value on the option if entering tomorrow.

For equities, the best play has been to set at limit order of 1.25% gain as well as a 1.25% stop loss order.  Then exit after 10 days if the limit or stop have not been hit.


PS - Let me know if there are more specific questions on how to play this.

US Bond Prices Nearing a Blow Off Top

Click on Chart to Enlarge

This chart is the TLT etf which is composed of long term US bonds.  I have highlighted the upper boundary line which has been a resistance line going back several years.  The whole price formation over the decade has the look of a massive ascending wedge or terminal impulse type pattern.

Currently price has slightly overshot the upper boundary line on the chart, and so a top could form in the coming weeks.  A more drawn out bearish divergence pattern on the current leg up may be ideal before a top occurs.  As of today neither daily nor weekly MACD is showing a bearish divergence in the current leg up.  So it seems there could be some time spent forming a divergence in upcoming weeks.

While the focus of this blog is very much on SP500 analysis and the shorter term trading opportunities in that market, bonds and rates are major factors in our economic life and outlook.  My take from this is that the interest rates are hitting bottom, and this current run up in bonds, could well be the last hurrah.  I would suggest rising interest rates and falling bond prices for months, and possibly years to come.  At bare minimum, bonds don't likely have any significant investment potential for gains in the underlying prices given the 0% interest rate bound.  So I would be strongly suggesting getting out of any bonds held in retirement accounts.  The best place for available funds may simply be cash or equivalent short term treasuries at this stage.