Total Put/Call Ratio Sell Warning Suggests Negative Returns Ahead

For longer term followers of the blog, you may recall my repeated notes on times when the total put/call ratio drop relative to its intermediate range.  The following chart shows the way I have tracked it for years.

Click on Chart to Enlarge

The 5 day average of the total put/call recently dropped to its lower 1 standard deviation band.  This indicates relative complacency compared to the recent range.

Now there is a seasonal tendency to lower put/call reading in December, though they still may be significant.  But today I looked at past instances where the reading came in the doldrums of the year - in this case either July or August.

It is well known that there is a seasonal tendency for increased volatility in the Sept/October time frame, and that many major sell offs historically have often been in Sept and October.  So I wondered if the current signal would reflect a tendency for subsequent market sell offs.

So I looked back through my data going back to 1995 and looked at all similar set-ups on the total put/call in July or August.  I removed any clustered signals after the first in a series so that all readings are "unique".

The short of it is that past signal did indeed lead to average poor performance and negative skews to forward price changes in SPY.

From the 1 month to 5 month forward looking time frames the average MAX loss was greater than 3 times the average MAX gain.

My options trading model shows the following data, suggesting a 200% limit order on an ATM put with 2 months until expiration would be a great option strategy.  And even better according to the past instances (only 9 instances), would be to buy an ATM put option with 2 weeks until expiration and hold until expiration.  In this case that would be basically August standard expiration.  Personally I would rather buy time into September because that is historically the most negative month for stocks.

Click on Table to Enlarge

Some additional data on the equity/ETF side of things.......

At the 1 month forward mark, 7 out of the 9 instances had maximum declines of 2.6% or more.

And at the 4 months forward mark, 8 out of 9 instances had maximum declines of 3% or more.

And using my trading strategy of an OCO limit sell order and stop loss order on an inverse ETF, the MAX return scenario would be to set an 11.25% limit gain per the SPY etf and an 11.25% stop loss.  Then exit at 4 months if neither order is filled.  That would be approximately November 24th.

Now the stats on the past instances justify using leverage of 3x or more on this move, in which case you would take the percentage numbers above for SPY, and then triple them for orders if using an ETF like SPXU to try to capture the anticipated move.

Let me know if there are questions or clarification needed here.  Volatility makes its seasonal lows around this time of year, so understand that it pays to position yourself for the times of year when the odds of a significant move are higher.  It may take a little time to unfold, but feel the indications are clear that downside risk is higher than upside potential here.

Pete

Beware The Blowoff In CryptoCurrencies 7-31-17

Currently there is much buzz regarding the major gains in cryptocurrencies like Bitcoin and Ethereum.  I have noted a significant email buzz and ad buzz recently marketing the hype and gains of these digital currencies.

In short, please understand that by the time this is occurring, the easy money has been made, and the unaware last buyers/suckers are going to be drawn in.

I have no expertise in this area of cryptocurrencies, so my comment here is not in regard to that.  My comment is in regard to the herd mentality and recognition of what is occurring on a investment/trading psychology level.

I recall back in 2011 as gold was really nearing its peak, that I began to see a quick change an uptick in the marketing of gold buying.  I specifically remember one video marketing piece hit my inbox laying out about how to buy physical gold, and all this stuff with the idea that you can do this and make money.

And I remember seeing it and making some commentary of it in a post or video here on the blog with the suggestion that this alone, despite all indicators and technical analysis, was a great sign that the bull market was peaking.  And in fact the timing was great, as the bull market was right near its peak in retrospect.

And currently, the change and uptick in the cryptocurrency marketing I think is a similar level of mass psychology at work, and shows a trend near its end and bubble ready to pop.

In fact, in the years that I have been following markets and the few "bubbles" I have seen in oil, gold, commodities, housing, and (more recently I think in bonds), it seems like the "public", which may well include you and me, often become aware of and take action in the market AFTER the peak already occurs.  So they/we are not just late with little gains left, we don't even get in until all the gains have been made, and there is only down to go.

So just keep this post in mind if you are part of the investment crowd and are seeing or continue to see emails and headlines hit you about the digital currencies.

Probably better to wait and watch this deflate for a couple years, and then consider whether to now buy low, or not.


Pete

Breakout of Falling Wedge on GDX (Gold Miners ETF) - Probable Continued Price Advance in Coming Weeks

Click on Chart to Enlarge

In my last post I gave some perspective that gold and gold stocks would likely move higher in the near term.  And prices have done just that for the last couple weeks.

Currently on the GDX etf (shown above), price has moved up and touched the falling boundary line of a falling wedge chart pattern, which I have labeled here as an a-b-c-d-e triangle type pattern.

I'm sure some Elliott wavers would view this progression as an a-b-c-i-ii pattern with the current move up being the early stages of a wave iii, which would be anticipated to be strongly uptrending for a few weeks.

I have put a blue box on the chart to help gauge continued development of post pattern price strength and "price logic".  The idea here is that after a pattern or phase of market action completes, the objective signal of that a new phase has begun is that the last price segment is totally retraced in less time than it took to occur.

In this case the blue box represents the price and time consumption of the d-e move as I have it labeled.  So if that did indeed complete a contracting triangle/falling wedge, then the logical implication is that the current move up will rise above the top of the box BEFORE the right side of the box is reached (in this case that is August 10th).

Now I can't know that it will or won't do that.  But since the price is at a resistance line on the chart and beyond the midpoint of the box, it seems likely that a breakout will occur from the wedge very soon if my perspective is accurate.

It is not uncommon for price to back test a broken wedge line after the breakout occurs.  In this case say price moves up out of the boundary lines of the wedge this week.  Price may come back down to the approximate price level at which the boundary line was exceeded before moving notably higher.


Pete

Gold and Silver Prices Finding a Bottom? Based on CoT Positions I Think So - July 2017

Click on Chart to Enlarge

The chart here is a chart of gold prices and the Commitment of Traders data for the last couple years.  This is produced on Barchart.com

What is notable here is that the red line, which is the "smart money" commerical traders, is showing the highest reading going back until the bottom of the bear market in late 2015.  Basically with prices where they currently are, these producers are not seeing the necessity of hedging much.

Also, it is rare for the red line to ever cross above 0 as it did at the bottom of the last bear market.  Basically the commercials are totally unhedged and are in a small speculative long position when that occurs.

The other side of the commercial position is the large speculators.  And you can see they have the lowest net long position since the bottom of the bear market.

I am making note of this here, because it seems very possible that these levels are significant enough to form a corrective bottom in gold and lead to a significant advance.

If prices are able to break below this month's low, I would expect that commercials would continue to support prices and the chop may continue.

Gold Stocks Possibly Completing Major Basing Pattern 7-12-17

Click on Chart to Enlarge

The chart above is GDX which is the major gold miners ETF.  I will provide here a brief summary of some key factors for analysis but without taking time for further charts.

1.  Commercial traders are the most net long (actually least net short) at any time since near the lows of the gold bear market and at prior lows of legs down in the bear market.  This suggest the potential of a bottom here in prices in a continuing bull market in gold.

2.  The June/July time frame is the annual/seasonal low point for gold historically, and then some of the strongest seasonal move historically is the late summer.  So from this standpoint, it makes sense to look for a low here.

3.  Since early 2016, the CRB/SP500 ratio has been at the lowest point on the chart since 1995.  The prior major trough was in early 1999, after which a major commodity bull market ensued.  So the valuation of commodities to stocks is historically low, and on a longer term basis, could argue for a commodity bull market to be in the works.

4.  I have placed a pattern labeling scheme on the chart of GDX above, which in this labeling scheme, would be the maximum complexity pattern for a correction which can occur in Elliott Wave terms.  Another interpretation that is still bullish would allow for some further decline but without breaking the December low.  On this note, a contracting triangle in wave theory would be common at the end of a complex move as the selling loses steam and a base is formed for a new move.

5.  The bullish engulfing pattern on Monday occurred right at horizontal support and this is a classis bottom reversal candlestick.  This does not suggest the length of any rally, but is further confirmation that a bottom of some degree cold well have occurred on Monday.


I entered long on Tuesday on NUGT which is the 3x gold miners ETF.

The stop is below Monday's low, and I plan a stop movement technique using a moving average channel if prices rise.

Out of individual gold stocks, I really like the pattern on ABX best.


Pete