A Few Thoughts on Stocks Here 11-1-17

Today there is an FOMC statement to be released.

Tech stocks have pushed higher the last week, but to me it appear to be an exhaustion type move, as evidenced by the following chart.

Click on Chart to Enlarge

This chart is XLK on a daily time frame.  It is a tech stock ETF.  What I have drawn is an upper channel line which connects the previous price peaks during the uptrend.  A touch or break of such a trend channel line is often an exhaustion point for a move.

Couple that with the fact that the recent gap up from last Friday was the largest gap up in a couple years, it smacks of an exhaustion gap from a charting standpoint.  Is that gap up on the earnings news almost 2 years into a 65% run up in prices a "smart money" gap?  Or is it a "dumb money" type gap after the news is out?  I think more of the later.

Click on Chart to Enlarge

This chart is a weekly chart of the Dow futures contract with associated Commitment of Traders data below the price chart.  When analyzing the CoT data, there are a few common patterns that show up at reversal points on the chart.

One of the key points in CoT is always extreme positioning between the market participants and their historical range of contracts held.  We have seen extremes in the chart for sure as it pushed to new highs in 2016.  Other index contracts are hitting or near extremes on this rally also.

However, an even more notable signal than the extreme position is a "blow off" pattern in the futures where the "smart money" commercial traders hold an extreme position, but then price continues to rise and there is a break from their pattern of selling on price rises.  Instead we see the commercial group decreasing their short position substantially as prices rise.  That indicates a typical finale to a rally where the speculators "won".  They cashed out into a strongly rising prices.

That is what we are seeing on this Dow chart.  The commercial pattern of selling into the price rise was standard until October began.  Then for the last month, price has risen very sharply while commercials have bought and large specs have sold.

Once the run is done, this could result in a substantial decline, even a bear market.

Not all of the index contracts are displaying the same pattern, but this one has a classic bull market peak type of look to it, and so I am paying attention.


On a shorter term note, I back tested SPY data looking at opening prices outside the upper bollinger band on a gap up as is occurring today.  I also added various other conditions which are currently present in the market to gauge the short term expectation.

The only real significant finding is for the same day.  There is about 2 to 4 times greater MAX loss than MAX gain on the day of this finding.  The forward returns after the close of the signal day were flat to typical.

So given this tendency for a close below the open, and some of the exhaustion signals occurring, I wonder if the FOMC news will lead to a sell the news response here.

We will see.


Pete

Short Term Market Action Suggests to Me That Stocks Will Fall Starting Late This Week or Next

Click on Chart to Enlarge

This chart is an hourly chart of SPY.  What we are seeing here is an obvious overlapping type short term action, not a directional upward movement that would signify major buying interest.

Notice that the overlap has occurred underneath 2 trend lines, one from the consolidation beginning in September.  The other origin is not shown, but is a trend line from Feb 2016 lows to the June 2016 lows.

Also interesting is that the 214.50 level is level that SPY was trading at just prior to the last FOMC meeting announcement.  It had been support for the triangular consolidation in September.  Now prices have met some mild selling each of the last 4 times price attempted to reach that level.

The next FOMC meeting is next week.  And so we could possibly see some market movements with higher volatility next week.

Currently I am positioned in 3x leverage (SPXU) at ~24.00.  Also, the banking sector stocks and brokerages have hit the extreme end of their harmonic reversal zones and it looks like today could have been the final day up in that major rally in big banks.

Based on what I have posted here in recent weeks, as well as the larger prices pattern and cycles, it seems likely to me that a substantial move down is imminent.

But we shall see.

Pete

Complacency In the Markets As the FOMC Meeting Occurs

Click on Chart to Enlarge

There are a number of shorter term notable bearish divergences occurring over the last couple weeks as stocks have continued to advance.  Also, there are some intermediate term sentiment extremes showing up in the put/call option data.

Today the FOMC released minutes and as occurred at the Sept 17th meeting, the VIX is at a relative low, contacting the lower longer term bollinger band on the chart above.  This indicates complacency in the options market relative to the recent range.  This type of signal occurs frequently near inflection points, in this case possibly with a short to intermediate term top in stocks.

There are several other indications of loss of momentum in stocks here.  I will run some scans over the next couple days to look at possible profitable opportunities in the options and stocks.


Pete