Get Out of Stocks At This Morning's Open - Oct 1 2020

Currently everything I am looking at, taken together, suggests that after this morning's apparent gap up, the risk is much higher than reward over the coming couple weeks.

I don't have time to put much info or charts here but I will quickly verbally summarize.

• Today there is about a 1% gap up indicated.  There was also a 1% gap up on Monday (which has not been filled).
• Back tests show about a 2:1 or greater risk after the open than reward.
• Back tests show about 66% chance of the close being below the open today.
• Back tests show about 66% chance of prices closing lower than today's close at the 5-6 day forward point (Oct 9th in this case)
• Back tests show about 90% chance of a lower close than today's close within the next 5 days.
• I would estimate the chances of a big decline (like 5%+ in the next 5-6 days at about 33% or higher)
• Short term cycles that I follow are peaking this morning in the context of intermediate term cycles being in a strong downward portion of the cycle.  This info is extracted independently of the other data above, but is clearly giving a confirming downside bias to the historical back tests.

The strongest portion of the coming down cycle appears to be between today and October 13th.

This recent decline has been "weird" in that it never registered any significant fear type readings in the most reliable and consistent measures that I follow (put/call ratios, VIX and VIX/VXV ratio).

The big money is apparently basically unhedged and long both stocks and the stock futures. CoT data shows that the hedgers and small speculator/gamblers were the buyers since March.  Large funds which usually buy rallies, were not buyers since March.

So if prices decline, I don't see any other option than for the big money hedgers to quickly sell out.  It could be a stampede to the downside at some point.  Add to this, the potential for the large hedge funds to begin entering new short positions on a technical break, and the recipe seems strong for a big decline if the September lows are broken.

Lastly from a price pattern standpoint, I had looked at the 9/21/20 decline and attempted reversal day.  It was pretty unique, but in 25 years of data there were 4 previous very similar days.  

• 1 marked a significant bottom
• 3 lead to 10-20% declines over the next 2-4 weeks
• So if there is a close below the 9/21 LOW, I would estimate the odds at 66% or higher of a wipeout type of decline shortly to follow.

Pete

Expect Another Round of Selling After A Possible 1-2 Week Rally from the Recent Lows - 2-12-18

In follow up to a post from last month on put/call ratios which was timely and gave forewarning of the potential for a sizeable sell off to come over the next few months, I want to reflect on the development of those comparable instances to gauge how the decline may unfold and see what type of readings (in the indicators which flagged the decline) showed up at the end of the correction/leg down.

I had looked for times when:

• 21 day avg. of EQUITY put/call was less than or equal to 0.92 of the 84 day average
• 5 day avg. of TOTAL put/call ratio was less than or equal to -0.95 standard deviations below to the 20 day average

As the ensuing sell offs developed, there was tendency for a 1-2 week rebound rally to occur when the 5 day avg. total put/call ratio rose above 1 st. dev above the 20 day average.  At the first occurence of this, the above mentioned equity p/c ratio had moved back up about ~1.0.

However, that rally offered a secondary selling opportunity.

When the corrections had bottomed in the other instances, the 21/84 equity p/c ratio had flip flopped to a reading of 1.08 or more, indicating a comparable imbalance in the opposite direction.  When those levels had been reached in the longer term eq. p/c ratio, then a total p/c reading indicating extreme pessimism was a great indication of a more lasting rebound attempt.

So our current market seems to be following this template so far.  The initial plunge over the last 2 weeks, has led to a short term spike in p/c ratios.  But the 21/84 equity p/c ratio has only just reached back to 1.0.  

The current small rally may be expected to continue for several days.  But the past instances would suggest the probability that another move down will occur with a higher 21/84 ratio.  And that could very well make a significantly lower low.  A shorter term pessimistic extreme in the ratios which occurs in that context would fit the template for a larger rally attempt.

Pete

Dual Time Frame Price Channel Throw Over in SPY - Topping Probably 1-18-18

Click on Chart to Enlarge

The top chart here shows SPY on a 60 min log chart going back to August 2017.  I have connected a couple key highs in the run up since then, and currently price is hanging out above the upper boundary of the channel on this time frame.  The next chart will show this with a higher time frame also.

Click on Chart to Enlarge

This chart is a daily log scale chart on SPY going back to the 2016 low in January after the 2015-2016 correction.  I have drawn some channel lines on this time frame we can see that SPY is also hanging out above the upper boundary line of the channel for the last week or so.

So we have a dual time frame move up above the upper channel line coupled with extremely one sided bullish sentiment on the market.  I have showed some similar events in past markets, and in my estimation this is significant and could be a point where prices peak and begin a multi month consolidation.

Currently the market is showing some unique signals in real money sentiment.  

For instance, today was the 3rd close in a row above the upper daily bollinger band on the VIX which typically would show a cluster like that at the bottom of a correction, or early in the phase of a sell off.  But yesterday prices on SPY closed above the upper bollinger bands and at a 52 week high.

I can't find any instances of a similar occurrence in the past 23 years.

Also when the VIX is stretched to the upside, usually the put/call ratio is rising also, both of which indicate rising fear or pessimism.  But currently, the put/call ratios have been at extreme opposite conditions both short term and on a multi year basis.  So the pairing of relatively elevated VIX and relatively extreme low put/call ratios is at a discrepancy I also can't find a comparable scenario to for the last 23 years by a few different measures.

Price is the final result of all other market info, and so the multi time frame extreme throw over of the upper price channel of the rise for the last 2 years seems to me to be the final say of significance.

Markets can run up or down for extended periods, and so when staying with the trend this is where a methodical trailing stop adjustment scheme is so key to stay with the trend.

Further Signs of Excessive Complacency From Put/Call Ratios 1-15-17

As of Friday's close,there are further signs of a stretched or imbalanced condition in the put/call ratios which suggest that stocks may be within days of an intermediate high.  The table below shows when there is a "sell" signal from the total put/call ratio while the equity put/call ratio is at a longer term complacency imbalance.  I have removed clusters and we are left with some notable tops in recent years.

Click on Stats to Enlarge

I have looked at the data from a few angles including:

• total put/call "sell" while SPY closes above bollinger bands = BEARISH
• total put/call "sell" while equity put/call ratio is imbalanced = BEARISH
• total put/call "sell" while MACD daily and weekly are UP and SPY closes UP = BEARISH
• total put/call "sell" at a 52 week high = BEARISH

The total put/call "sell" is a 5 day average that is more than 1 standard dev. below the 20 day average.

Also recently there has been a cluster of days where the VIX rises while SPY also rises.  I have looked at the in conjunction with a relatively low VIX/VXV ratio and it is mildly bearish over the next few weeks on average.

Also, I have a "gap indicator" which factors into account cumulative gap direction and relative size and over the last week it reached to an extreme level indicating possible "exhaustion".  I filtered that condition with times when price closed above the bollinger band, and the result is also moderately bearish looking out to about 1 month and then results are typical after that.

Also I looked an example of extreme price momentum in SPY, where the daily and weekly MACD are both positive and in an UP position with no bearish divergence and price has closed above the upper bollinger band on SPY for 2 consecutive days.  Removing the 2018 instances from the last couple weeks, there were not many instances but 3 out of 5 showed sizeable pullbacks of greater than 2.5% over the next 2 weeks.  The negative skew didn't last longer than a couple weeks, but possibly this extreme momentum puts stocks at a spot of probable near term "profit-taking".

So in summary, on a long term basis stocks have historic levels of complacency and indication that the investment crowd is very "one-sided" in the bullish camp, creating a condition of long term risk for stock prices.

On an intermediate term basis, I put the most weight on the put/call ratio studies mentioned above based on personal experience.  And currently, this real money gauge is suggesting a negative skew to forward market prices for several weeks or months.

And in conjunction we have some signs from VIX, gaps, and price momentum, that stocks could be near to a shorter intermediate term correction when comparing to past similar data.

Looking at price cycles currently active in the market, SPY is currently near a peak of the upward portion and from my most recent analysis, the currently active cycles will be creating a downward pressure for several weeks. 

Pete

Stats for A Call Option Set Up From Last Week

Last week as prices reached the lower bollinger band on the daily time frame, the previous bearish set-up and trade recommendation was exited at its target profit.

There was a reasonable bullish looking set up at that point, though I did not run any scans looking for the bullish edge.  One notable feature was a modestly elevated total put/call ratio at the end of last week.

In retrospect I ran some scans and found a profitable set-up which occurred on 5-5-16, last Thursday.
Scan criteria were as follows:

• 5 day average of total put/call ratio was 1.1 or greater
• SPY closed down 3 days in a row (or more)
• %K of the daily stochastics (14,3,3) was less than or equal to 20

So this scan indicates a period of at least short term elevated fear as evidenced by the put/call ratio being high.  Also, the stochastics is "oversold".

Results for the options are listed in the table below.

Click on Stats to Enlarge

For a 1 week until expiration at-the-money call option purchase, setting a limit order to exit the trade at 100% profit or letting the option expire worthless yielded the best profit scenario.  In this case it was basically a 60% chance for the option to double.  

I am posting this here for future reference and addition to my database of profitable trade set-ups.

The equity side of the trade did show a profit opportunity but not one that I felt was exceptional to post.

So understand that this trade is not a current recommendation.  The trade was already triggered and actually hit its 100% profit target yesterday, and would be closed already.

Pete

Put/Call Ratio Showing Sell Warning For Stocks - 4-19-16

Click on Chart to Enlarge

I have shown this chart many times in recent years, and it provides relevant context for the position of the market time and time again in my experience.

In this case, the 5 day average of the total put/call ratio is below it 1 standard deviation band on both the 20 period and 126 period time frames.  So there is a type of dual time frame extreme here demonstrating complacency in the options market.

However, note that this is occurring with prices NOT making new highs for the bull market.  So a 2 year low in the moving averages of the put/call ratio is occurring, and yet prices are not making new highs.  To me this suggests a market that is ripe for a significant top to be made.

Arguably the biggest weight pulling the market down has been energy and commodity related issues.  And this may be true, but the Commitment of Traders data on crude oil futures shows that the rally over the last couple months in crude oil has been a typical short covering rally.  Overall positions declined.  Shorts declined, but also longs did as well.  So the net buying was the covering of short open interest.  That is not a pattern in the big money players which is typical of healthy leg up in a bull market, or of new speculative interest coming into oil.  This suggests that oil will likely still see yet lower lows in its bear market.  And so my point here is that it doesn't appear that the weight of the energy sector's pull on the market has run its course. So my guess here is that we see the oil rally fizzle out and move to new bear market lows, and that stocks take another leg down in the process. It would not surprise me if this next move down in stocks was a big one and broke the support around 1800 in the S&P 500.  Understand that as prices move lower there is increased volatility typically, and the possibility that some related companies bankrupt from the leverage they have in play in the market which is moving lower.  And that type of context tends to cross barriers into other sectors of the market and "trickle" down.  So that is possibly the rationalization of the next big move down in stocks if it does come here before new bull market highs are made.


Pete

Kiss of Death? or Buy Set Up.....

Click on Chart to Enlarge

This chart shows the total put/call average ratio has spiked above the standard deviation band suggesting that there is relative extreme fear in the market sentiment right now.  This condition typically precedes a significant market rally.  However, in major declines, the initial spike may be a good bit before the low is in.  So, I view this as a set-up on the long side, but really we need to see at least an hourly time frame MACD bullish divergence signal in order to consider the long side from a technical standpoint in my opinion.

Click on Chart to Enlarge

The is the SP 500 cash chart on a daily time frame.  Currently price is trapped below a couple rising support trend lines, but above the long term bull market trend lines coming up from the 2009 low and the Oct 2011 low.  Both the trend lines are running close together just below price.  So from a charting standpoint the market price currently seems destined to make a major move.  Either it will find some support soon and then move to new highs, or the long term trend line gets broken with some significant downside follow through. 

From a qualitative standpoint, price broke below the blue trend line of the rising wedge on Monday.  Now today price rose back to the level of the break of the trend line which is a point where I often see back tests complete before a continuation of the new trend (in this case down).  Also price broke the red trend line of a smaller wedge, and price now has back tested the line and closed below it.  This has occurred on successively lower NYSE volume as well, suggesting a probable weak counter trend rally.

In my opinion the market seems very likely to move back below this week's low before any possible low can occur to this decline.  Along this same line of thought, my bottom spotting algorithm has not registered a low signal yet after the new lows on Monday, and it is pretty sensitive at catching bottoms on declines of this magnitude.

So the conclusion from my opinion is that stocks may be close to an intermediate term buy point, but lower lows are likely still ahead on this decline.  But given the long term trend lines just below, and the non-confirmations and rising wedge chart pattern, the possibility of a major decline (at least a legit 1 month correction and roughly ~10% decline) is very real.


Pete

Sell Warning From Total Put/Call Ratio

Click on Chart of Total Put/Call Ratio to Enlarge

I haven't had time to provide more detailed info on this, but Monday the total put/call ratio gave a sell warning with the 5 day average closing below the 20 period 1 standard deviation band.  I have discussed this signal quite a number of times here in the past, and you could search the blog for related terms to find more info.

Interestingly, this signal came at a slightly lower high in the SP500.

I will try to provide more detailed info here in the next day or two.

Currently I feel the two most reasonable price scenarios are for a continued rally to new highs as suggested in the recent video on an ending diagonal in the SP500 OR for weakness into the end of the month followed by a rally to new highs in May, which could also be the end of an ending diagonal if the price relations remain within the rules of logic for such a pattern.

The most recent signals from the ratio mentioned above were

• 12/26/14
• 12/26/13
• 7/19/13

Pete

Low Volume in QQQ Suggests Rally Will Falter

Click on Chart to Enlarge

The chart above is the volume of QQQ with some moving averages and standard deviation bands.  The 8 day average of the volume is the lowest since August 2013, at which point it went very slightly lower.  The next lowest reading in between came at the beginning of Sept 2014 as stocks pushed towards the highs and then corrected sharply into October 2014.

In general waning volume on a rally is a bearish leading indicator meaning that it will occur in advance of a top in price.  So my interpretation here is that near multi year lows in volume as the other indexes are trying to make breakouts of the December highs (and in the NYSE highs back in July 2014), is probably not a good sign for bulls.

I have analyzed current Commitment of Traders data for the major stock indexes, and a major selling surge came in in mid December.  There is not the same level of extreme in selling currently.  That could be interpreted as a bearish divergence, but it also could be interpreted as the smart money just not being extreme, and so there may be room to move higher before they create another extreme selling effort.

Shorter term measures of the total put/call volume ratio and equity put/call volume ratio came towards the lower end of their recent range this past week.  And so in conjunction with market volume waning, it appears that some complacency is setting in for this rally.

Given stocks are at new all time highs, a trailing stop behind the market may be the way to proceed from here, but another possibility is to exit part of long positions at these levels, with the idea to consider rebuying on the next correction.

Pete

Mixed Currents In Stocks 9-4-13

Click on Chart to Enlarge

This chart shows a striking bullish divergence on the MACD in SPY.  So from this time frame it would be sensible to go long here with a stop below the 8/28/13 low and a target of the August high.

Click on Chart to Enlarge

The 15 min time frame is not showing any bearish divergence yet which suggests that price will move at least slightly higher before possibly continuing a larger time frame down trend.

The CBOE total put/call ratio today came in at 0.77 which is rather low.  The ISE call/put ratio came in very high, and the equity put/call came in at 0.54 2 days in a row which is on the low side.  All these reading could be interpreted as persistent complacency in the options market despite just a 2 day rally in stocks.  Also volume came in lower today compared to yesterday which means that the add on to yesterday's strength was on waning activity.  All these could be signs of a probable corrective rally which could be a shorting opportunity.  But price action holds the final answer.

In a case like these if looking to short then I would look for a bearish divergence pattern to develop on the 15 min technicals at a bear minimum before taking any sell signals to short.  Given the indicator set-up I think a 30 min chart may even need to develop some divergence before this attempt stalls out.

Situations like this can be tricky because there is no clear market trend and different time frames are mixed on the signals and set-ups they are giving us.  So there is no necessity to trade if it is not obvious what to do given one's method.

Put/Call Ratio Suggests a Rebound Attempt Soon

Click on Chart to Enlarge

The equity put/call ratio has spiked to a level suggesting a short to intermediate term bottom could be forming very soon.  However, with historical tendencies as a guide, it looks unlikely that whatever low may form will be the low for the correction.  Spikes away from the trend to this degree are typically in the middle or early in the trend, and when the final bottom is in place there is a divergence that forms.  Additionally the VIX closed above its upper bollinger band today suggesting a statistical extreme in the range may be at hand.  However, until the move is complete, it implies increasing volatility and accelerating price declines.

Click on Chart to Enlarge

The ideal time for a downward "flat" Elliott wave pattern to complete would be tomorrow morning. The tightest harmonic resistance zone is 133.40 on SPY.  So given the bullish MACD divergence on the hourly chart and short-term sentiment extreme, a lower low and reversal higher tomorrow may be a good time to follow the hourly chart signals on a long trade.

The flip side to this equation is that all the major indexes have confirmed potential price downtrends by retracing the recent rallies in less time than took to form.  Also, as of tomorrow with a lower low in the S&P 500, the daily ADX will be rising and above 20 with prices moving down suggesting a possible new downtrend.

Here is a guideline that I would suggest in this current environment.  The odds likely favor a rebound and a rally attempt is likely very soon.  However, if the market rallies for a day or two (or more) and then fails and moves below the current lows, the market could quickly move down about as many percent BEYOND the current low, as it already has moved down in to that low.  In the current case, say we rally a day or two, and the market has already declined 6% off the highs.  Then if new lows are made, it could quickly decline about 6% below that level.

A major battle is being fought around the 1350 SPX level, so eventually one side will be exhausted and a sharp price move will occur.  The bullish divergence suggests that may be UP.  But an initial attempt which fails, will lead to a sharp move down.