Gap Up on Options Expirations Suggests Weakness into Early Next Week

If anyone didn't have time to get into the SDS trade yesterday, simply buying with a market order at the open today may end up being a good entry. It will be better than the entry yesterday, and historical stats of 2 day returns after a gap up on options expiration are solidly negative with minimal upside potential intratrade.

Exit will be at the next short-term oversold signal.


Pete

New SDS Trade

The S&P 500 model is a hair from overbought so there may be a bit more upside in the market, but intraday technicals suggest it is likely to be limited if existent. Price is under the major resistance from the last 2 weeks and was not able to put together a broad based large rally on "good news" from jobless claims data, which suggests that buying interest may be sparse.

New Trade Recommendation:

Buy SDS today with a market order. Current price is 55.75 which will be the blog entry price.


Pete

Possible Trade Today

This is just a quick heads up that there is a reasonable chance for an inverse ETF trade (probably SDS) entry later today if there is more market strength into this afternoon. So be alert for that possibility for the rest of today.


Pete

More Supporting Evidence of Topping

Click on Charts to Enlarge

The top chart is the VIX with some trendlines in green, a 20 day moving average in blue, and a 63 day Time Series Forecast in red. The VIX has now closed above the down trendline from March. It has remained above the TSF 63 on a closing basis since the last week of May. Now it has made its 3rd consecutive close above the 20 day MA, which many watch. It only barely closed above that average 1 day (March 30) during the rally since March.

The VIX is the commonly followed "fear gauge" which really measures premiums on the market value of options. When fear is high or increasing, traders will be willing to pay more in premium to make sure they have put protection. Typically a rising VIX reflects a falling market, and more demand for put options, and thus higher premiums. The fact that the VIX appears to be turning up after a long downtrend is supporting evidence that the market may be leveling off on this rally.

The lower of the 2 charts is the equity put/call ratio which is a good contrary indicator. I had posted a month or so ago about looking for a moving average cross-over and for the averages to turn up to help confirm a shifting sentiment in the options market that has been a good slightly lagging indicator of the ends of bear market rallies the last year or so. Yesterday's spike in the ratio (relative to recent readings) basically broke the down trendlines since January. Again, this could be intrepretted as a shift toward more fear in the options market and potential for future declines.

On a different note, the short-term model that I use for blog trades got solidly oversold Monday, yet failed to rebound Tuesday. Then today, there were further declines before a modest rally attempt. This type of failure to rebound from oversold conditions is often an indication of a shift in trend from the prevailing trend. Particularly if stocks continue down tomorrow or even into Friday, that would be a big hint, that this rally is in all likelihood over.

Pete

Quality Trade Set-Ups on Different Time Frames

QCOM

XOM

POT

The 3 charts above from top to bottom are Qualcom, Exxon, and Potash. These are all showing nice tradable patterns on 3 different time frames. It is important to time your trades with the general market, and now that it seems almost certain to me that the general market will be heading south, it is a good time to look at individual stocks or options on them.

QCOM is showing a potentially long term short trade. From the looks of the chart, it would not be surprising to see QCOM near $20 by early to mid next year. That would complete a potential Gartley Pattern off the 2008 highs. A Gartley pattern is where wave A retraces to the 61.8% level and then the wave C retraces to the 78.6% level, which is at about $20.50 on QCOM.

XOM is showing an upwards ABC correction with nice time relations and a nice long-legged doji at the last swing high. This could be a nice intermediate term time frame trade for a short sale. Notice how far XOM is from its January highs as the S&P actually slightly broke above those levels. That may indicate future weakness.

Lastly POT is showing a very nice head and shoulders top on an hourly chart. There is really no support until about $96 on this, so an entry could be made short with a stop above the high of the right shoulder.

Pete

This Rally is Probably Over

Today's decline below the last 2 weeks' lows tilts the odds highly in favor of the top being in for this rally since March. I am really only posting this because I want to make sure any blog followers who participate in the trades take this opportunity to get in the suggested trade if you were not already, or got stopped out, etc.

As I have said at basically every potential top for the last month or so, when the top is in, you will typically see a larger (and often faster rate of decline) decline than any pullback during the uptrend. This often undercuts the first major support before making a significant pause or rally attempt. That would still be 4-5% lower than the current S&P price.


Pete

ROBO Ratio, Fibonacci Arcs, and S&P Time Analysis.......A Storm is Brewing

Today's video discusses a bit about how to use Fibonacci arcs, and what they may be telling us right now. Also takes a look at the time relationships of recent legs up and down in the S&P 500 since the Oct 10 2008 crash low.

Click on Chart to Enlarge

The chart above is the "Retail Only Buy Only" put/call volume ratio chart from Sentimentrader.com. For the first time since the bull market highs in 2007, both the call volume and the ROBO ratio itself has risen above its standard deviation bands. The indicates that small individual traders are buying calls to an extreme degree. Unfortunately as a group, they/we get most bullish at the worst possible times....at the tops of major rallies when all coasts look clear.

Bullish extremes like this are less frequent than bearish extremes, and prior moves of the ROBO ratio above its bollinger band has typically occurred only in the very late (often almost the absolute peak) stages of rallies if at all.

At a time such as this, it is interesting to wonder what will be the next potential "driver" of a decline in stocks. While I can't tell you for sure, an interesting news item broke late last week that makes you go hmmmmm. I'll let you read for yourself and do the follow up, but if this proves to be legit, then it will raise many serious question about our own government's past conduct in the sale of bonds, and also obviously makes you wonder if someone else (foreign govt.?) knows something we don't and is trying to get $135 billion in cold, hard cash for their US bonds before we all find out.

Regardless, it pays to train yourself to think opposite the crowd. Things look so rosy now to the hopeful eye, but all the data I have presented in recent weeks should be as good as a CNBC news banner to tell a bull that he is in danger of being slaughtered. Time will tell, but if I was long the stock market, I would cash in rather than wait and find out.