Gold Short Covering Rally Looks to Me Like It Will Continue

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The chart here is of GLD etf and shows projections of a continued advance up from the recent lows.

Since the lows over the last week or so, the rally in gold has been notably larger than any counter trend advance going back to the April highs.  So by this measure, the rally has overbalanced previous moves in the leg down, and indicates by objective measures that a larger phase of upward market movement may occur.

I have drawn lines on 3 of the major short covering moves off of lows over the last 2 years, and then projected them up from this August's low.  And we see what looks like an 10%+ move as realistic coming off of the current low if it holds.

The sentiment at this year's lows was at a historically extreme level and would argue for the possibility of a major low occurring here.

The Commitment of Traders data showed that large speculators went net short at the recent bottom, which is very rare in gold historically.  It does not mean that the low is in, but would indicate the possibility of a historically large amount of speculative short interest to unwind which could fuel major legs up in months to come.

Other precious metals look to me to be in similar set-up, and so this complex I view as having explosive potential.  Just based on the moves over the last couple years, there may still be 3:1 reward to risk using a stop below this month's low, if the rally were to continue and reach gains similar to the amounts of previous rallies in recent years.


Pete

VIX and SPY Bollinger Bands Suggest at Least a Minor Pullback is Right Ahead

The VIX has closed 2 days in a row below its lower bollinger band, which is not a common occurrence.

I have looked at this data and combined it as a filter in a few different ways with other data.  The message is consistently that in the past after similar occurrences there has been a relatively strong skew to the negative in the short term.

Over the next couple weeks the MAX loss has been greater than 2 times the MAX gain on average. 

However, in this LOW VOLATILITY environment, a strong skew does not really mean big price action.  So over the next couple weeks, the average decline to be expected from past data may be ~1.5%.

The cycle analysis timing that I use, also suggests that there may be 1-2 weeks of downward pressure still in stocks.  So these perspectives are consistent and would suggest weakness (or at least NOT strength) through roughly August options expiration.

There are enough divergences showing up here that I feel a high confidence that in the short to intermediate term the market may cool off and not make much more net gains for a few weeks.


I don't have much of a longer term perspective to offer from the data.  I would suggest that in the quest for investment yield, the odds seems to be tipping in favor of money flowing to bonds and away from stocks.

Bonds and notes have major short interest accumulated, and the SP500 dividend yield has fallen below very short term yields on Treasuries.  The suggestion here is that there may be money ready to flow back into bonds rather than piling into stocks on a breakout to new highs in the SP500.

For those who may have interest in commodities and currencies, there is much evidence in the underlying positions that we are quick approaching a commodity rally and probable decline in the US Dollar index.

Some notable markets with extreme short interest and probable sharp rallies to come are gold, silver, coffee, sugar, among others.

Oil actually is more the opposite.  It has come off of record long positions and extreme bullish sentiment, and so from a pairs trade perspective, a long gold/short oil trade may make sense.


Pete

Another Test of 200 Day Moving Average in SPY - 5-3-18

I have discussed the tendency of markets to rebound from key moving averages in the past, and also given perspective on some subtleties which follow.

First, from my perspective an average like the 200 day moving average in SPY leads to rebounds when touched simply because of groupthink which is programmed into the market.  So computerized/automated trading programs may involve buy/sell action or contingencies at these commonly followed averages.

So there is nothing magic about it.

What I have seen in the past is that strong and lasting rebounds from key averages often are initiated by gap ups and closes above the open following the decline to the moving average.

When we see weak (no gap up, and or no follow through after the gap up) price action following the touch of the average, that may be an indication that the market will not continue its rally attempt.

TAKE NOTE of multiple weak follow through attempts followed by even slight breaks to lower lows.  What can be happening there is that selling is coming in following every automated buying blip, and THEN when the buying triggers are exhausted, the bottom falls out underneath so to speak.  So there can be a rapid downward movement in prices.

Given that since February, each successive touch of the 200 day moving average has held, BUT BEEN SMALLER in the attempted rally, we find ourselves at a point of convergence that is about to break.

I would argue that it would be correct to short sell on a stop order as it breaks to new lows following today's rebound attempt.

Active cycle analysis suggests to me that any rebound from here may be short lived.

I don't know how strong a move down will occur on a price break, but I have seen this type of exhaustion in enough markets enough times to recognize the risk of a big move down as well as the opportunity for rapid price moves and volatility expansion which can work in one's favor if positioning for a breakout.

Since a contracting triangle appears to be forming, I am alert to the possibility of an upside breakout and continuation of the bull market.  But it appears to be unlikely to me that it will occur at least for a few weeks.


Pete

Put/Call Ratio Extreme Suggests That Rebound Attempt Is Imminent - 3-28-18

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The above snip is the result of a scan looking at extreme put/call ratios by a few different measures while occurring in the context of a bull market moving average configuration.  Other conditions were that daily and weekly MACD were pointing down and SPY closed down 1% or more on the day.

That paired the list down to a very bullish subset.

SPY only declined about 1% or a little less this morning, but from short term timing cycles and non-confirmation with the QQQ fund, as well as the above noted study, it seems that the downside could be muted for the coming days. 

I exited the rest of QQQ puts I held.

I entered an April 4th SPY 258 strike call with a limit order of 13.50 to exit before expiration if it occurs, but otherwise exit at expiration next week.


Pete

Multiple Comparison Pointing to Thursday as Probable Short Term Bottom

I have scanned past history of SPY in comparison to today's closing action and have further confirmation that on average we may expect a volatile couple days, but probably a rally attempt and short term bottom likely to form within the next week.

The most common thread here seems to be an elevated downside skew for the next couple days before stabilizing.

Based on what I am seeing I would estimate the odds of a further 2% decline or more over the next 3 trading sessions to be greater than 66%, with some possibility of a "wipeout" type move.  I would estimate the odds of a wipeout move to be ~25% or a bit greater over the next 3 days.  That would be something on the order of 5% or more loss at least intraday.

Again price in SPY has come back down close to the 200 day moving average.  And the failure of price to clearly stay above it after yesterday may indicate that yesterday's rally was just a program trading buying surge at the 200 day average but without broad follow through.  So it could be just a "blip" from that average in the midst of an incomplete selling cycle.  It seems very possible that a sharp move down to wipe out stops and trigger sell orders could occur over the next couple days.

That would be the classic market behavior, often accompanied with a break of a prior significant low.  In this case, this significant low is the February low which is about 3% below today's closing price in SPY.

The next significant low below that would be the August 2017 low down around 242 on SPY which is about 7% lower than current closing price.

I would estimate somewhere in that range to be a probable low over the next 2-3 sessions, with some minor possibility of something even greater to the downside occurring.

I currently am holding some put options on QQQ since 3-14 of which I exited half at today's close because of the bullish divergence on the hourly chart.  I plan to exit the other half by the end of this week, but quite a bit of action could occur by then, so I will key in on the 60 minute and 15 minute chart for ques for exit, and run some back tests as I see what gaps and price moves are occuring.


Pete

Short Covering Rally - Short Term Expectations 3-27-18

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Yesterday the stock averages gapped up and gained ground from the open in explosive fashion. 

After a period of decline, the question is what this means going forward.

I scanned the history of SPY and looked at times where the prior day closed below the lower Bollinger Band and was down 1% or more, and the current day gapped up 1% or more and made further open to close gains all without making a lower low compared to the previous session.

The above table is the whittled down history of market days similar to Monday going back to 1995 in SPY.

Of note, within the next 5 trading days, 6 out of 8 experienced losses of 3.7% or more relative to the close of the signal day (Monday in our case).

7 out of 8 experienced losses of 1.9% or more relative to the signal day close.

Those numbers are based on intraday figures, NOT on closing figures.  But we can see a clear skew to the downside right away in the past instances.  And on a closing basis, the first day following the signal days did not make much further gain or loss on average.  But the next 2-3 days following that showed about half the instances made some sharp breaks lower to retest the lows.

In going through the charts of the past instances, they all experienced some temporary support after a retest of the lows.  So we may expect that if prices do come back down to challenge Friday's low, that we could see further rally attempt somewhere between there or the February price lows.

Also, note that all the instances in that table were in the context of incomplete bear markets except the August 2015 instance.  So possibly this is a harbinger of a longer term shift???

Click on Stats to Enlarge

Also an extreme total put/call ratio was registered on Friday at 1.53.  The above table shows readings of 1.5 or greater in the past.

Also note the downside skew over the next few days.  Again, while not shown here, the MAX closing loss point is the 2nd and 3rd day after the signal. 

So both of these studies suggest a possible/probable retest of last week's low by Thursday this week or maybe a bit beyond.

That fits well with what I am seeing in time cycle analysis in the Nasdaq, which currently projects a bottom on March 29th which is Thursday.


I will update as action unfolds over the next couple days.  Personally I would be looking only to play clear short term reactions expected to the upside of say 1-2 weeks, with the idea that the longer term trend may have shifted to down already.


Pete

Chances of a "WipeOut" Move This Week.....

I have scanned current market data from several angles in comparison to the last 22+ years of data in effort to estimate what is likely to occur in the wake of this week's decline and technical set-up.

In short I estimate about 25-50% chance of a wipeout type move occuring by this Wednesday.  By that I am meaning something on the order of 5% loss or more.

Based on the several factors I would estimate that SPY could easily carry down to 247 by April 3-4th. 

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The chart above here shows a typical time and trend channel pattern for a "flat" correction.  This would project a move to the lower trend channel at April 3-4th which would be ~$247 on SPY.
That would be 4-5% below current levels and based on several scans comparing to past similar declines, that would be reasonable in the next 3 days to 2 weeks.

Points of note here are that the hourly chart currently does not have a bullish divergence occurring, so it seems more likely with this intensity of decline, that we will see either a divergence develop or a large capitulation gap down like 2% or more gap down as at least a temporary capitulation/spike low.

Also SPY is perched right at its 200 day moving average as of the close Friday.  As I have noted many times in the past, these key moving average points will typically be met by gap ups with gains after the open shortly after the average is challenged.  We saw a sharp rebound off the average on Feb 9th.  However, the more times price comes down to touch the average, there is implication of weakness and the possibility of a sharp break down in prices.

Part of the idea here is that certain key averages factor into program trading and if the buying thrusts off the average are weak and re-tested, there may be a major break down through the average.  The average and the space below it may be stop loss triggers or even trend following short trigger points and result in a large and sharp price movement.

If we are to see that occur here, the chart concern is that there is not a major chart support region until down at the $240-220 region of SPY which would be a pretty major decline.

From a chart point if prices are to break clearly below the lower channel line of the chart above, it would be indicative of longer term trending action to the downside rather than corrective activity of the bull market.

As a side note but maybe of significance, bond prices have rallied weakly off the recent lows, and as of this coming week, the key time cycles in bonds are peaking and indicate downward pressure into early or mid May.  Given that prices are marginally above MAJOR horizontal support, it seems possible that a major breakdown in prices could occur on a break to new lows for the bear market in bonds.