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

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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.

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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.

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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

Put/Call Ratios Suggest Correction Ahead for Stocks 1-9-18

Currently many measures of market sentiment are in excessive optimism territory. 

One of the data sets I follow closely and which is a real money measure of sentiment is the equity put/call ratio from CBOE.

Currently there is a relatively low reading on the 21 day average, the lowest going back to mid 2014.
However I looked at this from a larger scale relative basis and what I did was to take the 21 day average a divide it by the 84 day average.  So we are taking the last 1 month readings relative to the last 4 months total.

Currently the ratio stands at 0.92 which is a relatively low reading for the data set.

I then searched for past times when these low readings occurred at a 52 week high and with a close of SPY above its upper bollinger band.

I removed clustering of a few readings where a few days occurred in a short period (like is occurring now).

And the results were a notable bearish skew to forward returns for the next couple months, but being most notable at 1 week to 1 month ahead.

This was pretty consistent as well in that 9 out of 10 instances had equal or greater MAX losses over the next week relative to gains and the MAX losses on average were over 3.5 greater than the MAX gains.

In 7 out of 10 instances there was a 1 week forward looking MAX loss greater than 1%.

Looking out 1 month, when removing clustering and leaving only the very first reading of a cluster, there was ~2.5 greater MAX loss than MAX gain over the coming month.  6 out of 9 instances had MAX losses of 2% or more in the next month.  6 out of 9 instances also closed negative at the 1 month forward mark.


Given my overall assessment of the market here, I would estimate that the above numbers give a fair risk assessment for the upcoming weeks.  I would not be surprised to see a 3% or more decline over the next 3-4 weeks, from this week's opening values.


Pete

Short-Term Weakness Ahead Suggested by Total Put/Call Ratio 12-4-17

To follow up on my recent post regarding SPY and the forward outlook here, I have 2 back tests of current conditions that I think are worth mentioned.

For the short term, today gapped up and price is opening outside the upper bollinger band and at a new 52 week high.  I ran a back test of similar conditions and looked at various sized gaps. 

The result is that there is about a 4 or 5 to 1 greater MAX loss than MAX gain during the session/today, based upon the back tests.  The average intraday decline FROM THE OPEN, has been about 1.0%.  And the close has been below the open more often than not, with a open to close loss of ~0.5% in the back tests.

So for the short term, this was/is a sell at the open and cover at the close situation, with a 60-80% chance of a gap fill during the session based on the back tests.

Click on Table to Enlarge

What this shows is a scan of times when the 5 day total put/call average was less than -1 standard deviation below the 20 day average of the total put/call ratio AND prices were at a 52 week high.  I also removed clusters so that we were looking at unique instances.

And what we can see is that there was a very skewed downside over the next week.  In particular, at the 3 day mark, which would be through Wednesday this week, there was about 7:1 MAX loss versus MAX gain.

So this would suggest that we are likely to see prices reach resistance here and have a modest sell off in the short term of the next week or so.


Each market environment is unique, and with prices turning parabolic to the upside for the last week, it sure doesn't FEEL like the downside risk is notably larger, but the combo of new price high with extreme complacency from the put/call measure has suggested that short term weakness is probable.

Silver Breaking Out of Triangle 11-28-17

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Silver has been trading in a very tight range for a couple months.  The chart has the appearance of a symmetrical triangle, but has experienced some choppy action at both boundaries of the triangle.

Today there was an obvious close below the lower/lowest boundary of the triangle.  This occurred with a marked increase in volume, suggesting a possibly complete triangle formation with further downside action to follow.

The chart above projects some measure type moves based upon the chart and price formation.  The early October low would be the bare minimum expected move to the downside.  But the 15.00 to 14.50 over the next 1 to 4 weeks would be a reasonable move.  That seems like a large move given recent action, but just this calendar year you can see many up and down moves on the chart which of that size or greater.

SPY and Stocks Probably Very Near to Intermediate Term Highs

I will do further analysis after closing figures are complete for today, but based on this afternoon's current data that I am estimating from, it appears that the current move in SPY is likely to be very near an intermediate peak in prices.

Based on a few simple back-test studies on put/call ratios and VIX readings, the backtests suggest about a 2 or 3 times greater downside risk over the next 2 months compared to upside potential.

Now these scans are by their nature not inclusive of all market conditions, and every market environment is unique, but from past experience with observing markets and running back tests for comparable conditions, I feel that the market has limited upside potential from here for several weeks or months.

I will provide further stats tomorrow or possibly this evening.


Pete

Change of Character in Trend - Lower Bollinger Band Probable Target - SPY 11-10-17

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The chart here is SPY on a daily time frame.  It shows several months of the recent uptrend and nicely illustrates simple concept in technical analysis pertaining to Bollinger Bands.

Once the center line is crossed on a closing basis, the idea is that the nearest band becomes a price target.  So in an uptrend, when prices close below the 20 day average center line in this case, the lower band becomes a price target.

In this case we can see the action in June where prices closed below the band in the second half of June, and then tagged the lower band after about 5 days.  In August, there was a wide range break below the mid point that tagged the lower band the same day.

Now notice the current trend up since August.  I have marked with green arrows the 4 days at which price came down to touch the center line.  Each day price reversed to close off its low and above the mid point.

Now when I see something like this, it indicates to me that program trading may be coming in using the center point as a buying trigger.  But here is a more subtle point I have picked up on over the years and have written about here before.

If you look at the last 3 times the mid point was touched (before yesterday), you can see that the next day gapped up.  In fact the next 2 days gapped up in all 3 instances.  Similar comments apply to the March 9 and 14 center line reversals as well as the June 16 center line reversal.  Gaps ups following the center line test, generally indicate "successful" short to intermediate term tests of the center point.
So the norm for a continued trend is the programs kick in to buy at the mid line and then continue the buying into the next session and create the gap ups.

So when the character changes and price does not gap up, PAY ATTENTION.  To me it indicates that the normal trend continuation program buying pattern is not in place. 

In fact a decent size gap down the following day, indicates a failed test of the average and a probable quick test of the lower band.

This morning prices are set to gap down moderately.  Coupled with the clear bearish divergence at the recent highs and the weak/negative breadth as evidenced by the McClellan oscillator being negative for a couple weeks as price rose, I would suggest that this current gap down will likely lead to a quick move to the lower bollinger band.

Currently the near term support on a move down is 254.00.  But I think prices clearly have more risk than this to the downside in the coming couple weeks.

The last time I remember such and extended period of negative McClellan oscillator readings as prices were making higher highs was Sept 2014 before the vertical decline into mid Oct. 2014.


Pete