10 + 10 Things to Consider

Posted On December 12, 2016 1:34 pm

As we come into this week here I are 10 market ‘sentiments’ i’m thinking about; most are positive but a few flags are starting to run up the pole.

And then Steve Burns provides us with 10 ‘technical’ spots to watch on the SPY chart, which also suggests the market is due for a rest short term, but is bullish long term.

My observations:

1) the market is very extended and likely due for a pullback. Meaning it will be hard to come by as first dips will be bought.

2) “overbought” conditions can remain so for an extend for extended periods of time.

3)The S&P 500 rose 3.2% last week. On all past 14 occasions over the past 20 years the SPX has registered a gain of 3% or more the following week has also been positive.

4) with all the major indices at all-time highs their charts have no resistance levels.

5) As indices and individual stocks make new highs it means recent buying is profitable so there are few sellers waiting at “breakeven” levels. Buying can beget buying.

6) Breadth based on the NYSE advanced/decline line hit a new high. This is a positive.

7) Money flow continues to move from bonds to stocks. But people remain underweight stocks on a historical basis- currently 55% allocation vs. 50 year average of 65%. This trend can push stocks higher.

8) The VIX actually rose last week which is a negative divergence.

9) Put/call ratios have dropped to low levels (bullish positioning) which is also a contrary indicator. Without portfolio put protection in place if a sell-off comes it might accelerate.

10) Fear and Greed reading is getting extreme.

In his piece Steve Burns provides us with another 10 important technical points and clues to watch for in the SPY this week:56

  1. The first support for $SPY on any small pullback would be the 10 day EMA. $SPY is over two ATRs from the 10 day EMA and a pullback there would be a normal pullback inside a parabolic uptrend. We should see this next week.
  2. Over the next few weeks the next key level for support would be the $218.50 old resistance that it broke out of before this run. It is normal to pull back to old resistance one time after a break out.
  3. An overbought 77 RSI in $SPY is extremely rare, this is usually the area where momentum is lost and we fall back to the 70 RSI.
  4. The MACD is extremely extended here after this powerful move. The bearish crossover did not happen last week. As momentum slows we could see this lines start to close their gap.
  5. The ATR expanded last week briefly but it was upside volatility. No warning sign here yet to the downside.
  6. Volume was excellent last week showing accumulation and a lack of sellers at lower prices.
  7. At all time highs everyone long $SPY is currently profitable with no selling pressure as no stop losses or trailing stops are being triggered.
  8. Shorts being forced to cover is adding fuel to the upside as reversion to the mean strategies and short side swing trading are failing.
  9. With $VIX at 11.75 we are near a short term top in the market going straight up, the volatility cycle usually starts back at a $VIX 11.00. We will not necessarily trend down but price could start to swing in a larger range both up and down as we approach a $VIX 11.
  10. The risk/reward does not favor new longs here but having a trailing stop to lock in profits when this bull party starts to end.

Bottom line seems to be: be patient with your buying but be prepared for a fresh leg to what is now an seven year old bull market.

About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.