Friday's Intra-day Reversal

Friday was set up for a rebound, and it happened. A long tailed hammer formed on the indexes, which is usually a sign of bullishness in the days ahead.

Volatility stayed subdued during last week's pullback. The term structure remained positive as the short term volatility measures never marked higher than longer term measures.


The SKEW actually fell during most of last week's pullback, and it never printed above 130.

The Put/Call ratios did roll over to give sell signals on the SPX, but the index never broke below 2040. This was the previous area of resistance from which the market launched its run to 2100. It seems like it is pretty solid support now.

The NDX is the most oversold and the weakest of the major indexes. Mainly this is due to the awful performance of AAPL since its earning announcement. Applying Fibonacci Retracements, the NDX is bouncing off the important 38% level. Also the Market Forecast Indicator just created a bullish cluster (when all 3 lines are below 20) and is starting to bounce up. The Stochastics are also curling up. If the Put/Call ratio was not on a sell signal, I would say this is a short term bottom. It still maybe, but a bit of caution is warranted.

Selling ITM puts on the NDX with an expected move of 100 points in the next week or two should be a decent trade.

Still Bullish

The SPX and RUT have been incredibly bullish, while the NDX and tech related ETFs are really pulling back. I imagine this doesn't bode well for the SPX and RUT, but as of now the market is not showing signs of rolling over. The SKEW is still below 130, and the down days are limited.

I rolled the RUT calls a couple times and last Friday I put on some RUT bull put spreads knowing that today is historically a very bullish day.

I continue to watch the usual indicators for signs of weakness in the market: the SKEW, the Put/Call Ratio, the VIX term structure and, market breadth. As Oil stay strong and signs of oil demand continue, the market should at least trade sideways if not continue up.

Sideways seems like the way this market could trade over the next few months, and I expect this to be a generally easy time to make money on both the bullish and bearish side.