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.

Low Skew at Market Highs?

Friday was the first day I can remember when an extremely low SKEW  (around 113) registered on a market that is in a bullish trend. Low SKEW readings always come when a market is no longer going to fall further after a steep downfall. Today, we got an immediate rally within the first 40 minutes of trade, but after that the markets sold off and closed lower on the day.

Bearishness is creeping up as seen in the uptrend in all measures of volatility. The short term measures of volatility are still below the longer term measures, but the VXST is close to crossing over VIX.


The momentum of the uptrend has been weakening since March 7th, when the percentage of stocks trading above their 20 day moving average hit a very high level of above 90% intraday.

Our RUT trade is still on to the end of this week. The 1110/1120 call spread has been violated, but since has come back down into an area of profitability. A single good down day this week would allow us to close it out at near full profits.  If the market moves up, we will need to roll it out a couple weeks. 

The RUT chart shows that the small caps have not been able to gain significant ground in to the low area of the trading range that existed for nearly two years (the area of the blue box). Recently the RSI (bottom line graph on the chart) hit a very high number that has corresponded in the past with pullbacks to at least the lower Bollinger Band on the price chart currently around 1066, about 3% lower). 

With options expiration next week, and two days of reversals from highs in the mornings to close at the lows of the day, I suggest we can expect more weakness this week. 

Almost 8 days up

Yesterday marked 7 positive days on the SPX, and today was nothing of a pullback. The SKEW finally got back over 130 today, so a bumpy ride can be expected over the next few days, I suppose. 

The bulls are so in charge that any pullback in the overnight and early morning action is immediately the low of the day. The market closes near the highs of the day every day now for what seems like forever. 

The RUT call spreads are close to being at the money, but I wait for the pullback. 

SKEW at 133

And the SKEW continues to rise. Most likely this is because of the upcoming Fed meeting. Investors are paying for OTM options, most likely lots of puts, as the Fed is likely to move the market strongly.

Today was a non-event after Friday's big rally. The NDX led and the RUT lagged.

Even after last week's pull backs on Tuesday and Thursday, the market remains overbought in terms of market breadth and price action. If there is any surprise from the Fed on Wednesday, the market will sell off.

But the Fed never surprises.

SKEW at 130

The market traded wildly today, but in almost a predictable fashion. The SPX is not showing signs of real bearishness, but there are some indicators that are giving warning signs.

First, today's SKEW closed over 130. This number is only extreme in the fact that it has been ages since anything around this number has shown up. It used to be that the SKEW above 130 was common place, but I am more concerned about this now as the market is still barely off its high and showing uncertainty.

Second, the percentage of stocks trading above their 20-day moving average hit 90% recently! Previously I mentioned this as being something not since for many years. That percentage closed below 80% today, and seems to have peaked in the short term atleast. I suspect we will need to see a pullback of some magnitude before we can see that number rise again.



Third, the RUT was weak today, and never really rebound. NDX has been weak for days and was down for several days while the SPX was making new highs. This is not the sign of strong market lead by tech and consumer discretionary stocks.

One sign that investors fear has subsided lies in the volatility indexes. VXST traded back below VIX. Actually, VIX was trading higher most of the day, while VXST traded lower. This is bullish.

Today's uncertainty could lead to a bit of a bloodbath tomorrow. Or we can trade higher. Or both, like we did today. Whatever the situation, a set up for a bullish week would suggest upside movement tomorrow is limited.

5th Day Up

Now the RUT and the SPX posted five positive closes in a row. Its been ages since we have had that type of bullishness. Both these indexes sit right around previous support levels, which should act as a bit of resistance in the short term.

Today's market showed signs of tiring. This followed a late day sell off on Friday. Weakness is typical after bullish action when non-farm pay day reports come out. With next week being options expiration, this week should give a set up for the rally next week.

Today the short-term volatility index (VXST) closed higher than the VIX today. This is generally a short-term bearish signal.

We will look for opportunities to close the RUT spread this week, on any pullback, and open some bullish trades for next week.