The three indicators we utilize for forecasting hit extreme oversold levels on Tuesday, shortly after we suggested a dead cat bounce was near. Equity markets should firm over the next few days, as these indicators suggest. And, like any Grand Master, we need to visualize the markets 12 moves ahead.
The S&P 500
Two distribution days have bludgeoned the S&P 500 over (-6%) this week and (-8.10%) since the all-time highs at 3393.52. RSI is oversold similar to previous occasions in 2018, suggesting a dead-cat bounce is near.
Many of you are watching the 200ema at 3079.50 which would represent a (-9.25%) pullback from 3393.52. We would close most of our hedges if that level is achieved.
Indicator 1 – Put/Call
That said, the put/call ratio hit an extreme on Tuesday, closing above its upper Bollinger Bands. This level has marked a short-term bottom in the past.
December 2018 saw put/call spike to 2.0. S&P 500 drawdown was 20%.
Indicator 2 – NYMO
The McClellan Oscillator (NYMO) registered (-98.55) intraday on Tuesday, closing near extremes at (-95.85). Previous occurrences in 2018 pointed to a bounce in the days that followed. We anticipate this statistic will validate bullish positioning in the next few days.
We will liquidate more hedge positions in gold and inverse funds if NYMO starts trending higher in the next few days.
Indicator 3 – VIX – Fear at Extremes
Fade the fear is our mantra. While VIX can certainly stay elevated, this measure suggests puts are highly favored precisely at a point where markets might reverse. Calls and longs should do well in the next few days/weeks. We will seek confirmation before committing capital.
Washout lows are near, so we will be monitoring institutions activity over the next few days. These assumptions should be validated as follows:
- Block trades should increase if institutions are active.
- Gold should retreat as the safety trade unwinds.
- Bond yields and Junk bonds should reverse.
Futures are currently back in the green. Gold and crude oil are lower. Yields are higher by more than 3%. We should see a follow-through today, mindful that price action could drop to the 200ema before finding a bottom. The financial media seems intent on exacerbating that premise.
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Happy Trading,
Vinny
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