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NorthmanTrader

Markets-Macro-Charts-Crypto-Alerts-Technicals

OPEX Week

Note: Per my message last week I’m closing down for new registrations and will wait list prospective clients if spots open up. Thank you for all the support!

ESI was almost tempted to title this post “They know nothing Part II” for the obvious repeat performance on Friday of Thursday’s gaming exercise. Once again futures ramped overnight this time right into the NFP report with people eagerly awaiting all the good news that was promised to them, stops were taken out again, shorts covered and people bought. The grandiose miss with a 74K headline reversed the overnight move and the patient scaling process into shorts paid off once again.

As I had indicated Fridays have had a positive bias and so covering shorts proved prudent even on a reload as the $SPY 183 level held stubbornly. Yet I’m getting to the point in this market where even intra-day day longs don’t feel right as opposed to the previous days when I also played opportunistically long. In fact, the action in the small lottery plays were of note. $AAPL & $NFLX are of course not representative of the entire market, but the complete lack of bounce in them and quite a few others reveals some underlying weakness in this market that the overall index action seems to mask.

It is then of note that voices of caution are getting are a bit more pronounced as the $VIX completely collapsed again into close on Friday. In fact, after market close Goldman Sachs confirmed what I had suspected on Dec 23rd: Goldman was getting very cautious on the market:

“S&P 500 valuation is lofty by almost any measure, both for the aggregate market (15.9x) as well as the median stock (16.8x). We believe S&P 500 trades close to fair value and the forward path will depend on profit growth rather than P/E expansion… Furthermore, the cyclically-adjusted P/E ratio suggests the S&P 500 is currently 30% overvalued in terms of (9) Operating EPS and (10) about 45% overvalued using As Reported earnings.”

With a 3% target higher for EOY 2014 they clearly expect a sizable correction in early 2014 without calling for it publicly.

VIXSo what does this mean from a trading perspective? It means I’m getting cautious about the upside without betting against price yet as I see OPEX week as a potential driver for higher prices. So I’m parking myself in a $VIX February futures position as any serious reversal, when it comes, will likely result in a 25-60% up move in the $VIX over the course of the next few weeks. And that sets up a great R/R money making opportunity on both sides. I want to be long for that move up and short the $VIX for its inevitable ride back down. Catching the up move in the $VIX is always more difficult than the down move. The down move is predicated on a sudden sharp excess move to the upside while the bottom can drag on for weeks. Hence I prefer to play the $VIX with futures here and with smaller put positions on spikes. From my perspective the downside in the $VIX is somewhat contained here and I face no decay on my future contracts, so even of markets were to move higher a bit here the $VIX’s downside is likely contained to within a handle.

With regards to equities: The action in the past 2 trading days has shown that the market rewards extremely nimble and opportunistic action. In other words: Take your profits when you have them and don’t get married to an opinion or position.

IWMUntil I see some trend lines break this will be then my strategy going forward. As the weekly chart of the $IWM to the right shows the trend lines are still in place, yet the wedge is getting very narrow. While a few more handles of upside seem to remain the risk to the downside is getting very large.

ES hourlyFrankly if it weren’t for the recent positive bias for OPEX weeks I’d say this market is ready to tumble hard. A look at the 60 min $ES chart here points to a rather quick downdraft scenario: Lower high, with a very defined H&S pattern pointing straight to 1800 on break of the neckline. I will keep a close eye on this neckline and maybe this would be the surprise move for this week. And fwiw, the bear flag pattern on the $SPX is still intact as well.

Bottom line: Technicals continue to point toward a bout of weakness into the end of January. Yet given OPEX and the weekly channels I see a potential upside of 1845-1860 in the $SPX with a likely target in the 1780 area. So R/R is favorable to the downside. Mind you I only expect a corrective move here which will likely be followed by another test of highs or even possible new highs.

Key events this week: 

Bank earnings: $WFC $JPM $BAC $SCHW $AXP $GS $MS, we also have $INTC and $GE, in short: Key numbers and some volatility surround them and opportunities for some lottery plays.

POMO: $5B on Wednesday and $3B on Friday with only small operations the other days.

My trade strategy this week then in summary:

1. Swing long $VIX futures here near base lows in case of sudden reversal

2. Day trade long & short the ranges & levels with options & futures

3. Lottery plays on select earning releases.

Key weekly charts below with comments included:

$SPX

SPX weekly

$QQQ

QQQ

$GS

GS weekly

$BAC

BAC weekly

$AAPL

AAPL weekly

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Categories: Daily Market Brief, Market Analysis

1 reply

  1. This is good stuff, and looks like it played out. Nice reminder that you’ve been successful at this for a while. Looks like OPEX structure is still positive (and particularly for Sept) today.

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