Daily Market Brief

Boxcar Market

boxcarWhen I was younger and much prettier, well younger anyways, I used to roam through the vast expanses of the American Southwest on motorcycle. Quite the visual experience as this land is so alien compared to much else on the planet. The canyon lands of Arizona and Utah are simply amazing. Part of these lands haven’t really changed all that much and when you ride through Flagstaff in northern Arizona you get to see the transcontinental railroad passing through with boxcar trains transporting goods across the country.

Looking at the recent $SXP chart I couldn’t help but be reminded of these boxcars. Rectangular in shape and just chugging along. Yet I can’t help but get the sense that this boxcar has some serious mechanical issues with its wheels about to fall off. After all this latest bounce just got us back to the middle Bollinger band:

SPX daily

A zoom in look at the weekly chart shows us that this market is clearly at a critical juncture here:

SPX week

I can’t recall ever seeing back to back weekly candles like this. Now granted the week is not concluded yet, but this action shows at best a very uncertain market, at worst a market that’s about ready to give it up. But you wouldn’t know it from the behavior of market participants. A couple days worth of bounce and the CPC is back to its lowest point in 3 years indicating maximum investor complacency. Yet the chart shows the potential for an enormous shift in the other direction:


A break above the upper trend line could indicate a seismic reversal in this market’s fortune. The $VIX chart shows a  very similar message. As you know I have been pointing toward another large spike coming based on the seemingly regular intervals in the chart. Note also that the smaller middle spikes have resulted in a repetitive 4 week period of dread for the $VIX during the last several occurrences. As we are now in week 4 of a similar event one can reasonably ponder if we are not getting ready for another move higher soon:


Yesterday I pointed out a large call spread on the $VIX for the May time frame, this is not the first time I’ve seen this recently. Some people are expecting something big to happen in regards to the $VIX or at least want to be prepared for it. Note on the chart that the 200 weekly MA has acted as resistance over the past couple of years. This MA is now getting easier to capture and a break above it and the upper depending trend line paints a similar conclusive picture as the CPC chart: Markets are vulnerable here and could experience a sudden shift in risk.

Is there any evidence in the price action to support this thesis? Looking at a longer term $SPX chart I would submit yes. This week’s low coincided, yet again, with the longer term trend line that has now been tested 5 times since the rally began. My view remains that this trend line will get broken and the market will get hammered when this happens with the initial target zone outlined below:

SPX weekly

The question remains when this will happen and I have been dancing along the unsteady beat of this market for weeks blocking and tackling its gyrations in every direction long and short and so far so good. Calling for the bounce this week following the sharp drop on Friday made sense and the trade-set ups worked out nicely.

Now we are entering, in my mind, a very tricky phase of the market that requires patience, decisiveness and flexibility at the same time as multiple scenarios present themselves on how this will all play out.

I exited most index long positions yesterday for nice profits and started expanding my short book again with shorts in $YM futures and longs in $VIX futures and calls in $VIX itself. Yet I’m also keenly aware that this market may gyrate higher on fluff as we saw again yesterday. Note the two largest rally days in the past couple of weeks came on one person only: Yellen. That’s it. That’s the only time the market ramps hard now. Yellen saying the same thing, i.e. the economy is bad, jobs suck and I will support the market blah blah. Boring and frankly silly, but so it continues.

But note that even the ECB throwing the specter of a trillion dollar QE program out there can’t get European markets to new highs. QE and easing is juiced out as far as I’m concerned, and while they keep trying to keep the boat afloat the structural message is under way: This market is tired, rusty and in need of some serious R&R. Like an old boxcar.

Trade Plan: Per my outline I’m expecting weakness today due to the Thursday pre monthly OPEX phenomena, hence I scaled in short and closed most longs. Now how deep this impact will be I can’t know of course. Yesterday I pointed to an ideal move into $SPX 1865-75 for a reversal into 1828 $SPX. We got to 1872 $SPX on the close. So I can’t complain about that call. Now the key is what will happen next. It is obvious that 1838-40 $SPX is key support. A break of which would bring us out of this box car and should pave for a move much lower. Yet monthly OPEX weeks tend to be bullish so I am mindful of yet another move higher next week. Sea sick yet? Get used to it, this market will be choppy all year and the occasional central bank driven rallies will continue to be part of the game.

Binary move: If we do break 1838/40 on a closing basis this week I’m staying short. If we don’t and play out a higher low, double bottom, or lower low with a bounce above 1840 type scenario I’ll switch long for a bullish move into next week.

Gold: Nice move overnight. The buy on the January highs test proved to be a good level. On the chart I could point to an inverse pattern that should scare Gold bears if it plays out: A move to approx. 1,500 which would indicate a fear trade commensurate with a sharp drop in equities. We shall see.




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