SPY Bearish Options Play

I entered a bearish vertical option spread today (it's a DEC 2016 211/203 SPY put spread). I'm betting that the SPY will close below 203 by 12/16/2016. If it does, I gain a max profit of $630/contract with a risk of $170/contract, for a risk:reward ratio of 3.7.

So what makes me think this is likely? Let's start with the big picture.

The chart above shows the 10 year monthly chart for SPY. Note that the Elliot Wave pattern indicates that a 5th wave could be close to complete. MACD divergence is clear, and the biggest volume months in the past year or so have been down-volume. All these signs tell me that the market is reaching exhaustion point.

From another perspective we can see that Dow Jones Industrials have been out-performing Dow Jones Transports. The two indices haven't confirmed each other and this is a bearish sign according to Dow Theory.

Finally, zooming in to the SPY daily chart, you can see that price is tracing out a pretty clear ending diagonal pattern. I love this pattern because it usually resolves in sharp counter-trend moves that often retrace the entire height of the diagonal. A one or two month move down to 1800 would not be out of the question, hence my reasoning for buying a bearish Dec, 2016 SPY put spread.

I plan to hold until expiration but I would sell early if we got a drop to 1800 at any point before then.

Divergence Forming on AAPL… Buyers beware

I posted a cautionary article about AAPL a few weeks ago, but it continues its massive rally. Take a look at the chart below, and then throw caution to the winds. Its 5-wave small-time-frame rally appears just about finished, and there is ominous MACD divergence.

On the Razor’s Edge

As you may know, I’ve been bearish precious metals for some time. Recently, I shorted silver as it spiked to $29/oz, and took a quick profit. I mentioned that silver could make further new highs, but any additional upside was to be shorted. I maintain that stance, and believe that metals are hanging on the edge.

First take a look at the Gold chart above. For the past 2 years, gold has been a perfect, no-lose investment, capping a 10-year streak of straight gains. However, if you look carefully at the wave structure, it’s apparent that the uptrend is nearly complete, and signs of exhaustion are showing. Gold is still making new highs, but recently it has been carving out an Ending Diagonal, which will reverse violently. I expect one more test to 1430-1445 before a trend change.

Another factor that makes me believe metals will soon drop substantially is the fact that silver recently consolidated in a triangle (see chart above), and has now broken out to the upside. Triangles often precede the final thrust in an uptrend before the trend reverses (you can see many examples of this phenomenon that I have highlighted on this blog). Furthermore, volume has been down-trending as silver makes new highs, and MACD divergence is ominous. If silver reaches $31.66, I will be buying a Put for a sharp decline.

If you believe that metals are a one-way train because they are  “real money”, and because the Fed is printing trillions of dollars, consider this: money is backed by debt, so the money supply can only multiply and expand if people borrow the money that the fed is supplying to the system. Out of the three major sources of borrowing (government, consumers, businesses), two are slowing down, or will be forced to slow down in the near future. No new debt = slow money supply growth = slow inflation. Food for thought.

SPX Update

SPX may be near completing a 2-year uptrend. I remain bearish, especially as the market nears the 1250-1300 zone.

Notice in the daily chart above that the market made a strong 5-wave move from Oct 2007 to Mar 2009. Following this, we’ve seen an equally impressive 21-month rally that has taken SPX from 666 to 1245, an 86% rally. However, this rally appears to have subdivided into zig-zag 5-3-5 formation, and it is nearing strong trendline resistance.

Note that Wave-C is relatively muted compared to Wave-A. This makes sense to me given the fact that the looming trendlines are providing good selling pressure. Also, given the strength of Wave-A, one would expect Wave-C to be slightly more modest.

The daily chart above shows Wave-C of the rally from the Mar 2009 low. Notice that it unfolded in in a clear 5-wave pattern. Each corrective wave lasted about 3-4 weeks, similar to the corrective waves in Wave-A. The fifth wave coupled with MACD divergence tells me that the market is about to turn over.

I have been proven wrong so many times over the past 21 months. At this point, I see no reason for the market to form a major top near this level, but on the other hand, this kind of sentiment seems prevalent right now. The top occurs when no one is expecting it as a possibility.

BIDU Blow-off Continues

I prematurely posted about BIDU going parabolic a month ago. The rally continues, but keeping an eye on the bigger picture makes me think that the rally will soon run out of steam.

The monthly chart above shows how extreme the rally has been. Notice that after 17-18 months of strong rallying, BIDU has now blasted off in a classic blow-off formation.

The more interesting phenomenon appears on the daily chart. Notice that BIDU has recently consolidated in a triangle formation, and triangles often precede the final move in a trend. Furthermore, there is MACD divergence forming. So I believe that when this up move finishes, BIDU will begin a multi-month downtrend.

First USD/CHF reversal confirmation

A few weeks ago, I switched from long EUR/CHF to long USD/CHF. I still like this position, and today, the first sign of a trend reversal came out.

Notice on the daily chart above that USD/CHF has now clearly had the biggest rally of the entire downtrend. Coupled with clear MACD divergence, I think this indicates that the character of the downtrend has changed, and a new uptrend is potentially forming.

Fool’s Gold?

Once again, I’m talking about Gold. A few months ago, I was expecting a sharp drop, which did occur. However, the subsequent bounce has been stronger than I expected. I still believe that gold will weaken soon, and if it does make a marginal new high, it won’t be sustained very long.

In the first chart above, the 3y weekly chart, notice that gold broke a multi-year supporting trendline, and is not in the process of retesting this trendline from below. Second, notice the MACD divergence that has not yet fully resolved. Third, notice that in every other major rally prior to latest one, volume expanded heavily on the upswings. This time, volume is absolutely meager, which indicates that buyers are not nearly as confident as they were in the previous rallies.

Next, take a look at the COT data for Gold. The chart above shows gold’s price in the upper panel, and the 78-week COT commercial trader’s index in the lower panel. When the blue line is at 0, commercial traders are more short than they have been in the past 78 weeks, and vice versa for when the line is near 100. With the recent rally, commercial traders have taken the opportunity to drastically increase their short positions, which is a bearish sign.

Finally, I want to comment on sentiment. Seasonally speaking, August and September are quite bullish for gold. However, because this tendency has been so apparent in the past couple years, there is now a general consensus that gold will continue to rally in the coming weeks and months. Combining this bullish sentiment with the bearish factors mentioned above tells me that the probability of a drop is higher than the probability of a rally, and I am positioning myself accordingly. Good luck!

Interesting formation on QQQQ

I last wrote about the overall market here. As you can see, since then the market has not made very much overall progress. Today, I noticed an interesting pattern on the QQQQ ETF that tells me that this could be a terminal thrust in this rally.

Above is the weekly chart of QQQQ highlighting my Elliot Wave count. I believe that the rally we’ve seen in 2009 is actually a triple-zigzag, a corrective move. I’ve come to this conclusion because there are no clear 5-wave moves in this rally; rather what I see is a collection of 3-wave moves that overlap significantly. Also, notice that volume has been dropping, and MACD is nearly curling over. Finally, notice that price is back-testing the uptrend line that it broke back in October.

The short term picture tells me that we’re nearing the end of this holiday rally. Notice that QQQQ consolidated in a very clear triangle before breaking out this past week. As I’ve mentioned many times before, triangles are normally patterns that precede the terminal thrust. Often, price will go up an amount equal to the height of the triangle. This projects a high of 45.62, where we are right now. Be careful if you’re long and complacent.

Happy holidays!