What’s New Besides More Chop and What to Keep Focused on

The bottom line is that there really isn’t that much new to say regarding the markets so I will keep this brief and highlight some things I think are important to keep track of as the chop continues.

• I’m seeing many people expect some type of resolution to this chop next week. It’s possible and it would be very welcomed I’m sure, but I would like to keep an open mind that we could just get more rangebound chop and no clear trend.
• Monday May 26th is Memorial day and the markets are closed. Hence, Thursday and Friday could be very light (as if it hasn’t already been) as people take a long weekend.
• VIX expires Wednesday morning and I looked back a few years to instances that the VIX expired after regular options expiration week. In most cases there was a couple good down days during that week, more-so when we were near highs (like now) than when we had already pulled back. Last year, right before Memorial Day weekend, markets dropped marking the start to one of 2013’s pullbacks; however, it wasn’t coming from a place of sideways action, but rather from increasingly new highs almost daily.
• Also regarding the VIX, keep in mind that it is coming into expiration week at very low levels and we may begin to see people rolling out to June or July months, which could then lead to a rise in volatility. Furthermore, the VIX often sports a nice pop each time price reaches or moves below the lower Bollinger Band as it has recently done. Thus, it would be wise to keep your eyes on it next week since it has an inverse correlation to the overall market.
• Then there is that treasuries demand and interest rate drop that is an anomaly. Josh Brown put together a good summary that Doug Kass wrote with regard to potential reasons if you are interested. Regardless of why or if it makes sense, until the TLT and the markets lose their tight correlation, keep your eyes open. The TLT is overbought, but with the uncertainty over why they are going higher and so many shorts piled in, I would be cautious trying to short them for more than a quick trade. I would actually like to see a pull-back for a potential long. Below is a weekly chart.

Breadth:

• As SPX was making new highs last week, participation among stocks making 20-day highs was bleak and not indicative of much strength. Having said that, it has been that way all year so it doesn’t necessarily mean it’s time to short. It does tell me that the risk/reward to the upside is not very intriguing. 
• And despite the weakness that began on Thursday, we are also not even close to a place that we can expect some sort of bounce based on 20-day lows being made. 
• The put/call ratio is looking decent, which is a good sign that people are getting more cautious. This is only a chart looking back one year. As you can see below when it gets to these levels or a little higher it has marked a short term bottom. However, if you look back a few years (chart not posted), this level would still be considered an environment that wasn’t very fearful (which I’m sure you sensed anyway by the complacency among market participants still buying the dips and the low VIX).
• Levels of resistance on SPX are 1890 and 1902.17. Levels of support are 1860, 1850, 1834 and 1814. 
• Although expectations are high that the SPX and DOW will soon follow the IWM and QQQ down into a correction, don’t fall into the belief that it’s a guarantee or that you can time it. If you look at the weekly chart of the SPX below and disregard the crumbling factors outside of it, you would see a very healthy looking chart. Yes, the crumbling factors are a concern and I don’t suggest turning a blind eye to them (or this entire post would be a waste). The point, however, is to be careful trying to predict if, how, or when a correction will take place. 
• As for next week, flip a coin. I’m pretty sure no one would be surprised to see more new highs, more chop, or a break of the recent lows – or even all three. There are still some good set-ups both long and short and until a clear direction emerges, concentrate on individual sectors and stocks that are showing relative strength or weakness. And if it works with your style of trading, try not to overstay your welcome in any trade because follow through has been a bit of an issue this year.

Check out my subscription if interested in more. I offer several different things and I had some questions on what I show regarding the open interest part, so here is what I posted for my subscribers last weekend, but note it’s just one small aspect of the entire service.

Tags: breadth indicators, SPX, stock market, Treasuries, VIX