Ominous Signs in this Market Indicator

The stock market has been on a rip lately. The S&P has risen well above 3000, and currently sits at 3120.5 (^GSPC Chart). But how high will we go without a pullback? More importantly, how big will that pull back be?

Yesterday, while trying to find clues, I put the ‘On Balance Volume’ indicator on my SPY chart. This indicator basically gives you an idea of accumulation and distribution in the market; it tells you, in general, if the market is scooping up shares, or selling shares. I use the OBV from time to time, but have not used it in a while. What I found was scary.

SPY chart as of 11/15/2019

Notice the descending trend on the OBV indicator? More importantly, notice the pullbacks that have happened each time the OBV dropped in relation to the market rip higher?

At the end of last year we had a correction. The markets tanked for a couple months, and finally bottomed out on December 31. Since then the market has climbed to all-time highs setting record after record.

Our first substantial pull back of this year happened right after the May high. This is when the Trump administration basically said a deal with China was currently off the table. The markets did not like the news one bit, and down it went. From there it rallied to new all-time highs in July.

Same story in July – more negative trade news, and the market soon fell. However, the fed started to talk about lowering interest rates, and the market liked that. It soon rallied again in September and met up with the July all-time high. Then, of course, another pullback on… you guessed it… negative trade news. Since the pull back bottom in early October, we have rallied to even higher highs. The market is on a rampage!

But there are ominous technical signs that this is not sustainable without some sort of pull back or correction. Take a look at the chart one more time:

SPY chart as of 11/15/2019

The blue vertical lines are meant to show the market highs in relation to the OBV. The red arrows, of course, are pointing to the highs of the OBV in relation to the blue lines. The blue dashed line on the indicator shows the May OBV high, and the purple dashed line shows the July OBV high.

Notice, each all-time market high comes with a lower OBV high. This is divergence. The On Balance Volume indicator is showing divergence with the overall market.

After the July market high, the market pulled back. The OBV might have predicted this, as it could not reach the May OBV high. Same story for the September rally – the OBV might have predicted that one as well. This time, the September OBV could not reach the July OBV high or the May OBV high. And here we are today. The OBV is right at the September OBV high, but well below the July and May OBV highs.

Quite a tongue twister that last paragraph was. LOL! But you get the idea.

There is one other ominous sign the OBV is giving me. Notice the OBV has been slow to rise during this current rally when compared to the other rallies? That is showing that there is lack of conviction in this move. It seems market players are leary about moving forward on the current trajectory. The other rallies showed steeper OBV rise.

As I always say, this does not guarantee a pull back or correction will happen any day now. There is no “holy grail” of market indicators. The OBV is no exception to that. This is just something I noticed and wanted to share.

This post is my opinion only, and should not be taken as advice. Always do your own research before making any investment decision. Seek professional and licensed advisers if you are unsure.

Record Close for SPY Today

What a GREAT day it was for my account! New highs, and new record close. I’m still bullish, but with caution.

Click on the chart to visit my Trading View page.

A couple good things to note from today. 1) Volume was kind of weak until the end. It wasn’t horrible, but it wasn’t great either. It did pick up and ended up closing with about average volume. That’s a good thing. Low volume plus the record close would maybe be a bad thing. 2) The RSI divergence I wrote about yesterday is pretty much gone now after today. That is also a good thing.

Now, a couple of bad things to note from today. 1) The market is just one negative tweet, or one negative trade war news story from sending it down. That is enough to make me proceed with caution. I am still bullish, of course, but I’m cautiously bullish. 2) Jerome Powell (the Fed) speaks on Wednesday afternoon. He has moved the markets before, and he could move the markets again. If the market is looking for a 50 BP cut, and we only get a 25 BP cut, that could be bad. Or, even worse, if there is no cut at all that would be VERY bad for the markets. Everyone wants a cut, regardless if it’s a good thing or not.

Keep your eyes peeled and stay vigilant. Being at these all-time highs, a lot could go wrong. But, a lot could go good also. We will just have to wait and see what the near-term future holds for us.

My guess… and this is just MY guess alone… is that we move up and play in the $315 to $325 area for SPY. If negative news comes out, or if Jerome Powell dissapoints, forget about it! We would then probably fall well back into the $290’s.

Good luck to all, and may we all profit!

OPTION GREEKS – DELTA

Delta is my personal favorite “Greek” when looking for options. I would bet that it’s other traders favorite as well… and for good reason! It is how much you will make (or lose) for a 1 point gain (or loss) in the underlying.

Here is a screenshot from my TD Ameritrade account option chain. This chain is for SPY – the S&P 500 ETF I trade frequently.

The yellow highlighted rectangle is showing you the call delta’s for any given strike price. This particular chain is for October 25, 2019 expiration. So, what do those numbers mean? I’ll tell you…

Let’s use the 295 strike price. I have highlighted the option in question above.

This strike price, for this call option, on this particular expiration date (October 25,2019) has a delta of .51. This tells you that for every $1 SPY moves up, or down, you will gain or lose .51 cents PER CONTRACT. Don’t forget: 1 contract is 100 shares of the underlying. So, for every 1 contract, you would gain or lose $51. Let’s do the math…

Let’s say SPY moves up $1, and I own 1 contract of this call option. To calculate how much the price of my contract will move up, I simply take 100 shares (for the 1 contract I own), and multiply it by the delta which is .51… the answer equals 51, or $51 dollars. It means, if I bought the contract for $5, it would now be worth $5.51. All other “things” being equal of course.

Of course, if SPY fell $1, I would have lost $51 on my option price. I would be in the hole $51. The equation to determine that $51 is the same, but the direction the option price moved is different.

Delta is the price in which the option price will fluctuate for every $1 (1 point) move of the underlying. In this case, the underlying is SPY. Notice, the delta is less and less the farther “out of the money” the option is. It gets closer and closer to an even 1 for 1 the farther “in the money” the option is. Right “at the money,” like this option I hypothetically bought, the delta will be around .50. But delta is ALWAYS between 0 and 1.

Keep in mind,there are other Greeks in options (theta, vega, gamma) that influence the price of an option. But all else remaining equal, delta is simply the price fluctuation of the underlying based on a 1 point move (up or down) of the underlying.

SPY MONTHLY CHART LOOKING GRIM

The technicals are mounting in favor of the bears. Looking at the monthly chart for SPY, I noticed yet another double top… and more ominous, divergence with the RSI and volume.

What does the declining volume tell me? It tells me that month over month buyers are becoming harder and harder to find. What does the declining RSI tell me? It tells me that SPY is trying to come down from such overpriced conditions.

Of course, fundamentally, you have QE (quantitative easing) propping up the price. This is creating a condition, in my opinion, that will eventually trap new and novice investors. The newbies are probably buying up stocks, because they see there’s a rally. But the problem is, the rally is so old, and so high in price, that they are bound to get burned when this thing comes crashing down.

Do I think a recession is imminent? No. Do I think a big correction (15 to 20%) will happen? Yes! However, with that said, lowering rates and QE after QE is not necessarily a good thing. That could lead to recession type behavior eventually… it’s called DEBT!! The more debt companies get themselves in, the harder it will be for them to climb out if and when interest rates begin to tick back up.

I am overall a bullish investor, but right now I have a bearish sentiment. The technicals and fundamentals are pointing to a big correction in the works. But that’s ok! Because, after it does correct, I will sweep in and scoop up as much as possible for the next leg up. That’s investing 101 for a bull: buy low, sell high. Right now, it seems investors are buying high and selling high… that’s very dangerous!

Remember: ALWAYS DO YOUR OWN RESEARCH AND CONSULT A PROFESSIONAL IF YOU ARE UNSURE WHAT TO DO.

SPY Taking a Breather

Yesterday, SPY gapped up and made a doji to close out the day. Today, that doji was followed by a bearish engulfing candle. By itself, a doji usually means reversal. The bearish engulfing candlestick that followed the doji, in my mind, is confirmation of a reversal.

I am bullish the US markets. But I think they are in for a pull back … more so, a profit taking round.

After breaking through the consolidation that lasted about a month (the green dashed line), SPY has been on a rip. This week it made new highs, but failed to close above the all-time high set in July of 302.23. I think this is a point where investors may want to take some profits.

Technically

See the long up-trend line I drew? That started from the low of last year on 12/26/2018. Up until July 26 that line held very well … then all hell broke loose, and SPY plummeted to 281.72. It then entered a period of consolidation that lasted until September 5, when SPY finally broke out of it with a pin bar gap. Fast forward a little more than a week, and here we sit at the all-time highs again.

But, notice how after we bounced off 281.72 it tried to get back above that long-term trend line and just couldn’t do it? And then tried a couple more times but failed … Then finally on the 5th of this month it busted through with conviction. That’s why I’m bullish overall from a technical standpoint.

However, I believe we are going to see some profit taking before the Fed speaks next Wednesday 9/18/2019. I think the doji yesterday, and the bearish engulfing today, shows that we are going to pull back from this level. Not too mention, profit taking is not uncommon at all-time highs. I think the pullback takes us to around 295 area (green dashed line). From there, fundamentals will determine if we bounce off and retest the all-time highs … or more ominous … continue down through the green line and confirm a double top pattern.

Fundamentally

TRADE WAR!!! Need I say more? It’s all about the US/China trade war. Jerome Powell and the Fed have nothing on the trade war. The market wants an end to it, and they want it now. Unfortunately for us (the market), it’s not going to happen now … well, I don’t think so anyways.

The reason SPY broke through the consolidation was because the US and China agreed to continue talks in October – the markets went berserk on the good news! But I remained skeptical; do you know why? Because when did the US/China talks ever stop? They’ve been going on for a year and a half. You gotta use logic here, but the markets don’t like logic. They like the news.

Logic tells me that nothing has changed on the trade war front. The talks have never truly “stopped” and this is nothing more than another round of them. October will go one of two ways: 1) A deal is made or 2) A deal is not made. That’s it! Don’t expect anything else. Well, the many other rounds of talks had the same two options.

When there’s talk of negations, the markets move up. When the talk turns to negative (i.e. nothing happened in the talks), the markets move down. That’s the pattern we are in, and that’s the pattern I believe we will stay in until a trade deal is made.

Donald Trump wants to get re-elected, so I think a trade deal will be made before then. But the elections are more than a year away; that’s a long time for this thing to be drawn out.

Bringing it all together

I think technically SPY is very bullish. I think fundamentally SPY is at the mercy of the trade war. Bringing those two together, I am basically trading on the news rallies or declines.

Disclaimer

ALWAYS DO YOUR OWN RESEARCH BEFORE MAKING ANY INVESTMENT DECISION. SEEK PROFESSIONAL GUIDANCE IF YOU ARE UNSURE.