Last week, we spent our time together, discussing the next high-odds shorting opportunity for the broad market, assigning it the affectionate term of MOPO. Well, actually we call it MOPO because I'm too lazy to keep writing out "Mother Of all Put Opportunities". GRIN In the past week, there have been some interesting technical developments and with earnings season winding down to the last few stragglers and the May FOMC meeting behind us, I thought it would be productive to address those changes. Not only that, but in playing around with the charts this afternoon, I made a couple interesting observations that escaped my attention last week.
In case you missed our discussion last week, you've got a fair amount of catch up reading to do before today's discussion will make any sense. Fortunately, those articles are conveniently archived on the OI website, and you can access them using the following links.
In full recognition of the fact that we've had an impressive rally over the past couple months and the bulls are still very much in charge, we don't want to be in an excessive hurry to start initiating full bearish positions. Sure the market looks over-extended, but that doesn't mean it can't ratchet a few notches higher before the turn comes. To that end, we've focused our attention on a few of the more consistent earmarks of bearish turning points for the market. The first consideration is always price, and we've taken a pretty detailed look at the S&P 500 (SPX.X)in our past discussions, so let's stick with that venue today. Here's the updated chart.
Daily Chart of the SPX
Despite the daily Stochastics remaining pinned in overbought territory for over 2 weeks, price just continues climbing higher. This is actually a plus for our MOPO setup, as the market isn't really pausing to catch its breath. We have a clear upside breakout above the top of the multi-year descending channel and it is looking more and more like the bearish ascending wedge is going to result in a pattern failure. We've cracked above the top of that wedge, but no confirmation of that breakout yet. It is still entirely possible for the SPX to break down through the bottom of the wedge (currently right at the key 920 level) and give us a belated, but valid bearish resolution to the pattern.
Recall last week that I said a decisive breakout over 920 didn't necessarily negate the potential for a very nice MOPO play, as we have additional resistance in the 935-940 area and then again at 950-960, near the highs from last August. But there's something that's been bothering me since last Friday's breakout over the top of the descending channel. For a technical study that has held so consistently for so long, a breakout above that level should have had some follow through. But we didn't get it, with the last 3 days surging higher, falling back and in the end, leaving us right where we ended the day last Friday.
Then I remembered something Linda Piazza taught me awhile back -- that when looking at longer-term patterns, the conclusions we arrive at carry more validity when using a logarithmic scale on the chart. So I converted the SPX chart above to LOG scale and all of the sudden things started to make more sense.
Daily Chart of the SPX - LOG Scale
You'll notice that the bearish wedge doesn't change at all, because it is a shorter-term pattern, covering only a couple months. But look how much the upper channel line shifts to the upside! That upper channel line now crosses at about 965, falling to about 956-958 by the end of May. What that tells me is that we still have a little bit of ground to cover to the upside before we'll really be in MOPO territory.
Next up is our good friend, the CBOE Volatility Index (VIX.X). Contrary to its recent action, where it kept falling in spite of the fact the market couldn't make any headway, the VIX is now holding fairly steady while the market continues to trudge higher. Take a look.
Market Volatility Index (VIX) - Daily Chart
Compare that VIX chart to the SPX chart and you can see that there has definitely been a change in the inter-relationship over the past couple weeks. The excessive fear has been almost completely drained out of the market, leaving a tiny little wall of worry, represented by the gap between the current value of the VIX (23-24) and the area of dangerous complacency represented by the 19-21 area. This is actual good for our MOPO plan, as scaling that wall of worry and dropping the VIX down into that "complacency zone" should coincide with the SPX trudging its way higher to test that 950-960 area. It could happen by the end of the week (very unlikely), or it could take until the end of the month (or longer), but it does give us a target to keep our eye on.
The last major piece of the puzzle in my mind is the Bullish Percents (BP). When we left off our discussion a week ago, the SPX BP was sitting at 56% and we were looking for it to at least move up to the 65% area, as a first test. That's the site of the bearish resistance line on the PnF chart of the SPX BP and likely to provide some resistance. But I've got a sneaking suspicion that the BP reading is actually going to make it higher and actually probe above the 70% (overbought) threshold. How will we know how high is high? It's really a matter of slowing momentum, and I've found the best way to find that turning point is by looking at the Sharp Chart of BP, as described and shown in last Monday's article, "MOPO - Remember That Term?". Our ideal setup is to see the BP push up above 70%, turn down through its 10-dma, with confirmation coming from the CCI oscillator traversing back below the zero line.
As you can see, there are still a lot of things that need to fall into place before we're ready to start stepping into this MOPO play, but things are playing out just how we'd like. Keep your powder dry for now, because when everything sets up, we'll want all the ammunition we can get our hands on!
Prosperous Trading Wishes to All!