I’m writing this Market Minute on Sunday evening. S&P 500 futures are ripping higher – up 18 points. If the buying pressure in the futures market holds up, then the S&P 500 is going open at a new all-time high near 2660 this morning.
And, with that, the stock market’s proverbial rubber band will be just about stretched to its limit.
You see… the S&P 500 rarely strays more than 30 points from its 9-day exponential moving average (EMA). If the index stretches more than 30 points above its 9-day EMA, then it’s overbought and the rubber band is likely to snap back – producing a sudden and sharp decline back to the 9-day EMA.
If the index stretches more than 30 points below its 9-day EMA, then it’s oversold and vulnerable to a sudden rally.
The 9-day EMA for the S&P 500 is at 2620 this morning. Based on the action in the overnight futures market, the S&P 500 is likely to open near 2660 this morning. That’s 40 points above the 9-day EMA. The rubber band will be stretched. And the market will be vulnerable to a swift decline – as if from out of nowhere.
By the way… that’s exactly what happened on Friday.
After Thursday’s euphoric move, the S&P 500 was trading more than 40 points above its 9-day EMA (which was 2609 on Friday). So, the rubber band was positioned to snap back.
Then, about 90 minutes into the trading day, we got a sudden, vicious decline. Buyers disappeared. And the S&P 500 nosedived all the way back down to 2610-ish.
Of course, the tripwire was the now-discredited ABC News story that Michael Flynn would testify against President Trump. But, let’s face it, the market was set up for this sort of a move.
The Flynn news provided the catalyst. But, really, even if the Flynn news never appeared, the market would have found some other news story to justify the drop. The technical conditions demanded it.
That’s what traders should be on the lookout for today. If the futures hold up, then once again, the proverbial rubber band will be quite stretched to the upside. A snapback move could happen at any time.
Best regards and good trading,
Jeff Clark
Reader Mailbag
In today’s mailbag, readers react to last week’s analysis of high-yield bonds and the Volatility Index (VIX)…
A lot of things seem to be coming to a head nowadays:
HYG has been going up steadily for almost 2 years but the MACD has shown negative divergence for the same amount of time. As you stated, HYG is trying to hang on to its 50-day moving average. Its Bollinger Band width is becoming increasingly smaller over the same amount of time…
So, at some point… it seems it would make a big move and that would be down.
S&P 500 is making investors and talking heads giddy. Bitcoin – an intermediate top? More than that? Your point concerning the put/call ratio and VIX was astute. The Bollinger Bands of many precious metals are contracting, as well. Such as JNUG, for example; it was really tight yesterday.
Tax reform probably passing now. Rate hike a toss-up after the Personal Consumption Expenditures (PCE) core year-over-year inflation report coming in indecisive. Possible government shutdown if by Dec. 13, rate hike not in the books. Geopolitical tension with N. Korea. As a contrarian, it just feels like something has got to give.
That said… from a gold bug standpoint, would you feel this might be as Jim Rickards puts it an “asymmetrical” trade setup since a rate hike is already priced into the market? Headwind for gold? Rate hike, life goes on; but no rate hike – dollar down, stocks reverse down, gold and euro and bonds up BIG? “Heads I win, tails I don’t lose”?
I made the mistake of going too big into gold too fast and am down big BUT WITH GOLD STOCKS I LOVE TO OWN even though they are down, but I own my choices and am learning from it.
Moreover, I somehow always choose the trades from you that don’t turn out as expected and put too little into the ones that work out well. Don’t ask; I don’t know. But I love your work and what I am learning. I love learning from your thought process and am so thankful you choose to share it with us. It shows humility and love – you don’t just “tell us what to do” accompanied by a well-written writeup. I appreciate that so much. A teacher with character is worth SOOOOO much more.
I LIKE the fact that there are errors in your updates. As a homeschool mom, our house is always untidy – a sign we live here. Thanks for “living with us” through your thoughts and ideas. Please continue. Thanks again.
– Clarissa F.
Thanks for this explanation… I was looking at VIX lately and wondering what’s going on. Great answer!
– Stan K.
As a market hobbyist for many years, I have finally set aside one profession in favor of trading full-time. I think I’m ready.
Your daily emails still teach me a thing or two, and I like your laid-back storytelling ways. As I settle in at home and become comfortable, I plan to read your thoughts more often than I’ve been able to in the past. And I am committed to subscribing once your advice pays the way by adding a base hit I wouldn’t otherwise have hit.
Many times I’ve seen your advice pan out, but being involved in my previous career I was unable to take action. Looking forward to this change for me, and glad to have you along.
– Gary K.
I loved your explanation on the rise in the VIX recently. I’ve also recently heard different explanation on a rising market along with a rising VIX…
The call option activity is due to market makers covering their sold calls as the market jumps higher; similar to your past statements of the bears throwing in the towel. When they look to buy to close at any price, the premiums jump on the calls but not the puts.
I was wondering if you knew of any tool that can track the amount of option contracts open. That could be used in conjunction with the put/call ratio chart you showed to get a better idea of what’s really happening.
Thanks for all you do and the time you take to explain things. It is very helpful. And I agree that your Market Minute is among the most valuable free newsletters available today. Keep up the great work!
– Bret R.
The everlasting battle between technical analysis (TA) and cycle analysis continues. TA and your methods worked better last time for a good trade when they called for getting out of gold a bit early. This time it went the other way. According to their cycles, which are a bit more difficult to time down to a few days, Gold appears to have an UPTURN date later in December.
By the way, I do rely on their work in precious metals, oil, and commodities. They are very good in those areas. Just sold GG calls at $0.17 on the Flynn spike. Bottom line is: nothing works all the time – and on to the next opportunity.
– Jeff W.
As always, if you’d like to share your thoughts, questions, or suggestions with Jeff and other Market Minute readers, send them in right here…