Bullish Bearish

It is the first trading session in November and that means it’s time for another momo update. What I’m seeing across the board reaffirms the current low participation holding pattern which I proposed in my last update. Various attempts to break even modest support zones have failed and in the process consumed almost all short term bearish momentum over the course of the past few weeks. Although I am still holding short positions from near ES 2150 my perspective now has shifted toward short term bullish and long term bearish. Let me tell you why.

Let’s talk about the more immediate future first and then we’ll talk more long term. Here’s the VIX:VXO ratio – the latter is often called the ‘old VIX’ a it focuses on strikes near at the money while the new VIX is composed a more balanced cross section of 30-day strikes.

The purpose here is to produce a delta in pricing which would suggest that front strike risk are either over or under priced in comparison with strikes further out the option chain. As you can see on the chart – quick spikes up usually are purveyors of reversals – a few weeks later. And that’s something we expected to occur at least a month ago. But as I already pointed out in my mid-October momo update – price ain’t budging. And as most of the bearish potential has been burned off I am unsure as to how realistic the probability of any significant downside is at this point. Especially with one more week to go until the election.

Now here we’re measuring breadth via the NYA50 versus the NYA200. Market breadth basically indicates whether or not stock indices are propped up by strong leaders while the remaining symbols are under performing. And that seems to have been the case as of late – I have not see such a pronounced divergence since 2012 when eventually price broke to the downside into a pretty subtle correction all things being equal.

So now we are more or less in bullish territory if you want to believe that rising diagonal I painted on the chart above. Sure there is more downside potential and this ratio could easily drop to 0.3 or lower. But given where we are right now (i.e. < 0.5) price should have budged quite a while ago. So short term paint me skeptical.

However the long term picture couldn’t be any more bearish. There’s a ton of fascinating material below, so if you’re not a sub then this is a great opportunity to make the leap:

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