February 2, 2021
3:33 pm
NDX tested its Cycle Top at 13504.04 with a high of 13501.22 today. While NDX outperformed the SPX, it has not made a new all-time high. The correction may be over.
ZeroHedge reports, “Last week, shortly after the start of Q4 earnings season, we presented an analysis from Bank of America according to which stocks were doing something they haven’t done since the froth of the dot com bubble: despite a preponderance of companies beating earnings expectations, their stock price was punished with a record 1.6% underperformance relative to the broader market on the next trading day, to wit:
companies which beat on both sales and EPS underperformed the S&P 500 by 1.6% the following day, representing the worst reactions in BofA data history going back to the dot com bubble days of 2000!”
2:10 pm
On January 12, I wrote,”I have been saying there may be one more surge to the all-time high in equities. Here is the one stock that outweighs all the others in market cap. I have constructed the Wave pattern and I have concluded that TSLA may go as high as 1000.000 before rolling over. The precise target is closer to 974.00. But what the heck, once it gets that high, what’s to stop it from hitting 1000.00 for just a moment of time before it crashes?”
My timing was off, but my expectation of 1000.00 may not be far off the mark. Should it exceed its prior high at 900.40, the RobinHood clan may pick up on it and push it over the top. Elon Musk has been cheering these folks on and there appears to be a strong following that may pick up the baton.
1:36 pm
VIX lingers near its low, beneath mid-Cycle support/resistance at 26.61 with a 73.2% retracement. This is a bit more than I figured, but positions vol buyers to enter at a low cost. Should this be a Cycle Wave III, I would anticipate a move well beyond the March high at 85.47. A VIX Cycle Wave III that is 1.5X the size of Cycle Wave I would have a target of 130.51. At 1.618X the size of Cycle Wave I, Cycle Wave III would have a target of 139.24. The monthly VIX chart sports a gargantuan Orthodox Broadening Top with the upper trendline above 140.00. There is still a significant amount of short interest in the VIX in options and futures that may fuel a massive rally in the event of a short squeeze.
ZeroHedge speculates, “One week ago, the Reddit crowd – then numbering 2 million users- sparked a historic squeeze among the most shorted Russell 3000 stocks (led by Gamestop) which inflicted hundreds of billions of losses on some hedge funds (while making other hedge funds that much richer), and launched a deleveraging VaR shockwave which forced even non-shorting hedge funds to unwind some of their biggest (and most popular) positions.
Then, this Monday, the same Reddit crowd – now having tripled to 7.5 million users – managed to spark the biggest surge in silver prices since the collapse of Lehman, and even though there were not nearly as many shorts here, the move was sizable enough to unleash another major VaR shockwave across markets, and forcing even unlinked assets to selloff amid another degrossing wave.
What the two episodes had in common is that any outlier event – and last week’s “most shorted vs most popular” slamdown was a 7 sigma event, which nobody had anticipated, with Goldman writing that Tuesday “was the worst day for GS HF VIP longs vs GS Most Short in our records (-7.7%)”…
… stood to unleash a cascading sequence of adverse events due to just one thing: leverage.”
RealInvestmentAdvice asks, “Is A Larger Correction Coming?”
11:00 am
SPX appears to have completed an expanded flat correction, were Wave [b] declines below Wave 1 and Wave [c] rises to the top of Wave [a] at 3830.50 and the Ending Diagonal trendline. Most investors view this as a resumption of the bull market. However, there may only be a few hours of lingering at the top of this correction before the decline resumes.
12:20 pm
Leaving the existing chart up…I had the trendline tagged near 3843.50 and it appears that SPX has turned back almost precisely at that level. In addition, SPX seems to be Cycling in 13-hour segments and it has reached hour 39 off the top of this 5.6-day Cycle at 3843.09. I expect to see more of these types of impulses as this decline progresses. Short-term support is at 3807.99. There is a large call position at 3800.00. Selling may pick up beneath that level .
SH is an example of an ETF that would benefit from the oncoming decline. Note: I do not own SH nor do I have plans to accumulate shares in SH at this time.
ZeroHedge comments, “Emini futures are pushing higher above 3800, rising above the large gamma strike at this level, with the VIX sliding 4 pts to 26 which has added to the equity tailwind. According to our friends at SpotGamma, call open interest has increased 15k at 3800, and the first resistance level is showing up at 3812 and then 3838 (on the downside, there is little support until 3750).
While there is a sense of tone change in positioning, there does remain an ominous gamma “void” down from 3800 to 3750, with SpotGamma warning that notional gamma levels remain low “which infers higher volatility” while put prices have ticked up vs calls as you can see below.
ZeroHedge observes, “Update (0955ET): The pre-market carnage in the heavily-shorted WSB squeeze-trades has worsened as the cash market opens with GME crashing back below $100 for the first time in a week…
The most-shorted basket is rapidly erasing all its gains…
8:00 am
Good Morning!
SPX futures briefly tested Short-term resistance at 3807.10, rising to an overnight high at 3803.88. There appears to have been a concerted effort to rally SPX over 3800.00 to neutralize the negative gamma lying beneath mid-Cycle support at 3757.18 and the lower trendline of the Ending Diagonal formation, just beneath it at 3750.00. Thus far the move hasn’t succeeded and selling may be ramping at this level. An open beneath the Orthodox Broadening Top trendline at 3775.00 may indicate selling pressure out of the gate.
ZeroHedge reports, “US equity futures have continued their Monday rally, rising above 3,800 as the collapse in most shorted stocks continued, with European indices firmer following the positive Asian session…
… while silver slid from an eight-year high as the latest short squeeze reversed.”
Silver futures made a low of 27.32and may be poised to move higher. The current Master Cycle has about three more weeks to run. It appears that the short squeeze may continue through the last week of February. The alternate view is that, should the short squeeze accelerate here, it may be complete in about a week.
ZeroHedge reports, “After getting a lot of attention over the last few days thanks to the so-called Reddit Raiders, topping $30 during yesterday’s trading, (paper) silver prices are fading fast this morning – following CME’s margin hike overnight – erasing almost all of the Monday’s gains.
Monday saw another massive inflow of funds into the SLV (Silver ETF), but we note that the value of the ETF is significantly discounted to its NAV…”
NDX futures made an overnight run to 13377.88. The Wave structure has become much clearer. We may expect NDX to complete its rally near 13400.00. The most likely structure is called an expanded flat.
ZeroHedge observes, “Yesterday, when GME was still trading at $300, we warned traders that the squeeze was almost over because as calculated by S3 Partners, the short interest had collapsed from over 110% to 53%…
… and warned subs in our private twitter feed to take cover.
For some reason, we got a lot of grief from the “diamond hands” crew for simply reporting the facts (and as we explained for those wondering, the most desperate shorts went so far as raiding the XRT ETF to obtain GME shares), which are manifesting themselves vividly this morning, with GME crashing by more than half from when we warned yesterday, and was last trading at just $142…”
VIX futures decline to a low of 26.98, testing the mid-Cycle support this morning, making a Fibonacci 62% retracement. Commentators are still looking for ways to short the VIX.
TNX is notably higher this morning. The Cycles Model projects a Master Cycle high in about 2 weeks. This rally may be one for the books.
USD futures made an overnight high of 91.17, testing the trading channel trendline. The Cycles Model suggests today may be the last day of strength, making this a half Trading Cycle high. The Model now proposes a three week decline to either the Cycle Bottom at 88.24 or possibly lower.
DBA appears to be hovering near its Master Cycle high at 16.65. However, it has slipped beneath its Cycle Top resistance at 16.50 and structurally must continue its correction. There are two dynamics clashing in this ETF. The first is a growing food shortage with China now being our biggest customer. The second is the absence of liquidity in the markets. It appears that liquidity (or lack of) may govern DBA for the next month or so. However, this may be one of the best opportunities to own coming out of the next Cycle bottom.
ZeroHedge remarks, “US corn futures are continuing to soar, hitting a 7-1/2 year high Monday. The bullish continuation in price is the result of “massive US corn sales to China last week,” according to Reuters.
Chicago Board of Trade March contracts are up 1.23% to $5.53 per bushel, to levels not seen since 2013.
Germany’s Commerzbank commented on the latest price action in corn, saying “Chinese demand for corn remains robust and unfavorable weather in South America” are some of the bullish catalysts lifting prices.
