C.O.T Report view: Commitment of Traders report
This is a look at the COT report and how the commercial traders are positioned in the NQ (nasdaq futures) Commercial traders are you large institutions, who many look at as the ones who control the tape. The large spec traders are your hedge funds that will ride the trend until they are forced out of the trade. These guys are usually late to the party and very late to leave the party. In the chart below, it is telling us that the commercial traders have a very large short position in the NQ.
When looking back on the data that is not seen within this chart, it is actually their 2nd largest net short position in the last 12 years. The large spec traders have the largest long position seen EVER in the history of charting the commitment of traders reports. So we have the speculative late to enter and last to leave traders long and the commercial or large institutions short.
As you can see in the chart below, commercial may be on the wrong side of the market, but they are very rarely wrong in the ultimate direction of the upcoming move. The longer they are on the wrong side, the longer it takes to unwind these short positions, which typically means an extended move is coming. That would be to the downside when looking at this chart.
The chart below is how the qqq's have reacted in the past when commercial traders were positioned long or short the NQ's.
Fear Barometer:Let's examine the Fear Barometer versus the VIX. The CSFB just hit an all-time high while the VIX was plunging 15%. When the CSFB is rising while the VIX is falling, historically the CSFB has been far more accurate as stocks usually stumble soon afterward.
The chart below shows the last time the fear barometer hit these levels.
The CSFB rises because traders are bidding up the value of put options. Keep in mind that large institutional traders hedge their long positions with puts. When the cost of puts becomes too expensive, many of these equity buyers will simply stop buying equities. This creates a shortage of buyers and makes the equities vulnerable to a sell-off
Leveraged Assets View or sentiment readings:
The sentiment levels are at levels where some major tops have hit. The leverage assets which you can see in the chart below are also at levels where we have seen big declines that have followed. Bulls are all in here and have to keep the indexes higher or we could see a mad rush for the exits as once The rydex bull/bear assets are titled heavily on the bullish side and when everybody is expecting the same thing (that would be up), we usually get some type of set back o even a total trend change, until the ratio's are back to equal.
Cash Reserves at low levels
As we know, cash coming into the market makes the indexes move higher. Cash leaving the market makes the indexes move lower. The chart below shows the different stages of of cash reserves and how the markets typical react. When cash reserves are at low levels, we could see the indexes continue to melt up, but typically at a slower rate of change than when there is a lot of free cash coming into the markets at once. We usually see that happen after large pull back or at the end of bear markets.
The cash levels are very low right now and that could have us either melting up with a slower rate of change or we about to encounter some type of deep pull back or a complete change in trend. Knowing which one is going to take place is hard, but with some of the sentiment levels and bull/bear ratio at the levels they are, I would lean towards either a deep pull back or change in trend.
Volatility Shock
The chart below from Hamzei Analytics, LLC, shows that there are some big players that believe the market is about to see some type of volatility shock, as they are invested in vix call options for March/April. If they are correct, we should see a sharp spike in the vix, which would put pressure on equities. When the vix rises, equities fall.
The Vix Pattern supports a volatility shock
The chart below is a daily chart of the Vix. It is coming off an equity sell signal and actually moved above the bollinger band. This could be setting up a vix sell signal and an equity buy signal. But the last time we saw the vix break outside of the upper bollinger band after an extended move down, like we just saw, it was followed by an even larger explosion to the upside and equities got crushed. The large bullish falling wedge for the vix is also supporting a much larger move to the upside, but the 2nd wedge needs to be taken out before we will see that type of move. It is getting close.
The Weekly VXV Bearish Count
The VXV is the vix futures and below is a weekly chart showing a potential very bullish pattern, which would imply very bearish pattern for equities IF IT PLAYS out. So far, the VXV has had a nice bounce right at the expected support area.
The Daily Tick Divergence
The daily tick chart is showing a double bearish divergence. It did turn up today, but the bearish divergences are still in play. In the past when we have seen this type of divergence, it has lead to a sharp move lower.
The intermediate term timing system is bearish
The chart below is the intermediate term timing system. There are 3 separate patterns, the first smaller pattern in yellow has played out and is part of the MUCH LARGER bearish pattern set up. The yellow patter is the smaller one that has played out already. The blue pattern is the one in play now, which is also the final piece of the MUCH LARGER pattern. The stochastic have crossed the middle line and the boxes in blue shows what has happened the previous times we have seen this set up. They have lead to sharp declines.
The swing trade system remains on a sell signal
The swing trade system remains on a sell signal. When the blue moving average on the macd for this ratio chart is below the zero line, it is a sell signal-when above the zero line, it is a buy signal.
SPX may have topped-if so, these are the targets to watch
Depending on where you draw your trend lines (wicks or body) SPX may have topped today. If it did, the targets that are posted in the spx chart is what I would expect.
IWM bearish wolfewave and potential targets
The wolfewave pattern is a pattern I follow religiously. The bullish wolfewave pointed out the target areas from the October lows and is now showing a very bearish pattern in place for IWM that would have IWM trading below the October lows if it plays out. The bearish wolfewave pattern is in red and I have pout down some potential short term IWM targets.
Conclusion:
Many money managers are telling as many as they can to get 100% invested in the stock market right here and now. They may be right in the long term, but our intermediate term indicators are saying that you may want to move to cash or at the least lighten up your portfolio if long. If you are aggressive, you can look to short this market, but understand tops are a process.
Some large traders are making big bets on some type of volatility shock to hit the markets through the vix call options for March/April expiration. With the vix in a bullish wolfewave as well as a bullish rising wedge, they may very well be correct. If we see a volatility shock hit, it will have the indexes heading lower. IWM is trading within a very large bearish wolfewave, which also supports lower levels ahead.
The commercial traders are as net short as we have seen in over 10 years. With the large institutions net short and looking for a volatility shock to hit, if you are just a long side trader, I think you will get a much better entry in the coming months. If you are a short or bearish trader, we should see a very nasty nail biting drop hit in the coming weeks. Good luck trading. G-
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