Is the S&P 500 in a huge bull trap?
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The recent white swan rally returned nearly 7% in the span of 7 trading days. The rally was incredibly fast, having 5 gap ups between the closing and opening prices. However, the volume for the rally was fairly low, with no day in the rally having statistically abnormal volume despite the statistically abnormal returns. This is shown in the NDO indicator, which didn't produce a value above 1 for any of the days in this upswing. Additionally, the macro-economic outlook is still not great, considering how the US debt is rapidly increasing, along with delinquencies. Quoting CNN, "Subprime auto loan delinquencies are worse now than they were during the financial crisis" (Source).
Now, the S&P 500 is running into a major area of buyside liquidity, where there was a previous swing high and a unfilled gap down. It is also running into the 100 day moving average which could provide an area of resistance. Additionally, this area has historically previously executed a large amount of volume, as shown in the two volume histograms on the right.
Given the rapid increase in the S&P 500, there is a good chance that there are will profit taking, and lots of stop losses set below the current price. Therefore, algorithmic firms can access significant sell liquidity right now by decreasing prices. With the number of gaps, the market can easily drop quickly if firms do decide to profit off this increased liquidity. The nearest major strong support level would be at the trend channel's support line, where there is significant volume on the 400 day volume histogram, however this is an entire 6% below current prices.
In other words, the market could drop significantly on fairly low volume, so to profit off this situation I will be shorting the market with some puts. The risk reward for this trade is very strong, because in the worst case, this sets the market up for a bearish pennant and a major market crash, and in the best case, it seems as though it will rally only to slightly above the resistance trend line, which is very close to the current prices.
Now, the S&P 500 is running into a major area of buyside liquidity, where there was a previous swing high and a unfilled gap down. It is also running into the 100 day moving average which could provide an area of resistance. Additionally, this area has historically previously executed a large amount of volume, as shown in the two volume histograms on the right.
Given the rapid increase in the S&P 500, there is a good chance that there are will profit taking, and lots of stop losses set below the current price. Therefore, algorithmic firms can access significant sell liquidity right now by decreasing prices. With the number of gaps, the market can easily drop quickly if firms do decide to profit off this increased liquidity. The nearest major strong support level would be at the trend channel's support line, where there is significant volume on the 400 day volume histogram, however this is an entire 6% below current prices.
In other words, the market could drop significantly on fairly low volume, so to profit off this situation I will be shorting the market with some puts. The risk reward for this trade is very strong, because in the worst case, this sets the market up for a bearish pennant and a major market crash, and in the best case, it seems as though it will rally only to slightly above the resistance trend line, which is very close to the current prices.
Note
Good day today, we saw some pretty clear stop loss hunting, which created a massive bearish engulfing, rejecting the past three trading days. I think we are now positioned very well to fill the gap below, driving the price to a level around 430. If we have a solid bullish reversal off the mid 429 level, it could be a very bullish signal, confirming a bull flag, but if it falls through we may be in for a very rapid drop to the next support level around 409 because of the enormous gaps left to be filled.Note
Brutal gap up, unclear where it will go from nowNote
Lots of absorption on SPY at the resistance level, with pretty much 5 back to back doji candles. It seems like there are lots of sellers at this current price, which is understandable since this was previously a resistance level for the S&P 500 which has been retested multiple times. With the VIX at an very low level right now, this seems like a solid opportunity to start buying puts. More generally, I am going to be going long on volatility as IVs seem underpriced right now based off the VIX.
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