We witnessed another upside gap today and in my opinion the bears were handed a gift, at least for the short-term.
Most of the highly- liquid ETFs I follow here at Crowder Options have pushed into a short-term overbought extreme, with several actually reaching a very overbought extreme.
Typically, when we see this type of price action, that is an upside gap into overbought to very overbought territory at strong overhead resistance, a short-term reprieve is to be expected. However, if you recall, I expected to see a reprieve after last Tuesday's large upside gap, but the gap in the tech-heavy Nasdaq 100 (one of my positions at the moment) has yet to close.
But, now that we have seen the all of the major ETFs, SPY, DIA, IWM and QQQ fail at major resistance levels (as witnessed today) the probability of a short-term downside move has increased. Again, couple a failure at strong overhead resistance with short-term overbought readings in over half of the ETFs I follow and the probability increases even further. And, if aforementioned bearish leanings weren't enough, the market is entering a period of seasonal bearishness.
IF that wasn't enough talented sentiment analyst Jason Goepfert of Sentimentrader.com recently stated, "
Mostly what we've looked at over the past couple of weeks has been either market-neutral or positive. We're starting to see some negatives now. We looked at one of those yesterday, the ratio of speculative Nasdaq volume to NYSE volume. That's a minor indicator, but it's at extreme levels.
Another negative is the spike in the OEX Put/Call Ratio. This means that traders have been busy trading put options on the S&P 100 index, the largest companies in the S&P 500. These options are normally traded by more experienced traders. With that put/call ratio high and the Equity Put/Call Ratio low, the spread between the two is at an extreme. This is kind of a poor man's proxy for smart money (OEX options) versus dumb money (equity options). Such a wide disparity between the two has not been a good sign."
Combine all of the aforementioned and you can quickly see why I expect to see a short-term decline that closes the 1/3 gap.
(Click to enlarge)