August 24, 2017

Bearish November Leads to Bullish December (Will the Historical Precedent Hold Up)

SPX settled today at 1484.95 well within our 300 point range of 1590-1290. The gain for the December expiration was 7.9%, our fourth consecutive gain since adjusting the Iron Condor strategy on 8/28. Since we made the adjustments the strategy has made 25.1%.

As for the current state of the market we are nearing a short-term overbought state in many of the major indices we follow (IWM actually entered an overbought state today). Seasonality is still with the bulls and I would not be surprised to see the S&P hit 1490 early next week, but according to the indicators I follow the upside should be limited. Plus, 1490 is an area of very strong overhead resistance in the S&P. Coupled with the aforementioned short-term overbought state and it could be difficult for a move to sustain itself above that level. 

Yesterday I stated that December 2007 has not been kind to the market. Well, that changed today. Just a few weeks ago I wrote an article titled “Bearish November Leads to Bullish December“. Basically, I went back over the last 30 years to see how December typically reacts after a bearish November. Interestingly enough there have been 8 such occurrences (bearish Novembers) and each one was followed by a bullish December.

Today the market moved above the 1479 level and into postive territory for the month of December so the historical precedent remains true, at least so far.

One thing that should be worrisome over the short-term is the large gap higher today. Typically large gaps like this have a tendency to weigh down the market and given the other reasons for concern (over the short-term) I would not be surprised to see the gap close over the next few trading days. The gap in the Russell 2000 (IWM) is the one to watch because of the short-term overbought state that it has entered. As I stated before, while the other indices are nearing an overbough state, IWM entered overbought territory today. Moreover, the RSI (2) reading for IWM is above 95 which often signals a short-term reprieve. The wild card right now is seasonality so we shall see who wins this tug-of-war next week.

Back to the gap today. Buying a large gap open (above 0.5%) on options expiration and holding until Monday has led to a paltry win ratio of approximately 22%. Could this be the exhaustion gap the Bears have been waiting for? Again, we shall see soon enough.

Food for Thought

According to the Stock Trader’s Almanac (makes a great Christmas gift) the week after triple witching the Dow has finished higher 12 out of the last 15 years. Furthermore, the trading day following Christmas has been higher nine years in a row.

Daily Market Insights

  • Is the VIX telling us something?

Overbought/Oversold for December 21, 2007 

S&P (SPY) – 58.7 (neutral)

Russell 2000 (IWM) – 71.7  (overbought)

Dow (DIA) – 60.7 (neutral)

Nasdaq 100 (QQQQ) – 67.6 (neutral) 

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