Neurotics and the Art of a Short Squeeze

By: Captain Hook | Mon, Mar 30, 2015
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The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, March 16, 2015.


This week we have a two-day Fed meeting, where they hope their irrational bullsh*t story will scare the neurotics into buying puts and shorting again, so these idiots can be squeezed out going into options expiry. In this regard, its no mistake this Fed meeting is in an options expiry week (or at month's end), not that they couldn't accomplish the same thing with other jawboning type theatre. Amazingly, traders / money managers / whoever, are so out of it these days the Fed is able to influence the markets with just expectations management, without having to take any actions, given this condition is now getting mature, meaning people are noticing this more and more and trading around it. This is the condition circumstance required for meaningful reversals in bubble markets.

So for this reason, things may not turn out according to Fed script this week because broad market(s) speculators, who are far more rational than those in precocious metals by the way (they respect risk), appear to be exhausted, as measured by falling key open interest ratios with prices, most evident in the absolute collapse in the RUT last week being the most extreme example. What this means is these guys cannot take anymore pain, and no matter if stocks appear to be crashing, they will no longer bet on such an outcome by either buying puts, or outright shorting the market(s). And again, since we appear to have this sentiment shift in hand, and with the Fed meeting this week likely to embolden the bulls (who are never disappointed by a Fed dedicated to preserving its asset bubbles), we could have a surprise for the status quo with the S&P 500 (SPX) falling to 2000, possibly setting the head in a larger degree head and shoulders pattern (H&S) that would count down to the 1880 area.

Updated short interest charts, shown here, support the view weakness in stocks could persist directly ahead. That being said, we have a Fed meeting this week, and they will do and say anything to keep their bubbles inflated so anything is possible in the short term. This means they will not remove the word 'patient' from their official statement without replacing it with some other linguistic gymnastics traders can obsess over. As you will see below, German stocks should continue to enjoy a QE tailwind in the short-term, so this week could be up for US stocks as well, given new highs would most likely not be in the cards. Best-case upside potential on the SPX is at approximately 2090, which defines the upper extremity of the right shoulder of the existing head and shoulders pattern.

Past this is where it could get interesting if the three monthly ratio charts from the Chart Room below have any predictive value, where in the first case we can see that because of the collapse in the euro, and the colliery economic competitive benefits this will give European exporters (with Germany at the forefront), the DAX has risen over 20% in just the last quarter, and is likely not done yet if the Fibonacci resonance projection (seen in Figure 1) has any predictive value. This should of course be of no surprise with QE in Europe now, however what might be surprising is how fast the benefits are burned off if collateral keeps drying up, which won't hit the money supply growth rate figures until it's too late for both bond and equity bubbles alike. (See Figure 1)

Figure 1

What's worse in this respect, it should be pointed out that while the parabolic moves in both the euro and DAX likely have further to go, once the later hits about 12,300 (only 300 points away now), not only will it be at the significant Fibonacci resonance related resistance denoted in Figure 1, from an important ratio related perspective dating back some 15-years, it will also be at an extreme against the Dow (see below), meaning all the bubble blowing benefits of ECB QE may be priced in at that point. A move to 17,200 on the Dow coupled with a 12,300 print would take the Dow / DAX Ratio below the 1.4 mark in a blow-off to the downside matching extremes not witnessed since the tech bubble in 2000. (See Figure 2)

Figure 2

Of course all this bearishness in stocks must be tempered until the SPX / CBOE Volatility Index (VIX) also gives us a clear signal the party is over, where as explained previously it would be better to see a blow-off up to the 200 area to signal a lasting top is in place. Any other scenario would leave the possibility of bearish speculators returning to the derivatives markets again prematurely, igniting unexpected short squeezes no matter how bad earnings get. That being said, while the trading pattern in the SPX / VIX Ratio looks like a developing bull flag, and maybe it is with more time required, the indicators and stochastics paint a different picture, one where we should expect lower prices. We didn't get clear signals (patterning) in 2000 and 2007 either, so maybe we won't this time as well. (See Figure 3)

Figure 3

And one thing is for sure, if the SPX / VIX Ratio doesn't hit extreme sinusoidal resistance now in the 200 area before closing two months below 80 (significant moving average support), this would be considered a failure, signaling a move to the bottom of the pattern. This is not what an asset dependent America needs given recession is spreading rapidly around the globe, where like in 2000, this may initially have a negative effect on precious metals before central authorities really panic and money supply growth rates accelerate higher. This is all in motion now, and is likely why the bond market(s) are likely to top out this year once they see that coming.

As for precious metals at the moment however, all that's happening here is they are churning as the broads fall, but once stocks can manage a lasting bounce, likely off the large round number at 2000 on the SPX, this will probably result in a continuation of their decent(s), no matter what the dollar($) is doing. That being said, with the broads possibly declining this week, don't be surprised if an unnatural bid comes into precious metals, however again, any such strength will most likely prove to be more violent churning in the end, where we are already seeing this in the violent swings being exhibited in the juniors. Here, it's not uncommon to see 10 to 20% daily swings these days, where whipsaws like this are enough to bankrupt unsuspecting traders in no time. And that's exactly what will happen to reckless speculators in the sentiment driven markets we have these days (because of the machines, algos, etc.) that don't know how their brethren are betting, where it should be pointed out the consensus here is still bullish - I mean - 'how else you gonna bet' (try and imagine that being said with a heavy Brooklyn accent)?

Looks like we're getting close folks.

Time to pay attention.



Captain Hook

Author: Captain Hook

Captain Hook

Treasure Chests is a market timing service specializing in value-based position trading in the precious metals and equity markets with an orientation geared to identifying intermediate-term swing trading opportunities. Specific opportunities are identified utilizing a combination of fundamental, technical, and inter-market analysis. This style of investing has proven very successful for wealthy and sophisticated investors, as it reduces risk and enhances returns when the methodology is applied effectively. Those interested in discovering more about how the strategies described above can enhance your wealth should visit our web site at Treasure Chests.

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