I like to take a look at some underlying market breadth metrics in order to try and position my trades accordingly. Price outweighs everything but I will tend to scale back if I do not see confirmation.
RSI was posting a negative divergence during the latter 1/3 of the most recent rally. Still, prices continued higher until early April. On the same chart, VIX was a relatively low levels which results in cheap hedges and would more than likely lead big players to protect themselves. The last couple of weeks have seen down days on heavier volume. Current prices look to be consolidating between the 20-day and 50-day SMA’s while the price pattern currently forming looks like a bear flag, to me.
On the above chart, new highs at the NYSE & Nasdaq were slowing as the S&P 500 continued higher. The McClellan Oscillator struggled to get above the 0 line which indicates that short-term (19-day EMA) net advancers were slowing relative to the medium-term (39-day EMA).
The percentage of stocks above their 50-day moving averages also showed signs of slowing as they were posting a negative divergence. The Nasdaq-100 was the strongest while the Nasdaq Composite struggled.
Finally, the relative charts above show that the Russell 2000 (RUT) was at par, at best, with the S&P 500 which is concerning, considering the RUT is supposed to be a higher risk/higher reward index. The Nasdaq-100 clearly led the markets higher but have begun to show signs of weakness into this dip. This behavior is expected because most of the high flyers are the ones to get dumped first during any sign of weakness. The Shanghai Composite (SSEC), a riskier index, was at par with SPX during the rally. However, it seems to be picking-up relative to SPX during this recent dip.
Based on the above comments, I will try and enter some starter longs, via bull call or credit spreads, just in case the bear flag scenario does not play-out. More than likely, my portfolio will be weighed a little more delta neutral so I would like to enter some neutral positions, via iron condors, and bearish positions via put spreads and bearish broken-wing or regular butterflies. Also, I may play some earnings this week.
Disclosure: Long LOW May 32/34 Bull Call Spread
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