Looking good...

We have formed a compression-day today, as we expected yesterday.

Moreover, all major indices, namely, DJI, COMPQ, NDX and SPX formed inside-day pattern with proper volume readings. In other words, these indices saw higher volume yesterday implying yesterday was the low.

Yesterday was also closed with Equity Put/Call reading over 1 indicating that retail traders who I consider fadeable under certain conditions were leaning too hard to the downside.

Another interesting option event happened today around 10:00 AM. OEX put/call reading unusually surged. From what I saw, big blocks of out-of-money put options were sold by large traders who I consider smart money. These transactions also coincided with upside surge across the market. When volatility and premiums are this high, whales prefer to sell options against the market direction instead of purchasing in the direction of the market. So they sold puts instead of buying calls.

From COT data however, I am seeing bearish configuration among different groups of traders. But you should note that COT is reported at the close of every Tuesday. We were near SPX=1000 level on Tuesday and since then we dropped about 100 SPX points. This means this bearish COT configuration may already have played out. In other words, we do not know what the current positions of the traders are after the sell off.

Lastly and most importantly is the internal setup we have had earlier. McClellan Oscillator indicated that an internal initiation occurred early this week. This kind of power spikes on McO usually followed by a price correction which we already had and the correction leads to new price highs. In other words, S&P will likely make new swing highs over 1010 level in coming days/weeks. In this context, we should have looked for a short term low after the sell off.

Considering all these factors, I tent to ignore lagging COT data and I keep my bullish stand going forward.

This week was tough for me because I made my first bad trade over the last 4 months. Relying on the fact that the market would eventually print new swing highs in a few days (McO setup), I added to my positions on the downside instead of getting out of the trade. My average based on ES contract is 936 :
(5c*910 + 3c*937 + 2c*975 + c*991) / 11c = 936, turned out to be fairly large position. I expect S&P500 to test 1020-1050 range in a few days.

I am a student of the market and I got an important lesson from this experience. Overbought McO readings produce sharper and deeper sell offs in intermediate term downtrends unlike those overbought McO readings in intermediate term uptrend.

If the intermediate term trend was up, overbought McO would led to a consolidation or shallow pullback. I thought this was the case but we were in an intermediate term downtrend as evident from weekly MACDs and the pullback came stronger than I expected. Nevertheless, I expect this trade to work out just beautifully in a few days.

Atilla Demiray