Imagine my surprise when equities melted higher throughout yesterday’s session, then sold off most of it in the last 30 minutes, only to gain it all back overnight? No you’re right – it wasn’t much of a surprise, especially after the big players showed their hands late last week by seeding the financial MSM with bearish opinion pieces. That’s how the game is being played – and it’s got a name: the good ole’ rope-a-dope.

To be honest I wouldn’t even waste much of my time mentally masturbating on each day’s gyrations but since many of remain obsessed with trading direction I deem it my duty to at least keep you out of harm’s way.

Shown above you is the Zero indicator, which if you were wise enough to buy a membership here at RPQ, should have given you enough clues to not step in front of this speeding freight train.

The sudden sell-off in the last hour came out of nowhere and clearly was bot driven, so once again I wasn’t surprised to see it all recover overnight.

But now let’s talk about where we are and where we may be heading next. What the bulls got going for themselves at this point is a spike high breach which may afford them enough mojo to make it above the big bad SPX 3k mark.

If that can be accomplished by the EOS Friday then I expect a run higher, followed by a retest of SPX 3k, followed by yet another push higher.

I mentioned the rope-a-dope and it’s really a fitting analogy and I’ll tell you why. See how last week the weekly expected move was breached but then we recovered back inside? Tony ran a ton of statistics on that on hundreds of issues over the past five years.

Turns out that this actually happens roughly 68% of the time – both on the up and down side in high, medium, and low volatility environments, indicating that as a whole options are priced to perfection. Max efficiency – yes sirrreee – despite all the silly tinfoil hat nonsense the financial MSM is carpet bombing you with on a daily basis.

Now what happens NEXT really depends on how we close this week. If prices remain above the upper EM for this week by Friday afternoon then the bulls may have a solid chance to heave this limping donkey of a market across the 3k mark and beyond. If not then we’ll mostly rot in whipsaw hell all through summer. Not an appetizing proposition.

Another key measure we need to keep an eye on is the VIX which – if only for appearances – needs to make it below the 25 mark. Nothing really exciting happens for the bulls unless we dip back into medium IV ranges (spanning between VIX 15 to 20).

More market analysis and teutonic humor below the fold for my intrepid subs:

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If you’ve never heard of the VVIX – it’s basically realized volatility on implied volatility. After a sharp spike higher (the rope) it’s been dropping hard and 2/3 back from whence it’s been camping for the past three weeks.

Here a drop < the 115 mark is needed to inject a bit more excitement into the equities market. An extended sideways churn in what is still considered an elevated range makes everyone nervous.

The IVTS is back below its median – and that is a good thing, assuming we can remain here for a while. Another push higher > the 1.0 mark would most likely result in another bear or sideways cycle – again, the hot summer in hell scenario.

Our ‘monsters of tech’ composite is back in charge and may – just may – make it above its all time highs. My views on extreme readings in market breadth were expressed in yesterday’s post.

Even financials have been able to attract a bid, which is undeserved but very positive for equities as a whole. There is still a lot of ground that needs to be recaptured but if they can hold out here until fall I think we are in good shape. A drop back below 20 and once gain – summer without air conditioning in Lucifer’s hot tub.

Consumer staples are back from the brink and may just be a buy. I’m giving this a bit more time and we should have a clearer picture later this week. Which is a short one as you probably know (Memorial Day on Monday).

Bonds are back at the lower base waiting for instructions. This must be one of the strangest market cycle swaps I’ve ever witnessed (super high IV to complete flatline courtesy of the Fed’s binge buying sucking all life out of it) and to be honest it’s difficult to plot a direction here.

The good news: If you’re bullish or bearish then here’s a good spot to either buy or sell. You will know very quickly whether you are right or wrong. The best play IMO is via options (no stops) and our newly minted hammock trade comes to mind.

This is a somewhat advanced topic Tony and I will be teaching here at RPQ in the near future, in case you’re interested.

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