The trouble with the “Thanksgiving Effect” is it skews the start of the next expiry, or at least can do.
And, this is exactly what has happened here, as it has forced the Dec expiry to start in R3 ratio.
There is no doubt at all that it doesn’t want to be battling this many futures this early on, and this now places derivatives firmly against equities.
Equities love the Thanksgiving rally, but in derivatives, when every step is met with an R3 level of dynamic delta, it’s not so easy.
You have to be really bullish to want to buy that many futures.
The fact that the ratios are significantly underdeveloped, reveals that people are not so convinced, after all, and not that long ago, it was extremely rare to see any Y ratio at all in one of the big expiries, and definitely not the biggest of the big.
Will equities allow for any pullback before, or even after, the 28th?
We doubt it, entirely because they haven’t in the past, and this scenario is no stranger.
But this is one weird Presidency, where every day something’s new, so when we say the above, we do so with a conviction ratio in the low teens.
Obviously, 3105 and 3155 are incredibly significant levels, and the first one to break will tell you all you will need to know about the conviction and desire in this market.
However, please do bear in mind, that the corresponding R3 ratio level is way down there at 2845, and if players were truly bullish then these ratios would be climbing, as would the zone itself.
Both may well do so, but also don’t forget how thin the US markets get next week, and are therefore notoriously volatile, as well as somewhat gung-ho.
Obviously, we are bearish, but in light of where we are in the calendar, a reappraisal post the holidays is the sensible suggestion.
Range: 3105 to 3155
Type: On balance only just bearish
Nb. Our comment on 11/26/19
Looks like “post” the holiday it is.
There was always that risk, and to be fair, Wednesday and Thursday last week were the deciding days.
On Wed it closed at 3108.46, having had the intraday low of 3091.41, which was hugely significant considering our range was 3105 to 3155.
Holding back in the R3 bandwidth showed remarkable resilience, which they needed again the very next day, with the intraday low of 3094.55 and the close of 3103.54.
It could have gone well for the bears at that point, but, as we said last week, its best not to underestimate the “Thanksgiving Effect”.
Looking forward, and it always gets a bit, well ok, a lot, silly in the thin market’s tomorrow and Friday, so unless you are of that temperament best to look towards next week now.
The ratios are building below the zone, which is bullish.
The fact the zone hasn’t moved is not.
The ratios above are slipping, also bullish, but considering where this market is in relation to them, this may just have the effect of taking away the support.
So, we maintain our stance, that this index is walking on very thin ice, but it is a situation it is not unfamiliar with at this particular point in time.
If previous years are anything to go by, sanity doesn’t return until late Monday, sometimes Tuesday or later, and so where this index is then in relation to the ratios will be the issue, not for the remainder of this week.
A bit like “shields are at 30% Captain, but holding, just”.