Patellic against the majority
Dear readers,
Welcome back to the Patellic Newsletter, where we provide technical and sentimental analysis about financial markets. On top of that, we deliver crucial market information that can influence financial markets to be always a step ahead of major market movements.
Investors are piling up puts and short positions at a record pace, so basically betting against the market. Will they be right and make huge amount of profit in the coming weeks? Let’s find out.
We don’t believe traders really appreciate what's happening in the options market right now. Last week, retail traders bought $19.9 billion worth of puts to open while they only bought $6.5 billion in calls to open.
This is the first time in history that puts were 3x calls.
As you can see in the image above, the current reading is at a new all-time high, no time in history was the spread between puts and calls so high.
When most traders are betting on one side of the market, the market tends to go the other way. So while almost everyone expects the market to fall further in the coming weeks, we expect a reversal in the trend to take place.
S&P 500 Index
To explain why we believe the market is about to rally in the coming weeks, we have take to look at the S&P 500 index. The price of the index bounced multiple times off the weekly 200 moving average. This moving average is considered to be a strong support/resistance line where a lot of investors pay attention to, this time was no different.
If we look at the technicals, you can see that the RSI and SMII made divergences in correlation with the price. This means that selling pressure slowed down in the latest downtrend.
A lot of traders keep attention to two resistance zones where the probability for a reversal back down is high. Those price zones are at $3900 and $4150 (white circles in chart), this is also where we start to take profit if technical conditions are diminishing again.
However if the index is rallying through the resistance zones as explained above, we expect the S&P 500 to go a lot higher in the coming quarter. It all depends on economic conditions and the current earnings season. If companies are releasing strong quarterly earnings, the chances are high that pessimism sentiment will fade for the time being.
Also, if stocks are rising fast investors and traders who bet against the market will have to cover their positions or they will get liquidated. This will cause stocks to squeeze even higher in the short term.
Success with your trades! - Patellic
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