Digest Issue 43 "Expecting More New Highs [Charts]" made to the case for the SPX reaching 4,650 based upon a Head & Shoulders Bottom pattern. However, after last week's gains, the VIX Correlation Indicator gave a warning signal as it turned positive. The Market Review fills in the details along with an update for WTI Crude Oil.

S&P 500 Index (SPX) 4605.38 advanced 60.48 more points or +1.33% hardly pausing to test the September 2 high at 4545.86 before making multiple new closing and intraday highs including Friday. While the September 2 high at 4545.86 offered no resistance on the way up it makes a good support level in the event of a decline. Below that, the 50-day Moving Average at 4459.31 should provide the second support.

Invesco QQQ Trust (QQQ) 386.11 gained 12.01points or +3.21% last week outpacing the SPX every day. On Thursday it closed above the previous September 7 high at 382.35 then continued higher again Friday. On any pullback, the September 7 high will provide the first support followed by the 50-day Moving Average down at 371.52.

CBOE Volatility Index (VIX) increased .83 points or +5.38% last week ending at 16.26. Our similar IVolatility Implied Volatility Index Mean, IVXM using four at-the-money options for each expiration period along with our proprietary technique that includes the delta and vega of each option, inched up .27 points or +2.29% to close at 12.08%.

VIX Correlation Indicator, Typically the VIX and the SPX move in opposite directions. As the SPX advances, the VIX normally declines suggesting less interest in bidding up SPX puts. Historically when the correlation turns positive it produces warning signal since positive readings, and even some just less negative, are followed by SPX declines, perhaps just minor pullbacks or occasionally something more menacing; the higher correlation coefficient the more important the signal.

The two charts below tell the story. First, the standard VIX chart followed by the VIX correlation indicator chart.

VIX Correlation Indicator +.15

VIX Futures Premium

VIX futures premium ended Friday at 21.30% down from October 22 at an abnormally high 29.92%. The front-month November futures contract at 18.75% had 19 days to expiration on Friday compared to 54 days for the second month December contract at 20.99%. While back in the green zone, both seem a bit higher than normal while the SPX makes new highs.

The chart reflects the distance from the VIX to the futures curve computed from the two front-month contracts.

Since most of the volume and open interest are in the two closest futures contracts measuring the volume-weighted premium relative to the standard 30-day VIX provides a good real-time sentiment indicator based upon actual commitments of large Asset Managers and Leveraged Funds.

Another troubling sign for the bulls comes from the options skew on VIX futures. On Friday, the 30-day implied volatility index for the calls ended at 124.89% vs. puts at 69.89%. While VIX put selling strategies account for the difference, the puts are near the low for the last year.

Market Breadth as measured by our preferred gauge, the NYSE ratio adjusted Summation Index that considers the number of issues traded, and reported by McClellan Financial Publications now at 319.14 added 93.85 points last week up every day except for a small decline Wednesday – encouraging for the bulls.

WTI Crude Oil (CL) 83.57 basis December futures closed the week down .19 or -.23% for the week. Since December 22 futures closed at 71.33 the futures curve is in backwardation by - 12.24 or -14.65% vs. -11.70 or -13.97% for the week ending October 19. Deferred contracts selling at less than prompt suggests tight supplies.

In order to align with the CFTC report mentioned below cash on Tuesday, October 26 closed at 84.65.

Since crude oil prices usually decline in November and December any sign of weakness could suggest declining seasonal demand. Comparing open interest to price can provide a signal when participants start loosing interest in the prevaling trend. The chart as of last Tuesday, October 26.

Price continues higher unconfirmed by Open Interest.

The Commodity Futures Trading Commission ( CFTC) Disaggregated Commitments of Traders - Options and Futures Combined report as of October 26, shows the category labled PMP,( Producer/Merchant/Processor/User), also referred to as Commercials were net short 21,463 contracts on August 3, then turned long advancing every week until reaching 50,389 net long contracts on September 21, before reducing their position again to net long 9,050 cntracts as of October 26.

From a trend perspective the December futures pulled back to touch the upward sloping trendline from the August 23 low at 61.11 on Thursday, then advanced again slightly on Friday. Closes below the trendline will confirm the start of a seasonal decline.

For a fundamental view RBN Energy expects prices to rise into 2022 with $100-plus possible.

Strategy

From a technical analysis perspective the upside objective for the S&P 500 Index remains at 4650 based upon an operative Head & Shoulders bottom pattern. Since a positive VIX correlation warns of an imminent pullback, prudence suggests deferring new long positions until the correlation returns to its normal negative state.

In the meanwhile, watch crude oil and be prepared to lift or hedge longs should it close below the upward sloping trendline.

Summary
Head & Shoulders Bottom pattern suggests the S&P 500 Index will continue up to at least 4650, the positive VIX correlation indicator suggests it may first pullback. Since crude oil futures ended the week slightly lower along with declining and open interest, the normal seasonal price decline could begin.