Bears Look For Next Entry After Bulls Reclaim The ST Trend - Morning Market Squeeze

Key Tactical Takeaways:

> As the window leading up to the presidential election grows smaller, expect VIX levels to remain relatively elevated. Volatility will remain under control as long as the VIX does not close above ... 

> While Friday's rally turned the ST trend from bearish to neutral/bullish in both SPY and QQQ, bearish leverage associated with the larger post-09/02 decline will leave both instruments vulnerable to retesting recent lows against ... and ..., respectively.

> Although the dollar is witnessing fast-money profit taking this morning, assets that have been inversely correlated to the dollar of late, such as stocks and commodities, face additional headwinds as DXY still has measured potential to ...over the near-term.

> On Friday, we took profits on our APO and ZION shorts and added long positions in ..., ... and ....

Some Quick Thoughts:

One of the standout observations from last week's Commitments of Traders report was that net commercial positions as a % of open interest - net large speculator positions as a % of open interest has been rising steadily in recent weeks. As a result, the 4-Yr Z-score of this indicator is now at levels that typically precede periods of VIX stability and upward rotation. This positioning is a factor of the nervousness/uncertainty that is likely to be pervasive as we get closer to the election. Although this development lends credence to our view that rangy-to-lower price action is likely to develop for the S&P 500 heading into October, it's important to remember that elevated VIX levels do not automatically mean lower equity prices. A perfect example of this is this morning's price action, where, as of this writing, the VIX is up by 0.85% as S&P 500 futures are +1.47%, at 6-day highs.

When we look at the US equity market, we see that the anticipated correction from the 09/02 cycle high has now unfolded as a classic 3-wave decline of 10% on the benchmark S&P 500. While the measured potential of this pattern was ..., Friday's closing rally above the 1 ATR trailing stop is an indication that participants understand the importance of the current zone of support, and are eager to leg back into longs.

Fundamentally, with the threat of renewed Covid-related lockdowns looming, the recent rollover in key economic prints warning that the fast growth phase of the recovery has peaked, credit stress starting to surface a bit as spreads rotate to multi-week wides, European banks showing real signs of distress, the domestic equity seasonal pattern weighing for another couple of weeks, our base case is that the S&P 500 is setting up for a ...

One thing that has remained certain during this great period of market uncertainty has been the dollar's strong inverse relationship to the US stock market. Although the $ is encountering some welcome fast-money profit taking to start this week's action, the fact that DXY still has measured upside potential to ... is another key reason why we expect the S&P 500's upside to be limited over the near-term.

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