Last week here I laid out my thesis for why I was more bullish biased and the importance of 1887. Ironically, even with my bullish bias, I pretty much benefitted more from shorting the first few days of the week and didn’t get long till Thursday. It just goes to show that as much as I can try to convey my thoughts for the coming week, the flexibility needed to thrive in the current market environment requires daily analysis. I will still try though :-).
Short term trend: At this moment, as long as Friday’s low holds (1894) assume the trend is higher (although breaching 1905 would be a warning sign). The internals began to firm up mid week (i.e. breadth was still positive during the Fed sell-off) and importantly oil and financials helped lead the way higher. Friday, there were signs of internal and external accumulation with a caveat explained below. The MACD had a bullish crossover and the market is not overbought by any means.
However, it would be remiss of me to not mention that without follow through, Friday could have been a trap. Every case is different and I only present a few examples so it’s only something to keep in mind for now, not a prediction. The high volume and MACD bullish cross that occurred in December 2014 and March of 2015 failed to follow through past a couple of days. Both were OPEX days, which account for the high volume. The August case was indeed true volume, but that too only led to two days of gains and was right after a crash type scenario due to lack of liquidiy. Friday’s volume was likely due to rebalancing and thus should not necessarily be considered external confirmation. Thus, follow through all of next week and not just a day or two (even in sideways consolidation) is imperative.
From NASDAQ: 
Anecdotally (so take it with a grain of salt), I follow several momentum stocks and where their best pin is. Typically on massive accumulation days that lead to further rallies, pinning does not work. Last week (minus the 15 minutes of rebalancing at the end of the day and after brokers likely closed retail traders weekly options), the majority of the momentum stocks I follow pinned.
Trend change? The longer term trend is still down. Their is no way to know if the low made on January 20’th is a cycle low, but at this point it seems unlikely. Either way, this current bounce can last a day or a few months (and it could also be mostly trend-less as you can see below). There is no point in trying to guess, but there is a ton of value in knowing what to look for in determining if the rally has legs or is beginning to peter out.
Chart from Chris Ciovacco: This is just an example of how the low held for months, but was awfully complicated. 
SPX stocks making 20-day highs: Friday’s bounce resulted in the highest number of 20-day highs in 2016. Assuming the rally continues, 20-day highs should expand. At the point where 20-day highs begin to make lower highs while SPX makeshigher highs, consider it a warning sign. 
SPX stocks at 20-day lows: In a similar fashion, 20-day lows can be viewed as confirmation to the current bounce. Pay attention to this one if the rally should have follow through. When it begins to spike up, it is again a warning that the bulls are running out of steam.
SPX new high-new lows: This has not been convinsingly over the 50% line since March of last year. Getting above August levels and the 50% line would add to the bullish thesis. If the rally continues and new highs minus lows stalls, it is once again a warning.
As you can see above, the market has plenty of room higher before reaching overbought signals. Should SPX remain above 1894 (Friday’s low), the bulls have the ball in their court. Should breadth on all the above measures expand along with higher highs, assume the trend is higher. Once the measures begin to stall the market is sending you a message so consider yourself warned.
SPY Open Interest: Not much can really be said here so for now it’s not very useful. There is a pretty clear path in both directions (minus some small resistance at 193, which price closed above). Only at 198, would SPY run into call resistance (as always the open interest is subject to change daily).
Bottom line: As long as price moves higher (or sideways) with an expansion of breadth consider the trend to be higher (for now). Should Friday’s low be taken out (breaching 1905 is a warning) or price strength not confirmed with internals, then caution is highly warranted. The first major resistance areas is 1950.
As I said a few weeks ago and on twitter, stay long TLT.
*The upside of the challenging environment can be hugely rewarding. Don’t go at it alone. Join us here for daily analysis, set-ups and real time entries and exists.
Was Friday’s Bullish Candle a Trap?
Last week here I laid out my thesis for why I was more bullish biased and the importance of 1887. Ironically, even with my bullish bias, I pretty much benefitted more from shorting the first few days of the week and didn’t get long till Thursday. It just goes to show that as much as I can try to convey my thoughts for the coming week, the flexibility needed to thrive in the current market environment requires daily analysis. I will still try though :-).
Short term trend: At this moment, as long as Friday’s low holds (1894) assume the trend is higher (although breaching 1905 would be a warning sign). The internals began to firm up mid week (i.e. breadth was still positive during the Fed sell-off) and importantly oil and financials helped lead the way higher. Friday, there were signs of internal and external accumulation with a caveat explained below. The MACD had a bullish crossover and the market is not overbought by any means.
However, it would be remiss of me to not mention that without follow through, Friday could have been a trap. Every case is different and I only present a few examples so it’s only something to keep in mind for now, not a prediction. The high volume and MACD bullish cross that occurred in December 2014 and March of 2015 failed to follow through past a couple of days. Both were OPEX days, which account for the high volume. The August case was indeed true volume, but that too only led to two days of gains and was right after a crash type scenario due to lack of liquidiy. Friday’s volume was likely due to rebalancing and thus should not necessarily be considered external confirmation. Thus, follow through all of next week and not just a day or two (even in sideways consolidation) is imperative.
From NASDAQ:
Anecdotally (so take it with a grain of salt), I follow several momentum stocks and where their best pin is. Typically on massive accumulation days that lead to further rallies, pinning does not work. Last week (minus the 15 minutes of rebalancing at the end of the day and after brokers likely closed retail traders weekly options), the majority of the momentum stocks I follow pinned.
Trend change? The longer term trend is still down. Their is no way to know if the low made on January 20’th is a cycle low, but at this point it seems unlikely. Either way, this current bounce can last a day or a few months (and it could also be mostly trend-less as you can see below). There is no point in trying to guess, but there is a ton of value in knowing what to look for in determining if the rally has legs or is beginning to peter out.
Chart from Chris Ciovacco: This is just an example of how the low held for months, but was awfully complicated.
SPX stocks making 20-day highs: Friday’s bounce resulted in the highest number of 20-day highs in 2016. Assuming the rally continues, 20-day highs should expand. At the point where 20-day highs begin to make lower highs while SPX makeshigher highs, consider it a warning sign.
SPX stocks at 20-day lows: In a similar fashion, 20-day lows can be viewed as confirmation to the current bounce. Pay attention to this one if the rally should have follow through. When it begins to spike up, it is again a warning that the bulls are running out of steam.
SPX new high-new lows: This has not been convinsingly over the 50% line since March of last year. Getting above August levels and the 50% line would add to the bullish thesis. If the rally continues and new highs minus lows stalls, it is once again a warning.
As you can see above, the market has plenty of room higher before reaching overbought signals. Should SPX remain above 1894 (Friday’s low), the bulls have the ball in their court. Should breadth on all the above measures expand along with higher highs, assume the trend is higher. Once the measures begin to stall the market is sending you a message so consider yourself warned.
SPY Open Interest: Not much can really be said here so for now it’s not very useful. There is a pretty clear path in both directions (minus some small resistance at 193, which price closed above). Only at 198, would SPY run into call resistance (as always the open interest is subject to change daily).
Bottom line: As long as price moves higher (or sideways) with an expansion of breadth consider the trend to be higher (for now). Should Friday’s low be taken out (breaching 1905 is a warning) or price strength not confirmed with internals, then caution is highly warranted. The first major resistance areas is 1950.
As I said a few weeks ago and on twitter, stay long TLT.
*The upside of the challenging environment can be hugely rewarding. Don’t go at it alone. Join us here for daily analysis, set-ups and real time entries and exists.
Share this: