How Monday’s Drop & Open Interest Set-up a Long Trade

Over the weekend I posted that there was a good probability of the market going lower before finding a bottom. I’m still not sure if we hit a cycle bottom, but based on the quarterly index open interest and 20-day lows, the risk/reward for a bounce was too good to pass up.

As a reminder here is what the open interest looked like for the quarterly’s over the weekend:

SPY: 

QQQ: 

IWM: 

As I mentioned over the weekend I don’t have enough data to back any theory on if open interest works in the way I use it for weeklies or monthlies; however, as an open interest fan I wasn’t going to ignore it.

On Monday SPY got to 198.65, which isn’t just below the 205 puts, but also below the high 200 puts. QQQ got to 101.75, which again was below the very high strike of 103. Finally, IWM was not just below the 113 to 115 puts (which I said over the weekend could cause a waterfall action). The low was 108.19 and once again below the high 110 puts.

Then there was 20-day lows which spiked quickly to about 70%, a level it had not seen since September of 2015. Not even in February did it spike that fast or hard. I definitely rather see 80 to 90% for a cycle bottom, but for a spike to 70% that quickly the market was oversold. I didn’t get a snap shot of how it was shaping up on Monday, but index indicators does offer an intra-day look. Here is what it looked like the next day.

Thus, with price below all the high strike puts on the quarterly expiration indexes as well as being oversold, there was a high probability of a bounce coming and hence why we got long.

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