Last week here I wrote that the most likely scenario based on the evidence was a period of consolidation and/or pullback. Based on the open interest I also discussed the drop that would likely happen if we breached the 210 level on SPY more than once. Both scenarios played out and now we find ourselves threatening a breach of the breakout level from February.
Bounce likely, but so is a lower low:
We are currently at, or close to levels where the market typically bounces. Below you can see that stocks trading at 20-day highs has gotten down to about 5%, an area where the market typically bounces. Note though that in most instances we see more than one oversold reading below 5% before a secure bottom is put in place.
The same is true for stocks trading at 20-day lows. Over 30% and the market is flirting with oversold levels. However, we often see more than one oversold spike and/or get even more stocks trading at 20-day lows before a more secure low is established.
On Friday there were multiple negative 1000 TICKS, the lowest being -1445. I looked back 3 years and counted 18 times that TICK traded below 1400. That type of negative TICK is a sign of indiscriminate and panic selling. It is also a sign that we are near capitulation; however, in 16 out of those 18 instances, the market made at least one more low within a week period (usually met with a higher low in the TICK). Note in the few instances when the market made a new high the day of the extreme low tick, the market sold off for several weeks. That was not the case last Friday.
Therefore, based on historical precedents regarding the oversold readings I have described above as well as the TICK, the risk/reward favors at least one more lower low before trading back up to new highs. If this scenario were to play out the question then becomes do we get a bounce first trapping in some dip buyers or do we go lower first? Since no one knows the answer to that question the best thing we can do is be aware of the likely scenario and know levels of support and resistance that are worth trading (long or short).
SPY technical levels and the open interest:
The 50-day moving average is around 206 which coincides with the area we finally broke out of in February. On any weakness that will be the first place I anticipate we bounce from. Below there and we likely hit 205, the level with the most about of open puts. I would expect that level to hold on such a sell-off. If however, 205 cannot hold or gets hit more than once during the week, then delta hedging would likely lead to a quick and dramatic drop just as we experienced on Friday (and that I had outlined was likely in my post last week). On the upside, the 20-day moving average as well as Friday’s high converge around 209-210 and would likely act as as first resistance point. Above there and the 211 calls would become resistance (note though that a bounce early in the week would likely change the high open interest calls which I monitor every day of the week).
Therefore, over the next couple weeks I would expect a bounce and/or secure bottom being put in. If we bounce first, before making at least one more low, then the bottom is likely not yet secure for new highs.
Good Luck next week. If you are looking for specific option or stock trade ideas (short and long term), daily market commentary, and open interest analysis consider a subscription.
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Tags: bearish, breadth indicators, bullish, day trading, open interest, options, pinning, stock, stock market, TICK
A Bounce and A Lower Low – Which Comes First?
Last week here I wrote that the most likely scenario based on the evidence was a period of consolidation and/or pullback. Based on the open interest I also discussed the drop that would likely happen if we breached the 210 level on SPY more than once. Both scenarios played out and now we find ourselves threatening a breach of the breakout level from February.
Bounce likely, but so is a lower low:
We are currently at, or close to levels where the market typically bounces. Below you can see that stocks trading at 20-day highs has gotten down to about 5%, an area where the market typically bounces. Note though that in most instances we see more than one oversold reading below 5% before a secure bottom is put in place.
The same is true for stocks trading at 20-day lows. Over 30% and the market is flirting with oversold levels. However, we often see more than one oversold spike and/or get even more stocks trading at 20-day lows before a more secure low is established.
On Friday there were multiple negative 1000 TICKS, the lowest being -1445. I looked back 3 years and counted 18 times that TICK traded below 1400. That type of negative TICK is a sign of indiscriminate and panic selling. It is also a sign that we are near capitulation; however, in 16 out of those 18 instances, the market made at least one more low within a week period (usually met with a higher low in the TICK). Note in the few instances when the market made a new high the day of the extreme low tick, the market sold off for several weeks. That was not the case last Friday.
Therefore, based on historical precedents regarding the oversold readings I have described above as well as the TICK, the risk/reward favors at least one more lower low before trading back up to new highs. If this scenario were to play out the question then becomes do we get a bounce first trapping in some dip buyers or do we go lower first? Since no one knows the answer to that question the best thing we can do is be aware of the likely scenario and know levels of support and resistance that are worth trading (long or short).
SPY technical levels and the open interest:
The 50-day moving average is around 206 which coincides with the area we finally broke out of in February. On any weakness that will be the first place I anticipate we bounce from. Below there and we likely hit 205, the level with the most about of open puts. I would expect that level to hold on such a sell-off. If however, 205 cannot hold or gets hit more than once during the week, then delta hedging would likely lead to a quick and dramatic drop just as we experienced on Friday (and that I had outlined was likely in my post last week). On the upside, the 20-day moving average as well as Friday’s high converge around 209-210 and would likely act as as first resistance point. Above there and the 211 calls would become resistance (note though that a bounce early in the week would likely change the high open interest calls which I monitor every day of the week).
Therefore, over the next couple weeks I would expect a bounce and/or secure bottom being put in. If we bounce first, before making at least one more low, then the bottom is likely not yet secure for new highs.
Good Luck next week. If you are looking for specific option or stock trade ideas (short and long term), daily market commentary, and open interest analysis consider a subscription.
If you find value in these posts please head over to my Facebook page and like it.
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Tags: bearish, breadth indicators, bullish, day trading, open interest, options, pinning, stock, stock market, TICK