Last week here, I discussed my bullish bias and that if SPY remained above 195 there was a good chance we would get to at least 200. That worked out perfectly as SPY hit 200 on Wednesday. I tweeted out Wednesday that my target had been hit and I had no expectations going into the FOMC, which we now know turned out to be a dud.
The market is currently in a downtrend and I believe this correction is not over, but I don’t necessarily think we will revisit the lows next week. Based on the evidence I present below, there is a decent chance we bounce next week and continue to create a bear flag in the 194-200 area. Although that is my current outlook, I have outlined a few scenarios below in order to keep an open mind and play what is handed to me.
Overbought/Oversold: As a reminder I use these breadth readings as an asset when looking for potential intermediate term tops or bottoms. Since the August drop, the 20-day highs and stocks above their 50-day MA have both remained very low. Last week was the first week that attempted to improve these conditions, but ultimately failed.
SPX stocks at 20-day highs: This attempted to move back higher from below 5%, but ultimately failed near the 10% area. Thus, the market on an intermediate term basis remains very bearish unable to bounce enough to bring stocks into a healthier landscape. There is no rule that it can’t stay this low for a long time, but seeing as it is rare, a bounce moving the 20-day highs near 20% shouldn’t come as a surprise. 
SPX stocks at 20-day lows: This is only very helpful when it reaches extreme heights, but down around the 10% area only suggests that most stocks are off their recent lows.
SPX stocks above their 50-day MA: Staying at low levels continuities to signal an intermediate term bearish outlook. Last week it was able to make it up to the 30% area before dropping back down. During the market correction in 2011 it also got to 30% on one of the market bounces and then as high as 45% on a separate bounce. Both times the market dropped lower again. Thus, it’s possible that 30% is all the market gives for now, but getting as high as 45-50% would not be out of the question and still could keep the market in an intermediate bearish trend.
SPX stocks above their 10-day MA: On a shorter time-frame stocks got to overbought levels last week before resuming lower. Currently, they preside in the middle of the range with room to move back up or down.
In the end, the breadth measures above don’t give many clues for next week, but the exercise of looking at them always allows us to know where in the oversold/overbought cycle we are.
Spy open interest: Taking this at face value suggests that we will have a relative market range of 195 to 200. Since the market closed near the low end of that at 195.45, there is a good chance the market sees a rally early in the week. Should that take place, 198.68, Friday’s high or the 200 area would be a good target and an area to potentially sell the rally. Although the scenario above is my first bias going into next week, a failure to stay above 195 would change my bias. Below are some main points to help as a guide.
- Staying above 195 early in the week would suggest a rally toward 199’ish/200 area. So perhaps a rally early in the week and then late week sell off. Should SPY happen to be very strong next week and get above 200 on strong internals, the next target would be 202 and then 204.
- Falling below 195 early in the week, look for support between 193.25-193.50 and then at 192.86, the gap fill from September 4th. Below there and the next strong support is 190. Should the market hold at any of these support levels and the 195 puts remain in the open interest,* look for a bounce back to that area and monitor the response.
- Falling below 190, would suggest a test of 186/187.
*Weekly open interest tends to change during the week, especially in volatile environments. It is important to keep track of the changes if you are using it as a tool to help assist in your trading. For regular updates and analysis on it as well as many of the momentum stocks come join my premium service, where you will also receive real time option trades. Plus you will have a sassy good time :).
A Bounce Potential Early Next Week?
Last week here, I discussed my bullish bias and that if SPY remained above 195 there was a good chance we would get to at least 200. That worked out perfectly as SPY hit 200 on Wednesday. I tweeted out Wednesday that my target had been hit and I had no expectations going into the FOMC, which we now know turned out to be a dud.
The market is currently in a downtrend and I believe this correction is not over, but I don’t necessarily think we will revisit the lows next week. Based on the evidence I present below, there is a decent chance we bounce next week and continue to create a bear flag in the 194-200 area. Although that is my current outlook, I have outlined a few scenarios below in order to keep an open mind and play what is handed to me.
Overbought/Oversold: As a reminder I use these breadth readings as an asset when looking for potential intermediate term tops or bottoms. Since the August drop, the 20-day highs and stocks above their 50-day MA have both remained very low. Last week was the first week that attempted to improve these conditions, but ultimately failed.
SPX stocks at 20-day highs: This attempted to move back higher from below 5%, but ultimately failed near the 10% area. Thus, the market on an intermediate term basis remains very bearish unable to bounce enough to bring stocks into a healthier landscape. There is no rule that it can’t stay this low for a long time, but seeing as it is rare, a bounce moving the 20-day highs near 20% shouldn’t come as a surprise.
SPX stocks at 20-day lows: This is only very helpful when it reaches extreme heights, but down around the 10% area only suggests that most stocks are off their recent lows.
SPX stocks above their 50-day MA: Staying at low levels continuities to signal an intermediate term bearish outlook. Last week it was able to make it up to the 30% area before dropping back down. During the market correction in 2011 it also got to 30% on one of the market bounces and then as high as 45% on a separate bounce. Both times the market dropped lower again. Thus, it’s possible that 30% is all the market gives for now, but getting as high as 45-50% would not be out of the question and still could keep the market in an intermediate bearish trend.
SPX stocks above their 10-day MA: On a shorter time-frame stocks got to overbought levels last week before resuming lower. Currently, they preside in the middle of the range with room to move back up or down.
In the end, the breadth measures above don’t give many clues for next week, but the exercise of looking at them always allows us to know where in the oversold/overbought cycle we are.
Spy open interest: Taking this at face value suggests that we will have a relative market range of 195 to 200. Since the market closed near the low end of that at 195.45, there is a good chance the market sees a rally early in the week. Should that take place, 198.68, Friday’s high or the 200 area would be a good target and an area to potentially sell the rally. Although the scenario above is my first bias going into next week, a failure to stay above 195 would change my bias. Below are some main points to help as a guide.
*Weekly open interest tends to change during the week, especially in volatile environments. It is important to keep track of the changes if you are using it as a tool to help assist in your trading. For regular updates and analysis on it as well as many of the momentum stocks come join my premium service, where you will also receive real time option trades. Plus you will have a sassy good time :).
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