As I mentioned in my post One Big Game of F***ery on Thursday, I think a lot of the price action last week had to do with January expiration. Given that it was a monthly expiration and the first one of the year it had quite a large amount of open calls and puts that when being closed or adjusted affected much of the price action.
Where we Currently Stand.
The market has pulled back 5% in the course of 11 days (as of Friday’s close). As you can in the chart below there was no V-shape reversal off the Jan 6th lows, meaning the 2013/2014 streak has come to an end (or is at least taking a hiatus). Over the last few years after each pull-back there has been a few consistent signs of a bottom that have led to new highs in the market. Although the market has become oversold enough for a bounce, we have not yet seen the typical oversold readings of a lasting bottom which include:
- TRIN closing over 2.0 (see chart below)
- Less than 30% of S&P 500 stocks trading above their 50-day MA (see chart below)
- Percentage of 20-day highs below 5%. We did get there on 1/6; however after making a lower low on price last week, that level has not gone back below 5%. That could be taken as a positive divergence, but if so then it would be a change to last few years in which price and 20-day highs hit a low together. Note the positive divergence made in October did not resolve itself higher. Chart courtesy of index indicators, annotations mine.
- Percentage of 20-day lows above 50%. It’s possible that this measure has already reached peak oversold readings when it got to 40% last week as it is the same percentage it reached when price bottomed in December. However, note that in most cases, the bottom tends to be met with over 50% of stocks hitting 20-day lows.
Although the ‘V’ is out, could a ‘W’ be in the making?
On Tuesday of last week I posted a chart on twitter questioning whether the market was setting up for a bullish ‘W’ pattern. It is still a valid proposal and even if we only slightly breach Friday’s low in the coming days/weeks, it would be possible for the pattern to play out (more info about a ‘W’ pattern here). Having said that, failure to mention the head and shoulders topping pattern on SPX would be negligent and so below is also a bearish technical picture that is not out of the question. 
What is open interest telling you sassy?
I’m going to show you two different views of SPY open interest. The first shows you more of a balanced open interest with a decent size range of possibility between about 200 and 205 before being met with too many calls (often acting as resistance) or puts (often acting as support). 
The second shows a picture with the open interest skewed heavily toward the put side with about 100,000 195 puts open. What this tells me is that if SPY falls below 200, watch for 195 to be a potential magnet.
So, where exactly does that leave us Sassy?
If going by the last few years of data, it leaves us with an interim bottom that may continue higher from Friday’s late day bounce, but that won’t reach new highs before another pull-back. Next week eyes will be heavily watching the ECB rate decision and what type (if any) stimulus will be announced. Even if you had privy to the information before anyone else, it’s still a guess as to how the market will react and whether the information is already priced in. Any disappointment might be met with a lower low from December and perhaps closer to the oversold readings I’m looking for. A huge surprise and a powerful move up met with short covering and FOMO (fear of missing out) could signal that we have a ‘W’ in the making.
Good Luck next week. If you are looking for daily market commentary, trade ideas and option education/trading then consider a subscription.
An Intermittent Bottom perhaps, but Swing Bottom in Question
As I mentioned in my post One Big Game of F***ery on Thursday, I think a lot of the price action last week had to do with January expiration. Given that it was a monthly expiration and the first one of the year it had quite a large amount of open calls and puts that when being closed or adjusted affected much of the price action.
Where we Currently Stand.
The market has pulled back 5% in the course of 11 days (as of Friday’s close). As you can in the chart below there was no V-shape reversal off the Jan 6th lows, meaning the 2013/2014 streak has come to an end (or is at least taking a hiatus). Over the last few years after each pull-back there has been a few consistent signs of a bottom that have led to new highs in the market. Although the market has become oversold enough for a bounce, we have not yet seen the typical oversold readings of a lasting bottom which include:
Although the ‘V’ is out, could a ‘W’ be in the making?
On Tuesday of last week I posted a chart on twitter questioning whether the market was setting up for a bullish ‘W’ pattern. It is still a valid proposal and even if we only slightly breach Friday’s low in the coming days/weeks, it would be possible for the pattern to play out (more info about a ‘W’ pattern here). Having said that, failure to mention the head and shoulders topping pattern on SPX would be negligent and so below is also a bearish technical picture that is not out of the question.
What is open interest telling you sassy?
I’m going to show you two different views of SPY open interest. The first shows you more of a balanced open interest with a decent size range of possibility between about 200 and 205 before being met with too many calls (often acting as resistance) or puts (often acting as support).
The second shows a picture with the open interest skewed heavily toward the put side with about 100,000 195 puts open. What this tells me is that if SPY falls below 200, watch for 195 to be a potential magnet.
So, where exactly does that leave us Sassy?
If going by the last few years of data, it leaves us with an interim bottom that may continue higher from Friday’s late day bounce, but that won’t reach new highs before another pull-back. Next week eyes will be heavily watching the ECB rate decision and what type (if any) stimulus will be announced. Even if you had privy to the information before anyone else, it’s still a guess as to how the market will react and whether the information is already priced in. Any disappointment might be met with a lower low from December and perhaps closer to the oversold readings I’m looking for. A huge surprise and a powerful move up met with short covering and FOMO (fear of missing out) could signal that we have a ‘W’ in the making.
Good Luck next week. If you are looking for daily market commentary, trade ideas and option education/trading then consider a subscription.
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