Last week here I discussed a more bullish bias with the caveat that there was one big strike at on the SPY open interest at 205 and price could get there or undercut it by a bit. I also said that it would be a great place to buy the dip. I was wrong and payed the price when I tried to buy the dip under 205. Once price went below 205 for a second time and couldn’t recover I luckily stopped myself out. The last time SPY undercut such a large put strike on monthly OPEX and continued to drop was in October 2014. A good rule of thumb is if price validates a highs strike more than once (SPY went below 205, recovered, then fell below again) it’s better to step aside and re-evaluate.
Bottom line, we are oversold – duh right? Having said that, I do not believe the lows are in. This can play out in several ways. 1) Strong bounce (which could last days) then roll back over 2) meager bounce and/or chop (meaning consolidate and create bear flag) before dropping further. 3) Flush very early next week and create a bottom.
Overbought/Oversold: As a reminder these are best used to assist in finding turning points and as of now this is definitely at or near a turning point.
SPX stocks at 20-day highs: Oversold and at levels the market bounces (especially in 2015); however, when the market is forming a bottom, it will often remain oversold for several days. 
SPX stocks at 20-day lows: This graph displays the last three years (as far as it goes back) to show how dramatic the move is. This is the second highest reading in that time period. A note of caution, typically there is more than one large spike when SPY is creating a secure bottom. 
SPX stocks above their 50-day MA: Oversold enough to be a bottom, but also could get more extreme.
SPY Open interest: 
If you are a regular reader of my posts then you will probably anticipate me saying that taken at face value this open interest is bullish and suggests either a large bounce or a bottom and rip higher. And yes, taken at face value that is typically true. However, in my three plus years of tracking open interest I have never seen price so far below its highest strike puts on SPY. I have on the other hand seen it a few times on momentum stocks so I can only tell you that anecdotally, it does not fair well for the long side.
Bullish/Bearish
Below I am going to outline a few bullish and bearish thoughts.
Bullish:
- The market is at fairly extreme oversold levels. Price is way outside of its bolinger bands; the VIX had tons of first time extreme moves (I’m sure you read all the stats from some great statisticians on TWTR by now). The put/call ratio (one way to measure sentiment) is at extreme bearish levels.
- One could easily make the case that we saw capitulation on Friday.
- Bounces in downtrends can be massive.
- There are lots of puts at the 207 strike.
Bearish:
- I know you have heard it before, but here it is again, oversold can stay oversold. Also refer to my overbought/oversold section regarding this point.
- As mentioned, price being so far below the high strike calls has not been a good thing when I have seen it on momentum stocks.
- There is no put support unless price moved back over 207 (quite a stretch from current price).
- Over the last several years when the market has snapped back creating a V-bottom price had come from an uptrend. In the current environment the market has come from a long sideways consolidation.
- The VIX typically has more than one large spike before bottoming.
- Very very small sample size here but when we bottomed in October (a monthly OPEX), the open interest for the following week had a lot of open interest on the put strikes unlike next week.
- Below is a chart showing the October low. I am in no way saying this is a model for things to come. I am simply showing it to remind you/me that things could get worse. Notice in October we had 3 big down days in a row. The percentage move down was 4.7%. There was one relatively small bounce day after that and then the market moved lower by almost 3% more. Last week we had 3 big down days in a row with a percentage move of 6%. No it’s not the same – but it hopefully helps prevent you from thinking the market “has to bounce.” I included a note showing a gap fill at 1905 SPX. I am not saying it will get filled, I am just putting it out there.
What to watch for next week:
If the market bounces next week, ask yourself what kind of bounce it is. How does it act at resistance levels (200, 202, 205, 207)? Rejection or consolidation below those levels suggest an unsustainable bounce.
Does the market further flush down creating more oversold conditions and a reversal candle with confirmation the following day?
How does further down support act (196, 194, 192)? Does price bounce hard from those levels, consolidate at those levels, or slice through them?
I don’t know how next week will play out, but I put myself in a position to be very flexible by stepping back when what has worked for me in the past didn’t work. This frees me from any particular bias next week and allows me to play both the long and short side. With the market volatility, there is huge opportunity (especially with options). If you are interested in deeper daily and intra-day analysis including real time option trades, come join my premium service.
Buy the dip or Sell the Rip?
Last week here I discussed a more bullish bias with the caveat that there was one big strike at on the SPY open interest at 205 and price could get there or undercut it by a bit. I also said that it would be a great place to buy the dip. I was wrong and payed the price when I tried to buy the dip under 205. Once price went below 205 for a second time and couldn’t recover I luckily stopped myself out. The last time SPY undercut such a large put strike on monthly OPEX and continued to drop was in October 2014. A good rule of thumb is if price validates a highs strike more than once (SPY went below 205, recovered, then fell below again) it’s better to step aside and re-evaluate.
Bottom line, we are oversold – duh right? Having said that, I do not believe the lows are in. This can play out in several ways. 1) Strong bounce (which could last days) then roll back over 2) meager bounce and/or chop (meaning consolidate and create bear flag) before dropping further. 3) Flush very early next week and create a bottom.
Overbought/Oversold: As a reminder these are best used to assist in finding turning points and as of now this is definitely at or near a turning point.
SPX stocks at 20-day highs: Oversold and at levels the market bounces (especially in 2015); however, when the market is forming a bottom, it will often remain oversold for several days.
SPX stocks at 20-day lows: This graph displays the last three years (as far as it goes back) to show how dramatic the move is. This is the second highest reading in that time period. A note of caution, typically there is more than one large spike when SPY is creating a secure bottom.
SPX stocks above their 50-day MA: Oversold enough to be a bottom, but also could get more extreme.
SPY Open interest:
If you are a regular reader of my posts then you will probably anticipate me saying that taken at face value this open interest is bullish and suggests either a large bounce or a bottom and rip higher. And yes, taken at face value that is typically true. However, in my three plus years of tracking open interest I have never seen price so far below its highest strike puts on SPY. I have on the other hand seen it a few times on momentum stocks so I can only tell you that anecdotally, it does not fair well for the long side.
Bullish/Bearish
Below I am going to outline a few bullish and bearish thoughts.
Bullish:
Bearish:
What to watch for next week:
If the market bounces next week, ask yourself what kind of bounce it is. How does it act at resistance levels (200, 202, 205, 207)? Rejection or consolidation below those levels suggest an unsustainable bounce.
Does the market further flush down creating more oversold conditions and a reversal candle with confirmation the following day?
How does further down support act (196, 194, 192)? Does price bounce hard from those levels, consolidate at those levels, or slice through them?
I don’t know how next week will play out, but I put myself in a position to be very flexible by stepping back when what has worked for me in the past didn’t work. This frees me from any particular bias next week and allows me to play both the long and short side. With the market volatility, there is huge opportunity (especially with options). If you are interested in deeper daily and intra-day analysis including real time option trades, come join my premium service.
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