Last week I titled my post Why Friday Afternoon Was a Good Time to Buy and Pyschology. I’m pretty sure that title nailed it as Friday was a good time to buy (at least for the gap up and then the end of the week), but you definitely needed to check your emotions in order to survive and better yet thrive.
Looking out to the longer term trend I continue to be a bearish. I was very bullish for a several years and possibly even extended my stay a bit last year, but not anymore. Looking out shorter term, I think the recent relief rally can carry on a little further. I was very adamant over the last few weeks that oversold in downtrends is NOT the same as oversold when the market is in bullish trend. Two Friday’s ago, I began to shift as oversold did begin to get into extremes (you can read about it in last weeks post) increasing the risks of shorting or remaining short.
New Evidence that favors more upside, but limited: Besides what I pointed out last week, there are a few new things that make the upside look more intriguing for a continued bounce off of Wednesday’s low.
- The low of October 2014 was undercut slightly but quickly got back above with follow through. For now that is a failed breakdown. Weekly chart below:
- Wednesday had unusually large volume for a non quarterly expiration day.
- New high/new lows exceeded the level made during the August plunge (first box). Furthermore, as price confirmed higher the following days, Friday made a high in the advance/decline line (the number of advancing stocks less the number of declining stocks) that often leads to follow through for several weeks (second box). One caveat is the first large surge doesn’t necessarily lead to an immediate thrust. After August 25th (circled) the market continued to chop for about a month before making a double bottom and then taking off into the October rally.
The limited side: Based on the evidence presented last week, in addition to the above, more upside seems favorable; however, there are a couple things still nagging at me that there may be one more swoon lower (or double bottom) before a more sustainable relief rally gets underway.
- The TRIN hasn’t closed about 2 since the start of 2016. Although intra-day on January 15th the TRIN got a bit higher than 4, a rally to end that day got it back below 2. A high TRIN close would be more indicative of a washout.
- There is no higher low being made on the RSI or MACD (bullish divergence) similar to the one seen in August that lead to the October relief rally.
- Macro still poses risk, particularly high yield spreads. Hat tip Callum Thomas
- Purely anecdotal: The rally on Thursday and Friday did not have the same feel as the rally that took place in October, which lead to a multi week strong bounce. Yes many points were added to the SPX, similar to October, but the momentum and movement seemed somewhat muted. Perhaps traders are waiting for the Fed?
Thus, based on the evidence at hand, a continued bounce seems more probable, but perhaps will be more short-lived than a countered bounce that takes place after a better washout and bullish divergence.
Important levels and potential wildcards: Should the SPX remain above 1887 next week, more upside is likely. A close below 1887 next week likely leads to lower prices. Over 1908, resistance comes in around 1925, 1940’ish and 1975. Finally, three wildcards next week can provide a catalyst to a more powerful rally or a retrace in price: 1) a plethora of significant earning reports, 2) the FOMC decision and commentary on Wednesday and 3) yes, of course oil.
SPY Open Interest: As an asset to the important 1887 SPX level, the 187 high strike puts on SPY should also serve as support should price get there. The current best pin is 190; however, there is currently more puts than calls at that strike and may act as support, but not deter more upside (also this is subject to change throughout the week). Finally, to the upside should a very strong rally ensue and technical resistance be cleared, 197 will act as call resistance in conjunction with technical resistance at that level.
Bottom line: Although the current environment leans more favorably to a tactical bounce, it may be shorter lived than the typical V-shaped rally. Without knowing how far this current bounce can go, staying long until further evidence is presented (i.e. price closing below 1887, a topping tail, a lack of positive breadth development, etc.) appears more appropriate, but don’t overstay your welcome.
Gook luck next week. Stay on your toes because the movement is offering a ton of great opportunity or a ton of frustration for those not adapting to the new environment. For daily and intra-day analysis and real time trades come join us at SassyOptions.
Countertrend Rally or Muted Bounce?
Last week I titled my post Why Friday Afternoon Was a Good Time to Buy and Pyschology. I’m pretty sure that title nailed it as Friday was a good time to buy (at least for the gap up and then the end of the week), but you definitely needed to check your emotions in order to survive and better yet thrive.
Looking out to the longer term trend I continue to be a bearish. I was very bullish for a several years and possibly even extended my stay a bit last year, but not anymore. Looking out shorter term, I think the recent relief rally can carry on a little further. I was very adamant over the last few weeks that oversold in downtrends is NOT the same as oversold when the market is in bullish trend. Two Friday’s ago, I began to shift as oversold did begin to get into extremes (you can read about it in last weeks post) increasing the risks of shorting or remaining short.
New Evidence that favors more upside, but limited: Besides what I pointed out last week, there are a few new things that make the upside look more intriguing for a continued bounce off of Wednesday’s low.
The limited side: Based on the evidence presented last week, in addition to the above, more upside seems favorable; however, there are a couple things still nagging at me that there may be one more swoon lower (or double bottom) before a more sustainable relief rally gets underway.
Thus, based on the evidence at hand, a continued bounce seems more probable, but perhaps will be more short-lived than a countered bounce that takes place after a better washout and bullish divergence.
Important levels and potential wildcards: Should the SPX remain above 1887 next week, more upside is likely. A close below 1887 next week likely leads to lower prices. Over 1908, resistance comes in around 1925, 1940’ish and 1975. Finally, three wildcards next week can provide a catalyst to a more powerful rally or a retrace in price: 1) a plethora of significant earning reports, 2) the FOMC decision and commentary on Wednesday and 3) yes, of course oil.
SPY Open Interest: As an asset to the important 1887 SPX level, the 187 high strike puts on SPY should also serve as support should price get there. The current best pin is 190; however, there is currently more puts than calls at that strike and may act as support, but not deter more upside (also this is subject to change throughout the week). Finally, to the upside should a very strong rally ensue and technical resistance be cleared, 197 will act as call resistance in conjunction with technical resistance at that level.
Bottom line: Although the current environment leans more favorably to a tactical bounce, it may be shorter lived than the typical V-shaped rally. Without knowing how far this current bounce can go, staying long until further evidence is presented (i.e. price closing below 1887, a topping tail, a lack of positive breadth development, etc.) appears more appropriate, but don’t overstay your welcome.
Gook luck next week. Stay on your toes because the movement is offering a ton of great opportunity or a ton of frustration for those not adapting to the new environment. For daily and intra-day analysis and real time trades come join us at SassyOptions.
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