Last week here I wrote that we were likely to bounce, but also to make a lower low. Both did indeed take place. The question now becomes have we bottomed or is there more downside to come and if so, how far?
A look at how oversold the market is:
- 20-day highs went below 5% which has often marked bottoms. There are times when the market has gone below the 5% level twice before a secure bottom, but note that this criteria of being oversold has been met.
- 20-day lows did get above 45% last week, which in the past has been enough to mark short term bottoms, including every minor correction since December. If we were to assume that the choppiness over the last 4 1/2 months (since early November 2014) was an intermediate correction through time rather than price, then slightly above 45% should suffice as oversold enough.
- Stocks falling below their 20-day moving average typically bottom below 15%, which was also reached last week.
In sum, although we have often revisited the oversold levels above before finding a secure bottom, we have indeed met the conditions if we were to rally back up from current levels.
VIX and the FOMC:
The current set-up is very similar to December 2014. The VIX expires on Wednesday and based on the open interest the most probable expiration will be between 16 and 20. Since the VIX closed at 16 on Friday, the most probable outcome early next week would be choppy to lower keeping the VIX elevated before expiration Wednesday morning at the open. This coincides with the FOMC meeting Wednesday afternoon. As mentioned this was the same set-up mid December when VIX expiration (which also had many puts that I expected were going to expire worthless) coincided with the FOMC meeting. 
SPY Open Interest: The last two weeks here and here have given us precise clues as to where the SPY could go. Next week isn’t as clear, but does reveal some reference points. The highest open interest is the 200 puts. Before concluding that it will become a magnet, note there is still heavy open interest at each strike from 205 to 201. Last week I emphasized the importance of the 205 level, which was defended by the end of the week. If it remains defended next week then it is likely we have already bottomed or at least have come very close. If however, we dip below 204.40 (the low from last week) it is possible we continue to breakdown with a target between 200 and 201 (the chances of this would increase if it was toward the end of the week due to delta hedging – you can read more about that here).
Therefore, based on the above oversold conditions mentioned above, the VIX expiration coinciding with FOMC and that the upcoming week has “historically been a strong week for SPX” (information taken from @ukarlewitz in his Fat Pitch post), we have the makings of a potential bottom and rally to come next week. This would likely come with a bid in treasures (TLT) and lower yields. Minus that outcome (which the evidence reveals as more probable) then a further sell-off to 200-201 may be in the cards.
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: AAPL TLT FB, bearish, bonds, breadth indicators, bullish, day trading, market, markets, max pain, open interest, options, pinning, stock market, VIX, volatility
Have We Bottomed Yet? Next Weeks Game Plan
Last week here I wrote that we were likely to bounce, but also to make a lower low. Both did indeed take place. The question now becomes have we bottomed or is there more downside to come and if so, how far?
A look at how oversold the market is:
In sum, although we have often revisited the oversold levels above before finding a secure bottom, we have indeed met the conditions if we were to rally back up from current levels.
VIX and the FOMC:
The current set-up is very similar to December 2014. The VIX expires on Wednesday and based on the open interest the most probable expiration will be between 16 and 20. Since the VIX closed at 16 on Friday, the most probable outcome early next week would be choppy to lower keeping the VIX elevated before expiration Wednesday morning at the open. This coincides with the FOMC meeting Wednesday afternoon. As mentioned this was the same set-up mid December when VIX expiration (which also had many puts that I expected were going to expire worthless) coincided with the FOMC meeting.
SPY Open Interest: The last two weeks here and here have given us precise clues as to where the SPY could go. Next week isn’t as clear, but does reveal some reference points. The highest open interest is the 200 puts. Before concluding that it will become a magnet, note there is still heavy open interest at each strike from 205 to 201. Last week I emphasized the importance of the 205 level, which was defended by the end of the week. If it remains defended next week then it is likely we have already bottomed or at least have come very close. If however, we dip below 204.40 (the low from last week) it is possible we continue to breakdown with a target between 200 and 201 (the chances of this would increase if it was toward the end of the week due to delta hedging – you can read more about that here).
Therefore, based on the above oversold conditions mentioned above, the VIX expiration coinciding with FOMC and that the upcoming week has “historically been a strong week for SPX” (information taken from @ukarlewitz in his Fat Pitch post), we have the makings of a potential bottom and rally to come next week. This would likely come with a bid in treasures (TLT) and lower yields. Minus that outcome (which the evidence reveals as more probable) then a further sell-off to 200-201 may be in the cards.
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: AAPL TLT FB, bearish, bonds, breadth indicators, bullish, day trading, market, markets, max pain, open interest, options, pinning, stock market, VIX, volatility