Since the recent 4.3% correction/pull-back from the high of 1991 on July 24th to a low of 1905 on August 2nd we have rallied 3.1% in just six trading days. The S&P 500 closed slightly above the 50-day moving average and based on recent market behavior after pull-backs, it would seem the easy money has been made. Having said that, it doesn’t mean it is time to go short or that we don’t have more upside left. If you look at the chart below you will see that SPX stalled right at 1964, just one point shy of the 2% down day on July 31st that authenticated the pull back something to take notice of. It will be important to see how price reacts to 1965 as many underwater longs may see it as an opportunity to exit their position or ‘be made whole.’ 
Is breadth signaling a warning?
Regardless of the impressive 60 point rally, individual stocks have yet to catch up to their respective averages. This can be viewed from two different perspectives. The first is that the lack of stock participation during the latest market rally is a warning signal that the sell-off is not over. The second is that stocks have a lot of room to the upside in order to play catch up. Below is a look at percentage of S&P stocks that are trading above their 50-day moving moving average. This is one measure of breadth that gauges how stocks are trading overall relative to their index.
About 45% of stocks are currently trading above their 50-day moving average, while SPX is trading less than 2% from all time highs. 
Why this rally may be more than a bounce:
As impressive as the SPX has been in its recent recovery from its low on August 2nd, even more impressive is the NASDAQ 100 closing at a high not seen since 2000. Going into next week it would be prudent to watch how the NASDAQ performs in relation to its current level. As a reminder, new highs is not bearish. To remain open minded however, I would like to acknowledge the notion that those market participants that lost money after the tech bubble ended will want to sell their stock once made whole again (near levels we are getting to). This is a fair argument; however, I would argue that those participants that have waited 15 years for the market to come back (not ever knowing that it would happen in their lifetime) did not likely hold on to their positions in order to repair the damage that had been done. Rather, they are likely long term passive investors that are able to see the forest for the trees and/or know that once they were made whole again, the market would likely then continue higher. 
Should the market stall and pull-back next week it will be important for it to hold the 1930 level. A breach of 1930 would then increase the chance that the market bottom was not made on August 2nd and the odds of a visit to the 200-day moving average increase dramatically. If on the other hand the market convincingly takes out 1965 than 2000 will likely be seen in short order.
Open Interest:
Here is a look at the open interest on SPY for next week. Typically when this many calls trade versus puts the upside is limited and either leads to a pull-back or choppy consolidation. The latter scenario that also includes some back and fill would be the healthiest scenario going into next week. It would also provide a good trading environment for individual stocks to rally in. 
Finally, I want to take this time to show you the power that open interest and options can often provide. First open interest. During Friday’s session, SPY pulled back from 196.65 to 194.31. At 11:36 EST SPY was trading at 195 and esteemed technician Greg Harmon (@harmongreg) asked me if I had a max pain value in mind. I quickly responded that 196 would be the best pin and based it on the below graph that I posted to twitter Friday morning before the open. Although it didn’t close at 196 it did close at 195.72, which is much closer to 196 than the 195 it was trading at when I responded. 
Regarding the power of options. Last week my subscribers and I were able to bank:
- 238% on GS puts in one day
- 443% on NFLX calls in one day
- 150% on GRUB in a little over a week (free trade that after 150% return we are still holding)
- 2091% on MNST calls over a few week holding period.
I don’t always have wins like that and I will be the first to admit that I often have losses; however, all losses are limited to the value of the investment when it comes to options whereas gains are unlimited. Over time many small wins, limited losses and a few big wins an really can really add up.
Names that I recently have started a position in include AAPL, ARWR, FB, EXPE, and ZU.
Good luck Next Week!
Check out a subscription for trade ideas and more.
Is The Easy Money Over?
Since the recent 4.3% correction/pull-back from the high of 1991 on July 24th to a low of 1905 on August 2nd we have rallied 3.1% in just six trading days. The S&P 500 closed slightly above the 50-day moving average and based on recent market behavior after pull-backs, it would seem the easy money has been made. Having said that, it doesn’t mean it is time to go short or that we don’t have more upside left. If you look at the chart below you will see that SPX stalled right at 1964, just one point shy of the 2% down day on July 31st that authenticated the pull back something to take notice of. It will be important to see how price reacts to 1965 as many underwater longs may see it as an opportunity to exit their position or ‘be made whole.’
Is breadth signaling a warning?
Regardless of the impressive 60 point rally, individual stocks have yet to catch up to their respective averages. This can be viewed from two different perspectives. The first is that the lack of stock participation during the latest market rally is a warning signal that the sell-off is not over. The second is that stocks have a lot of room to the upside in order to play catch up. Below is a look at percentage of S&P stocks that are trading above their 50-day moving moving average. This is one measure of breadth that gauges how stocks are trading overall relative to their index.
About 45% of stocks are currently trading above their 50-day moving average, while SPX is trading less than 2% from all time highs.
Why this rally may be more than a bounce:
As impressive as the SPX has been in its recent recovery from its low on August 2nd, even more impressive is the NASDAQ 100 closing at a high not seen since 2000. Going into next week it would be prudent to watch how the NASDAQ performs in relation to its current level. As a reminder, new highs is not bearish. To remain open minded however, I would like to acknowledge the notion that those market participants that lost money after the tech bubble ended will want to sell their stock once made whole again (near levels we are getting to). This is a fair argument; however, I would argue that those participants that have waited 15 years for the market to come back (not ever knowing that it would happen in their lifetime) did not likely hold on to their positions in order to repair the damage that had been done. Rather, they are likely long term passive investors that are able to see the forest for the trees and/or know that once they were made whole again, the market would likely then continue higher.
Should the market stall and pull-back next week it will be important for it to hold the 1930 level. A breach of 1930 would then increase the chance that the market bottom was not made on August 2nd and the odds of a visit to the 200-day moving average increase dramatically. If on the other hand the market convincingly takes out 1965 than 2000 will likely be seen in short order.
Open Interest:
Here is a look at the open interest on SPY for next week. Typically when this many calls trade versus puts the upside is limited and either leads to a pull-back or choppy consolidation. The latter scenario that also includes some back and fill would be the healthiest scenario going into next week. It would also provide a good trading environment for individual stocks to rally in.
Finally, I want to take this time to show you the power that open interest and options can often provide. First open interest. During Friday’s session, SPY pulled back from 196.65 to 194.31. At 11:36 EST SPY was trading at 195 and esteemed technician Greg Harmon (@harmongreg) asked me if I had a max pain value in mind. I quickly responded that 196 would be the best pin and based it on the below graph that I posted to twitter Friday morning before the open. Although it didn’t close at 196 it did close at 195.72, which is much closer to 196 than the 195 it was trading at when I responded.
Regarding the power of options. Last week my subscribers and I were able to bank:
I don’t always have wins like that and I will be the first to admit that I often have losses; however, all losses are limited to the value of the investment when it comes to options whereas gains are unlimited. Over time many small wins, limited losses and a few big wins an really can really add up.
Names that I recently have started a position in include AAPL, ARWR, FB, EXPE, and ZU.
Good luck Next Week!
Check out a subscription for trade ideas and more.
Share this: