Last week here I discussed the possibility of a buying opportunity as things were getting close to oversold and the open interest favored buying the dip. BOY WAS I WRONG! After things started to really deteriorate Tuesday I started to wake up to the fact that this wasn’t the normal get a bit over sold and bounce routine. By Wednesday I was on the bear side. When typical oversold isn’t working, open interest isn’t working, BTD isn’t working, I would have to be completely oblivious to not notice it’s time to adapt.
Bear Market? Everyone has a different definition of a bear market. For me, this is a bear market – most likely a cyclical one. In the end, it really doesn’t matter what I or you call it as I’m sure we can all agree that the intermediate trend is down and has been for quite some time….so let’s focus on that. In that sense, the tools we used for several years are not going to work in the same way (i.e. as we saw in August, oversold can and likely will remain oversold before a good bounce ensues). In November of last year I discussed the possibility that the October rally was a bear market rally. It’s worth a read as I give reasons why, which haven’t changed, and will clue you in on what would need to happen for a real change in trend (scroll down to, “Was October a bear market rally”). Point being, start adapting because the old signals aren’t going to work the same way.
Overbought/Oversold:
SPX stocks at 20-day highs: yes it’s oversold, but this can persistently stay oversold better than most other indicators (just look at August for an example of that). 
SPX stocks at 20-day lows: Last week I mentioned that better bottoms are formed when this reaches extremes. This is probably one of the best reasons to entertain a bounce coming shortly. However, often it takes more than one large rise in 20-day lows as you can see in October 2014 and July 2015 (there are more examples going further back, but was trying to keep the range reasonable enough to spot how one spike isn’t always a market bottom).
SPX stocks above their 50-day MA: definitely an intriguing area to begin thinking about a short covering rally, but in this environment, buying the dip blindly on ‘typical oversold readings’ may not be suitable for your future health.
Open Interest: Open interest is meant to be an asset to other tools. When the market is trending and in lower volatile times, it tends to work pretty reliably. It isn’t as helpful, but still informative in extreme situations (i.e. last week). When high strikes are not even acting as a place of pause, it informs me that the market is also not going to follow other technical rules either (i.e. typical support/resistance levels, overbought/oversold conditions, statistical norms, etc) and that going against the trend is a recipe for disaster. Recent examples that come to mind when there was a complete dismissal of high strike calls or puts by price were August OPEX and during the October massive rally. In that sense, what comes below should be taken in context of the overall action in the market.
VIX expiration: Seems that either there is a shift in buying protection through other means than the VIX or protection hasn’t been so popular as of late. If the market finds a bottom to bounce off early next week then it’s possible the VIX pins at 17 Wednesday morning. However, the fact that the calls are not in more demand have me less interested in using this as a helpful indicator next week. 
SPY open interest: The strikes of relevance are the 190 and 195 puts. Should the market find some sort of support to bounce off then there is good potential for a SPY close at or above 195 by Friday. However, any more downside or failure to convincingly bounce* and better to take note that the puts at 190 and 195 will have no affect on where price ends up on Friday and furthermore, most other indicators will likely not be as helpful either.
*What does a convincing bounce look like? It typically comes from a reversal day and involves two major steps. 1) Prices drop with very high volume, numerous extreme negative TICKS close together, extreme negative breadth, and a TRIN over 3 . This is followed by 2) a fast reversal that results in a hammer candle, extreme positive TICKS close together, a large drop in the VIX, a huge improvement in breadth, and participation from all sectors. A third step can be included for confirmation, which is follow through the next day (often with a gap up).
Will next week be a reversal week? I have no clue. Will we bounce? Of course. However, to say that I know the bounce will be a reversal gives me no room to trade flexibly and my goal is to make money not predict when we get a playable reversal. If the market bases sideways (with small bounces, but no follow thru) it will likely lead to a longer path down before a playable countertrend rally. On the other hand, should the market continue to drop with acceleration, then a reversal and countertrend rally is likely more imminent. Is it possible for the market to gap up Monday morning and never look back? Anything is possible; however, any gap and go Monday morning is likely a short the rip opportunity. The support level in SPX I find most intriguing is 1870.
Final words: If you aren’t adapting, then better to sit on your hands, practice patience and try to figure out the new environment. Good Luck.
It’s a new year with a new market environment, come start it premium style with daily set-ups, analysis, real time entries and exits and lots of fun sass ;-).
The Bears Have Awoken and Have Spoken
Last week here I discussed the possibility of a buying opportunity as things were getting close to oversold and the open interest favored buying the dip. BOY WAS I WRONG! After things started to really deteriorate Tuesday I started to wake up to the fact that this wasn’t the normal get a bit over sold and bounce routine. By Wednesday I was on the bear side. When typical oversold isn’t working, open interest isn’t working, BTD isn’t working, I would have to be completely oblivious to not notice it’s time to adapt.
Bear Market? Everyone has a different definition of a bear market. For me, this is a bear market – most likely a cyclical one. In the end, it really doesn’t matter what I or you call it as I’m sure we can all agree that the intermediate trend is down and has been for quite some time….so let’s focus on that. In that sense, the tools we used for several years are not going to work in the same way (i.e. as we saw in August, oversold can and likely will remain oversold before a good bounce ensues). In November of last year I discussed the possibility that the October rally was a bear market rally. It’s worth a read as I give reasons why, which haven’t changed, and will clue you in on what would need to happen for a real change in trend (scroll down to, “Was October a bear market rally”). Point being, start adapting because the old signals aren’t going to work the same way.
Overbought/Oversold:
SPX stocks at 20-day highs: yes it’s oversold, but this can persistently stay oversold better than most other indicators (just look at August for an example of that).
SPX stocks at 20-day lows: Last week I mentioned that better bottoms are formed when this reaches extremes. This is probably one of the best reasons to entertain a bounce coming shortly. However, often it takes more than one large rise in 20-day lows as you can see in October 2014 and July 2015 (there are more examples going further back, but was trying to keep the range reasonable enough to spot how one spike isn’t always a market bottom).
SPX stocks above their 50-day MA: definitely an intriguing area to begin thinking about a short covering rally, but in this environment, buying the dip blindly on ‘typical oversold readings’ may not be suitable for your future health.
Open Interest: Open interest is meant to be an asset to other tools. When the market is trending and in lower volatile times, it tends to work pretty reliably. It isn’t as helpful, but still informative in extreme situations (i.e. last week). When high strikes are not even acting as a place of pause, it informs me that the market is also not going to follow other technical rules either (i.e. typical support/resistance levels, overbought/oversold conditions, statistical norms, etc) and that going against the trend is a recipe for disaster. Recent examples that come to mind when there was a complete dismissal of high strike calls or puts by price were August OPEX and during the October massive rally. In that sense, what comes below should be taken in context of the overall action in the market.
VIX expiration: Seems that either there is a shift in buying protection through other means than the VIX or protection hasn’t been so popular as of late. If the market finds a bottom to bounce off early next week then it’s possible the VIX pins at 17 Wednesday morning. However, the fact that the calls are not in more demand have me less interested in using this as a helpful indicator next week.
SPY open interest: The strikes of relevance are the 190 and 195 puts. Should the market find some sort of support to bounce off then there is good potential for a SPY close at or above 195 by Friday. However, any more downside or failure to convincingly bounce* and better to take note that the puts at 190 and 195 will have no affect on where price ends up on Friday and furthermore, most other indicators will likely not be as helpful either.
*What does a convincing bounce look like? It typically comes from a reversal day and involves two major steps. 1) Prices drop with very high volume, numerous extreme negative TICKS close together, extreme negative breadth, and a TRIN over 3 . This is followed by 2) a fast reversal that results in a hammer candle, extreme positive TICKS close together, a large drop in the VIX, a huge improvement in breadth, and participation from all sectors. A third step can be included for confirmation, which is follow through the next day (often with a gap up).
Will next week be a reversal week? I have no clue. Will we bounce? Of course. However, to say that I know the bounce will be a reversal gives me no room to trade flexibly and my goal is to make money not predict when we get a playable reversal. If the market bases sideways (with small bounces, but no follow thru) it will likely lead to a longer path down before a playable countertrend rally. On the other hand, should the market continue to drop with acceleration, then a reversal and countertrend rally is likely more imminent. Is it possible for the market to gap up Monday morning and never look back? Anything is possible; however, any gap and go Monday morning is likely a short the rip opportunity. The support level in SPX I find most intriguing is 1870.
Final words: If you aren’t adapting, then better to sit on your hands, practice patience and try to figure out the new environment. Good Luck.
It’s a new year with a new market environment, come start it premium style with daily set-ups, analysis, real time entries and exits and lots of fun sass ;-).
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