Last week here, I laid out a compelling bullish case for the week and targeted the 200-201 SPY area. I said from there it was likely to stall and even more likely to pull-back. Stall it did, pull-back it did not. If you had the direction of the market correct last week, the opportunities were tremendous. Next week, I believe will be trickier to navigate after the recent move up.
Evidence that the market is strong: Whether the double bottom made on August 29th was in fact the bottom, no one knows, but as of now the evidence suggests it was. The move up last week was met with extremely healthy breadth readings that suggests there is strength behind this move. I’ve read that this could be short covering and nothing else, which of course could be true, but history suggests the recent strength is something that is carried forward for some time.
Don’t fight the strength: My bias for the short term (next couple of weeks) is the market is going higher and the pull-backs will be shallow. The key take-away from that is until evidence presents otherwise, shorting is not recommended (unless you are scalping); however buying the dip is.
Keeping an open mind: In order to be successful in the market keeping an open mind is paramount. Below I present the case for both a pull-back and for going higher. Perhaps I am missing evidence for the former or am demonstrating a good example of cognitive dissonance, but overall I found the latter to be more compelling. Feel free inform me of what I may be missing from the market extended section.
Market overextend:
- The market has gone straight up since 9/29.
- The market is near resistance from the topping tail made on 9/17 (FOMC rate decision).
- Overhead supply. You can read more about that here from JC Parets.
- The McClellan Oscillator (NYMO) often used to determine when the market is overbought or oversold has only been higher 4 times in the last 10 years; thus, it is currently considered very over-bought. More on this below.
- Stocks above their 10-day MA are are currently sitting at levels that often lead to a pull-back. More on that below along with chart.
Market can continue higher:
The following two examples are not predictions about what 2015 will do, they are solely illustrations that the market doesn’t “have” to pull-back after such a strong move.
- The market can continue higher even after going up a straight 7%. In 2011 after bottoming the market went up 13.5% before pausing (during the pause, which lasted about a week, the market gave up only 2.4% from its highest to lowest point). From there SPX went up an additional 6% before pulling back about 10%.
- After the bottom in October 2014, the market moved up 7% in eight days. Five trading days later it was 3% higher than that; a month later 6% higher than the initial 7%. Currently we are 7.6% higher in nine trading days. Below is a chart that will also illustrate other similarities between 2014 bottom and today.
- The McClellan Oscillator although at extreme levels (where pull-backs tend to take place) can also be a sign of strength and overbought can become less overbought through time as opposed to price. Below I highlight instances in the last ten years where it reached levels over 90. As you can see there is mixed results over the very near term (especially in 2009 where there were three in a short time span); however, all instances resulted in very bullish uptrends from that point or very soon after.
- Another sign of strength is the vast participation among all sectors and stocks during the recent rally. Below is a chart of the percentage of SPX stocks making 20-day highs which hit almost 50% last week, something not seen since October of 2014.
- SPX stocks above their 10-day MA are in what is considered “overbought” territory; however, overbought can remain overbought as it did in 2014.
- From Charlie Bilello
- From Brett Steeenbarger “On a five-day basis, we’ve seen buying strength that has only been present on 9 prior occasions since 2012. Ten days later, SPX was up 8 times, down once for an average gain of about +3.0%. Once again, this highlights the momentum effect once institutions dominate on the buying side.” You can read the entire post here.
Conclusion from above: based on the above evidence, it would seem normal for the market to consolidate recent gains from here; however, it doesn’t preclude that it can go higher first. Of course the market could also fall right back into a more bearish trend, but that is the least likely scenario at this point. Until the market proves otherwise, buying dips appears to be a much better strategy versus shorting the market (not including scalpers).
SPY open interest and relevant levels: Below is a monthly look at the SPY open interest. The current look of the open interest (which can change throughout the week) suggests a pin of 200 on Friday with a wide range from 195 to 205. Given my bullish bias, but price up against resistance my bias is neutral to bullish. Although this is likely contrarian, I do believe price could see 204-205 at some point next week.
- SPY above 200 targets 201.90 (Friday’s high), 202.89 (FOMC high), and finally 204-206. 204 represents the low end of the range SPY remained in for much of 2015. 205 is the highest call strike. 206 is near the 200-day MA. All the areas above are potential resistance zones where the market may stall or pull-back.
- SPY below 200.58 (Friday’s low) targets 200, then the 197-198 area (resistance from the August lows till last week and where there are a decent amount of puts) and then the 195 area (where the market has a gap and another area of many puts).
- Should the market fall below 195 and not quickly recover, than it will definitely call for a shift from the bullish thesis laid out above. In that instance note support exists at 192 and 190.
Final thoughts: Last week if you had the direction right there was enormous gains to be had; next week will likely be trickier and require much more patience – practice it. Also, note that earnings season has begun and many highly watched large companies begin to report. This of course becomes another factor to consider with regard to the overall trend.
If you missed last weeks rally and don’t want to miss the next one and if you are looking for
- daily analysis on the markets
- daily analysis on momentum stocks
- set-ups on stocks that have potential for large short-term moves
- real time entries and exists on option trades
- a sassy good time
then consider joining us where we banked over 1500% on our trades last week (including losses).
Running of the Bulls
Last week here, I laid out a compelling bullish case for the week and targeted the 200-201 SPY area. I said from there it was likely to stall and even more likely to pull-back. Stall it did, pull-back it did not. If you had the direction of the market correct last week, the opportunities were tremendous. Next week, I believe will be trickier to navigate after the recent move up.
Evidence that the market is strong: Whether the double bottom made on August 29th was in fact the bottom, no one knows, but as of now the evidence suggests it was. The move up last week was met with extremely healthy breadth readings that suggests there is strength behind this move. I’ve read that this could be short covering and nothing else, which of course could be true, but history suggests the recent strength is something that is carried forward for some time.
Don’t fight the strength: My bias for the short term (next couple of weeks) is the market is going higher and the pull-backs will be shallow. The key take-away from that is until evidence presents otherwise, shorting is not recommended (unless you are scalping); however buying the dip is.
Keeping an open mind: In order to be successful in the market keeping an open mind is paramount. Below I present the case for both a pull-back and for going higher. Perhaps I am missing evidence for the former or am demonstrating a good example of cognitive dissonance, but overall I found the latter to be more compelling. Feel free inform me of what I may be missing from the market extended section.
Market overextend:
Market can continue higher:
The following two examples are not predictions about what 2015 will do, they are solely illustrations that the market doesn’t “have” to pull-back after such a strong move.
Conclusion from above: based on the above evidence, it would seem normal for the market to consolidate recent gains from here; however, it doesn’t preclude that it can go higher first. Of course the market could also fall right back into a more bearish trend, but that is the least likely scenario at this point. Until the market proves otherwise, buying dips appears to be a much better strategy versus shorting the market (not including scalpers).
SPY open interest and relevant levels: Below is a monthly look at the SPY open interest. The current look of the open interest (which can change throughout the week) suggests a pin of 200 on Friday with a wide range from 195 to 205. Given my bullish bias, but price up against resistance my bias is neutral to bullish. Although this is likely contrarian, I do believe price could see 204-205 at some point next week.
Final thoughts: Last week if you had the direction right there was enormous gains to be had; next week will likely be trickier and require much more patience – practice it. Also, note that earnings season has begun and many highly watched large companies begin to report. This of course becomes another factor to consider with regard to the overall trend.
If you missed last weeks rally and don’t want to miss the next one and if you are looking for
then consider joining us where we banked over 1500% on our trades last week (including losses).
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