Last week here I made the case for the bulls and summed up my post with this
“In sum, the expansion in breadth with price supports further upside over the next few weeks and suggests taking on a buy the dip mentality. However, the current overbought levels and technical resistance may lead to a pullback or sideways consolidation before further upside. A failure to close above 1978 would put into question the current cycle uptrend.”
The lowest close last week was 1979 on Tuesday.
This upcoming week has a similar theme in that the bulls continue to have the edge. Breadth has been keeping pace with price and has yet to show negative divergences consistent with a rally on its last legs. Thus, for short term traders, a buy the dip mentality is still warranted.
Breadth:
SPX stocks at 20-day highs: In an uptrend that has staying power, oversold measures are quickly reversed. That was the case last week when 20-day highs got near 5% and were quickly reversed to close Friday near 50%.
SPX stocks above their 20-day MA: Remarkably this crossed over 90% for the second time in just one weeks time. As I mentioned in last weeks post, although the sample size is small given its rarity, a backtest using index indicators resulted in slightly positive returns five days later. Digging a little deeper into those instances, over the last five years there have been 14 crosses over 90%, most either in 2011 or 2013. Among those 14 occasions, there were two back to back one week apart (similar to now). All four resulted in positive returns five days later. The first in 2011, the market returned 1.12% the 1st week and 3.78% the 2nd (notice below a third thrust just one week after the second resulted in negative results of 2.5% – something to possibly carry forward). The second time was in 2013 in which the market returned 0.86% the 1st and 0.05% the 2nd week. Thus, lower returns next week might give more edge to the Bulls for several weeks rather than an outsized move next week that might be quickly given back.
SPX 52 week high minus lows: This is just at the brink of breaking out over one standard deviation where it has stalled since April 2015. Further upside would be supplemental confirmation of the broad strength in the market and likely future continuation on an intermediate term time frame.
As you can see above, there are elements of the market being overbought and thus subject to a pullback or sideways consolidation in the coming days. However, until breadth begins to diverge from price it would be rare for a sudden market collapse to occur.
Weekly MACD cross:
Last weekend SPX was on the brink of a weekly MACD cross which was made official early in the week. Looking back to 2005, every single instance of a weekly MACD cross (N = 23) has led to as least one further positive week. The case can be made that the cross was nearly made prior to last week and thus last week already equates to one positive week, but I’m more inclined to think the official cross was last week. Furthermore, for many of the crosses several positive weeks ensued, not just one. Taking a closer look at each individual case, October 2011 might resemble the current situation the closest. First, they are both coming off of a double bottom correction. Second, the slopes of the 50 and 20 week SMA are either flat or down and price right below the 50-week. Third, in both instances stocks above their 50-day MA reached nearly 90%. Fourth, the week it took place coincides with the 2nd weekly cross of over 90% stocks above their 20-day MA (just like now). Finally, both back to back thrusts over 90% in 2011 occurred during the two weeks prior to the third one on OPEX Friday. Recall the 3rd week that had a similar thrust resulted in a following down week. Thus, should the extreme strength continue into next week, there could be a pull back right around the corner.
2011 – present
2005 – 2011
SPY open interest: Currently the largest strikes that stick out are the 195 puts and the 200 calls. Seeing as price closed above the 200 level there is the possibility that it will be pulled back lower. However, should price stay above 200, then those calls could potentially add fuel for an even higher move as those who sold the calls need to buy to cover (or buy to remain neutral). You can read more about that here and here. On the other hand, should price begin to fall below 198, there would likely be at least initial support that begins at the 197 strike. However, if price breaches 197 and doesn’t quickly recover, delta hedging in the other direction can lead to a quick sell off toward 195, which should act as strong support. 
SPX levels:
Support levels: 2009, 1996, 1986, 1979, 1962. A close below 1996 and especially 1986 would jeopardize the edge the Bulls currently carry.
Resistance levels: 2039, 2054, 2064, 2074. The latter two, should they take place next week are levels to consider lightening up on longs or shorting.
In sum, current breadth and the weekly MACD cross suggest further upside next week. Given the market is overbought it may pause or slightly pull-back, but the evidence at hand supports buying a dip or consolidation. With that said, a further large move with strong internals next week could be similar to October 2011 in which the market gave back all the weeks gains plus some before resuming it’s upward momentum.
For daily analysis, intraday updates, high risk to reward trade set-ups and real time option entries and exits come join us at SassyOptions.
The Bulls Set for a Further Run Next Week?
Last week here I made the case for the bulls and summed up my post with this
“In sum, the expansion in breadth with price supports further upside over the next few weeks and suggests taking on a buy the dip mentality. However, the current overbought levels and technical resistance may lead to a pullback or sideways consolidation before further upside. A failure to close above 1978 would put into question the current cycle uptrend.”
The lowest close last week was 1979 on Tuesday.
This upcoming week has a similar theme in that the bulls continue to have the edge. Breadth has been keeping pace with price and has yet to show negative divergences consistent with a rally on its last legs. Thus, for short term traders, a buy the dip mentality is still warranted.
Breadth:
SPX stocks at 20-day highs: In an uptrend that has staying power, oversold measures are quickly reversed. That was the case last week when 20-day highs got near 5% and were quickly reversed to close Friday near 50%.
SPX stocks above their 20-day MA: Remarkably this crossed over 90% for the second time in just one weeks time. As I mentioned in last weeks post, although the sample size is small given its rarity, a backtest using index indicators resulted in slightly positive returns five days later. Digging a little deeper into those instances, over the last five years there have been 14 crosses over 90%, most either in 2011 or 2013. Among those 14 occasions, there were two back to back one week apart (similar to now). All four resulted in positive returns five days later. The first in 2011, the market returned 1.12% the 1st week and 3.78% the 2nd (notice below a third thrust just one week after the second resulted in negative results of 2.5% – something to possibly carry forward). The second time was in 2013 in which the market returned 0.86% the 1st and 0.05% the 2nd week. Thus, lower returns next week might give more edge to the Bulls for several weeks rather than an outsized move next week that might be quickly given back.
As you can see above, there are elements of the market being overbought and thus subject to a pullback or sideways consolidation in the coming days. However, until breadth begins to diverge from price it would be rare for a sudden market collapse to occur.
Weekly MACD cross:
Last weekend SPX was on the brink of a weekly MACD cross which was made official early in the week. Looking back to 2005, every single instance of a weekly MACD cross (N = 23) has led to as least one further positive week. The case can be made that the cross was nearly made prior to last week and thus last week already equates to one positive week, but I’m more inclined to think the official cross was last week. Furthermore, for many of the crosses several positive weeks ensued, not just one. Taking a closer look at each individual case, October 2011 might resemble the current situation the closest. First, they are both coming off of a double bottom correction. Second, the slopes of the 50 and 20 week SMA are either flat or down and price right below the 50-week. Third, in both instances stocks above their 50-day MA reached nearly 90%. Fourth, the week it took place coincides with the 2nd weekly cross of over 90% stocks above their 20-day MA (just like now). Finally, both back to back thrusts over 90% in 2011 occurred during the two weeks prior to the third one on OPEX Friday. Recall the 3rd week that had a similar thrust resulted in a following down week. Thus, should the extreme strength continue into next week, there could be a pull back right around the corner.
2011 – present
2005 – 2011
SPY open interest: Currently the largest strikes that stick out are the 195 puts and the 200 calls. Seeing as price closed above the 200 level there is the possibility that it will be pulled back lower. However, should price stay above 200, then those calls could potentially add fuel for an even higher move as those who sold the calls need to buy to cover (or buy to remain neutral). You can read more about that here and here. On the other hand, should price begin to fall below 198, there would likely be at least initial support that begins at the 197 strike. However, if price breaches 197 and doesn’t quickly recover, delta hedging in the other direction can lead to a quick sell off toward 195, which should act as strong support.
SPX levels:
Support levels: 2009, 1996, 1986, 1979, 1962. A close below 1996 and especially 1986 would jeopardize the edge the Bulls currently carry.
Resistance levels: 2039, 2054, 2064, 2074. The latter two, should they take place next week are levels to consider lightening up on longs or shorting.
In sum, current breadth and the weekly MACD cross suggest further upside next week. Given the market is overbought it may pause or slightly pull-back, but the evidence at hand supports buying a dip or consolidation. With that said, a further large move with strong internals next week could be similar to October 2011 in which the market gave back all the weeks gains plus some before resuming it’s upward momentum.
For daily analysis, intraday updates, high risk to reward trade set-ups and real time option entries and exits come join us at SassyOptions.
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