Last week here I showed why bulls were in charge and described that there could be a pullback in the short term (that should be bought), but that if price got over SPY 197 then shorting should be avoided and price would likely see 200 very quickly. The exception ended up the rule last week.
Breadth supports the bulls: As quick as the move has been and as overbought as the market may be, as of the close Friday, the bulls maintain the ball in their court. I mentioned last week that until price begins to diverge from breadth, the environment favors the bulls. Thus far, there has not been any meaningful divergences and thus, for the time being, pullbacks (if the market provides any) should be bought.
SPX stocks making 20-day highs: 20-day highs held up at very high levels all week supporting the rise in price. It would be normal to see it pullback over the next few days, but remaining above 20 would continue to speak to the strength of this current cycle. 
SPX stocks above their 20-day MA: It is very rare to see over 90% of stocks above their 20-day MA. In fact over the last five years (according to index indicators) it has only occurred on 13 independent occasions. After backtesting what happened five days later, price on average ended positive, but up very marginally (0.09%). The highest average return over the five days was 0.56%, while the lowest average return was -1.25% at the end of the fifth day. This supports the notion that a pullback next week is probable, but that it presents a buying opportunity.
SPX new highs minus new lows: Thus far this is one of the few measures showing a very slight negative divergence and should be monitored upon any further strength next week. 
SPY open interest: Taken at face value this would suggest an overall bearish week in which price closes below 196 by Friday. Having said that, as far as I can tell these are calls that were sold originally three weeks ago, rolled into last week, and then rolled again into next week. Thus, so far the seller has been wrong and at this point I would not consider this open interest informative unless price fell below 197.50 in which I would then only begin to take it into consideration (if it has not yet changed). The breakout level I mentioned last week is near 197, thus a close below there next week would bring into question the possibility of a false breakout. However, as stated above, the lack of divergence in breadth is more suggestive of further upside in the next few weeks.
SPX levels of importance:
- Support at 1978, 1961 and 1950. Falling below 1978 without a quick recovery would put into question further upside. It also provides a good place to buy the dip (at least for a bounce).
- Resistance at 2009, 2020 and 2038-2043. The latter level represents a gap as well as the downtrend line that starts from the high after the August correction.
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.
With many stocks extended and a high probability of minor pullbacks and/or sideways consolidation, honing in on only the very best risk to reward set-ups is recommended. If you are interested in the set-ups we are concentrating on at SassyOptions as well as receiving intraday commentary and real time trades come join us.
What are Market Internals Hinting at?
Last week here I showed why bulls were in charge and described that there could be a pullback in the short term (that should be bought), but that if price got over SPY 197 then shorting should be avoided and price would likely see 200 very quickly. The exception ended up the rule last week.
Breadth supports the bulls: As quick as the move has been and as overbought as the market may be, as of the close Friday, the bulls maintain the ball in their court. I mentioned last week that until price begins to diverge from breadth, the environment favors the bulls. Thus far, there has not been any meaningful divergences and thus, for the time being, pullbacks (if the market provides any) should be bought.
SPX stocks making 20-day highs: 20-day highs held up at very high levels all week supporting the rise in price. It would be normal to see it pullback over the next few days, but remaining above 20 would continue to speak to the strength of this current cycle.
SPX stocks above their 20-day MA: It is very rare to see over 90% of stocks above their 20-day MA. In fact over the last five years (according to index indicators) it has only occurred on 13 independent occasions. After backtesting what happened five days later, price on average ended positive, but up very marginally (0.09%). The highest average return over the five days was 0.56%, while the lowest average return was -1.25% at the end of the fifth day. This supports the notion that a pullback next week is probable, but that it presents a buying opportunity.
SPX new highs minus new lows: Thus far this is one of the few measures showing a very slight negative divergence and should be monitored upon any further strength next week.
SPY open interest: Taken at face value this would suggest an overall bearish week in which price closes below 196 by Friday. Having said that, as far as I can tell these are calls that were sold originally three weeks ago, rolled into last week, and then rolled again into next week. Thus, so far the seller has been wrong and at this point I would not consider this open interest informative unless price fell below 197.50 in which I would then only begin to take it into consideration (if it has not yet changed). The breakout level I mentioned last week is near 197, thus a close below there next week would bring into question the possibility of a false breakout. However, as stated above, the lack of divergence in breadth is more suggestive of further upside in the next few weeks.
SPX levels of importance:
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.
With many stocks extended and a high probability of minor pullbacks and/or sideways consolidation, honing in on only the very best risk to reward set-ups is recommended. If you are interested in the set-ups we are concentrating on at SassyOptions as well as receiving intraday commentary and real time trades come join us.
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