Last week here I showed how split traders were as to what was next (not surprising), but offered levels to watch to help dictate your week. I said “A gap open over 1865 that is not filled would increase the odds of a continued rally.” That coupled with the SPY open interest having heavy 190 puts increased those odds. The important part to that working out is not that I was “right,” because I had another scenario as well. The important part is that I didn’t have to know what the market would do to put the odds in my favor.
Will the rally continue?
If there is more upside next week it is likely to be limited. The market is still in an intermediate term downtrend and now short term uptrend. There is plenty of backing and filling below that has potential and wouldn’t necessarily be bearish. That doesn’t mean there will be heavy downside and the lows of at 181 will probably not be revisited for at least the remainder of the month if not more. I look at many open interest charts before the start to the week (not just SPY). Based on what I see the most likely scenario is a range bound mostly non-directional week overall (not necessarily lacking volatility intra-week).
Breadth: A good sign that the rally will be sustainable (not necessarily next week but over the next several weeks) is if breadth levels can continue to improve. Below are just a few examples.
- Can SPX stocks above their 10-day moving average remain above roughly 30% on pullbacks?
- Can SPX 52-day highs minus lows continue to improve? Currently it has made a higher low, a positive sign. For now it has stalled. Can a higher high be made next week?
Can SPX 20-day highs minus 20-day lows continue to make higher highs and higher lows? 
Limited upside? Below is the SPY open interest for next week. Typically, this would suggest that if price gets over the 194/195 level and the open interest does not change, it will not be sustainable. That coincides with the technical resistance from the late January early February bounce. 
SPX Levels of importance: With all the gaps from last week there are a lot of levels of support and resistance between 1872 and 1947 (high on February 1st). So to keep it simple, under 1872 gives the edge to the bears. Between 1872 and 1930 is neutral. Over 1930, but really over 1947 gives the edge to the bulls. Having said that, for next week I would’t blindly short under 1872 and buy over 1930. In fact, if internals are neutral or favorable (i.e. advance/decline, up/down volume, TICKS aren’t suggestive of a trending down day at support levels and vise versa at resistance levels) the odds favor buying the dip at support and selling the rip at resistance (especially if they coincide with the open interest SPY levels above). Read that carefully, odds favor they don’t guarantee, which is why watching internals and keeping up to date with open interest changes and breadth are important.
With a week of likely chop, finding where to fade the ranges on individual stocks will likely be the best strategy. To help you find those and for daily analysis and real time options trades come join us at SassyOptions.
Whether a Bull or a Bear, Curb that Enthusiasm Next Week
Last week here I showed how split traders were as to what was next (not surprising), but offered levels to watch to help dictate your week. I said “A gap open over 1865 that is not filled would increase the odds of a continued rally.” That coupled with the SPY open interest having heavy 190 puts increased those odds. The important part to that working out is not that I was “right,” because I had another scenario as well. The important part is that I didn’t have to know what the market would do to put the odds in my favor.
Will the rally continue?
If there is more upside next week it is likely to be limited. The market is still in an intermediate term downtrend and now short term uptrend. There is plenty of backing and filling below that has potential and wouldn’t necessarily be bearish. That doesn’t mean there will be heavy downside and the lows of at 181 will probably not be revisited for at least the remainder of the month if not more. I look at many open interest charts before the start to the week (not just SPY). Based on what I see the most likely scenario is a range bound mostly non-directional week overall (not necessarily lacking volatility intra-week).
Breadth: A good sign that the rally will be sustainable (not necessarily next week but over the next several weeks) is if breadth levels can continue to improve. Below are just a few examples.
Can SPX 20-day highs minus 20-day lows continue to make higher highs and higher lows?
Limited upside? Below is the SPY open interest for next week. Typically, this would suggest that if price gets over the 194/195 level and the open interest does not change, it will not be sustainable. That coincides with the technical resistance from the late January early February bounce.
SPX Levels of importance: With all the gaps from last week there are a lot of levels of support and resistance between 1872 and 1947 (high on February 1st). So to keep it simple, under 1872 gives the edge to the bears. Between 1872 and 1930 is neutral. Over 1930, but really over 1947 gives the edge to the bulls. Having said that, for next week I would’t blindly short under 1872 and buy over 1930. In fact, if internals are neutral or favorable (i.e. advance/decline, up/down volume, TICKS aren’t suggestive of a trending down day at support levels and vise versa at resistance levels) the odds favor buying the dip at support and selling the rip at resistance (especially if they coincide with the open interest SPY levels above). Read that carefully, odds favor they don’t guarantee, which is why watching internals and keeping up to date with open interest changes and breadth are important.
With a week of likely chop, finding where to fade the ranges on individual stocks will likely be the best strategy. To help you find those and for daily analysis and real time options trades come join us at SassyOptions.
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