Last week here I gave a few scenarios for next week with levels on SPY to guide you. Specifically, I said that if we gap higher or get above 208 then as long as that held, the bias was bullish. I also stated that,
“Once again, the market is in a similar predicament in which lower seems like the path of least resistance and that further downside would present a much needed washout. Unless the trend is ready to break, this could be a similar set up to the week starting April 6th and ending April 10th in which any early weakness is a buying opportunity back to the top of the range.”
We didn’t get much early weakness, but once we were above the main support area of 208 that I wrote about, the odds were we would head back to the top of the range. In this case we even broke through that range. Furthermore, every morning last week I updated the SPY open interest with the new level of support. Not ever breaking those levels was key to knowing we were going higher.
Overbought/Oversold: As usual I like to take a look at certain breadth levels to determine turning points. Last week I said that we were at levels that typically lead to a bounce, which is what happened. However, because we bounced from levels that were not at extreme oversold levels the likelihood of the bounce being sustained is slight. Hence, odds suggest that we will have some give-back before reaching major overbought levels.
SPX stocks at 20-day highs: No-mans-land. Certainly the market is not overbought. This can be viewed from two different perspectives. 1) The internals aren’t supporting price and price will likely correct. 2) There is more room to the upside while internal strength catches up to price. There perhaps is a third perspective, in which we remain choppy and both price and internals remain inconsistent with each other. Since I use breadth to gauge turning points, I personally can’t conclude much from this information.
SPX stocks making 20-day lows: This is fairly consistent with new highs, but not in any extreme overbought location.
SPX stocks above their 50-day MA: Again, this does not suggest the internals are matching price and there are several ways of interpreting that information. My choice is to accept that information as not useful without further evidence. 
Hence, the measures of breadth I look at currently suggest a neutral environment and no major turning point.
Road map for next week: In order to survive this choppy range bound environment, I have been continually offering several scenarios and levels of importance to help guide the trading week. If you are a regular follower you have seen that thus far the levels I have posted have in fact been very telling about the short term trend, but definitely require an open mind and flexibility.
If this were 2013/2014 then I would be writing about how all time highs is bullish. In this current market environment I find it hard to be bullish at the top of a range that continues to fail, but I am also not seeing evidence suggesting a bearish environment. Since breadth isn’t offering me a bias and new highs is typically bullish, but not in 2015, there isn’t much there for me to go by – so for now I will default toward this weeks SPY open interest.
SPY open interest: Right off the bat this tells me that any gains next week will be limited. In fact, typically when I see open interest that is this bullish biased, SPY rarely even reaches the high end of the calls (meaning the likelihood of reaching 215 is slight). With major earnings continuing next week, particularly AAPL (a large component of SPY) things can change drastically after Monday, but until then my bias is that any early strength will not be sustained. That would also align with the market giving back recent gains to either remain in a small choppy range or test the bottom of the larger range and continuing the 2015 theme. 
Potential scenarios:
- Opening over Friday’s high and particularly getting over SPY 212 gives a bullish bias with little resistance except all time highs of 212.24 (the 212.97 ghost print) and 215, where there are a large amount of open calls. Because we have been in a range for so long there are many support levels below (that I discussed the last few weeks), but the main heavy support levels will be 212, 211, 207 and 205.
- Opening between 211 and 212 will be the most murky open as there is little evidence to suggest anything but chop until 211 or 212 breaks.
- Opening under 211 and not being able to get above would give the benefit of the doubt to going lower and once again testing levels within the range and possibly the bottom of the range (SPY 207 or 205). On a purely anecdotal note, I have noticed that when seeing the open interest look the way it currently does, it often has led to a quick and fairly deep sell off at some point during the week.
Of note, the QQQ is exhibiting a good deal of strength and it’s worth watching as a possible predictor of what is to come. If its strength continues, which could be further boosted by AAPL, then SPY will likely have a bullish bias even if it remains in chop. However, upon weakness, especially if it fails to hold over 109, could be a heads up to a decent short set-up. 
Finally, if we remain over SPY 212 by Wednesday morning and the open interest has not changed or more calls were added at lower levels (I will update major open interest changes on TWTR) then I would be inclined to believe the FOMC might be a catalyst for a sell off.
Be flexible with your opinion. This is not the time to be a hero with a major bias.
Good Luck next week. If you are looking for specific option or stock trade ideas (short and long term), daily market commentary, and open interest analysis on momentum stocks consider a subscription.
Will Bulls Go For Gold or Pass the Baton to Bears?
Last week here I gave a few scenarios for next week with levels on SPY to guide you. Specifically, I said that if we gap higher or get above 208 then as long as that held, the bias was bullish. I also stated that,
“Once again, the market is in a similar predicament in which lower seems like the path of least resistance and that further downside would present a much needed washout. Unless the trend is ready to break, this could be a similar set up to the week starting April 6th and ending April 10th in which any early weakness is a buying opportunity back to the top of the range.”
We didn’t get much early weakness, but once we were above the main support area of 208 that I wrote about, the odds were we would head back to the top of the range. In this case we even broke through that range. Furthermore, every morning last week I updated the SPY open interest with the new level of support. Not ever breaking those levels was key to knowing we were going higher.
Overbought/Oversold: As usual I like to take a look at certain breadth levels to determine turning points. Last week I said that we were at levels that typically lead to a bounce, which is what happened. However, because we bounced from levels that were not at extreme oversold levels the likelihood of the bounce being sustained is slight. Hence, odds suggest that we will have some give-back before reaching major overbought levels.
SPX stocks at 20-day highs: No-mans-land. Certainly the market is not overbought. This can be viewed from two different perspectives. 1) The internals aren’t supporting price and price will likely correct. 2) There is more room to the upside while internal strength catches up to price. There perhaps is a third perspective, in which we remain choppy and both price and internals remain inconsistent with each other. Since I use breadth to gauge turning points, I personally can’t conclude much from this information.
SPX stocks making 20-day lows: This is fairly consistent with new highs, but not in any extreme overbought location.
SPX stocks above their 50-day MA: Again, this does not suggest the internals are matching price and there are several ways of interpreting that information. My choice is to accept that information as not useful without further evidence.
Hence, the measures of breadth I look at currently suggest a neutral environment and no major turning point.
Road map for next week: In order to survive this choppy range bound environment, I have been continually offering several scenarios and levels of importance to help guide the trading week. If you are a regular follower you have seen that thus far the levels I have posted have in fact been very telling about the short term trend, but definitely require an open mind and flexibility.
If this were 2013/2014 then I would be writing about how all time highs is bullish. In this current market environment I find it hard to be bullish at the top of a range that continues to fail, but I am also not seeing evidence suggesting a bearish environment. Since breadth isn’t offering me a bias and new highs is typically bullish, but not in 2015, there isn’t much there for me to go by – so for now I will default toward this weeks SPY open interest.
SPY open interest: Right off the bat this tells me that any gains next week will be limited. In fact, typically when I see open interest that is this bullish biased, SPY rarely even reaches the high end of the calls (meaning the likelihood of reaching 215 is slight). With major earnings continuing next week, particularly AAPL (a large component of SPY) things can change drastically after Monday, but until then my bias is that any early strength will not be sustained. That would also align with the market giving back recent gains to either remain in a small choppy range or test the bottom of the larger range and continuing the 2015 theme.
Potential scenarios:
Of note, the QQQ is exhibiting a good deal of strength and it’s worth watching as a possible predictor of what is to come. If its strength continues, which could be further boosted by AAPL, then SPY will likely have a bullish bias even if it remains in chop. However, upon weakness, especially if it fails to hold over 109, could be a heads up to a decent short set-up.
Finally, if we remain over SPY 212 by Wednesday morning and the open interest has not changed or more calls were added at lower levels (I will update major open interest changes on TWTR) then I would be inclined to believe the FOMC might be a catalyst for a sell off.
Be flexible with your opinion. This is not the time to be a hero with a major bias.
Good Luck next week. If you are looking for specific option or stock trade ideas (short and long term), daily market commentary, and open interest analysis on momentum stocks consider a subscription.
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