If you missed my Benzinga radio interview, check it out here.
Last week here my bias was more bearish; however, I clearly stated that if we got above SPY 207 then the downside would likely be limited. My caution to be ready for multiple scenarios was even quoted in MarketWatch Monday morning. That information proved to be invaluable due to how fast we got above that level on Monday as it allowed me to quickly switch from looking for a washout to bullish. On Thursday in my premium service, having a bullish mindset, I was also able to anticipate a rally as you can see below. 
Where are we now? If you are a regular reader then you know I like to look at oversold and overbought conditions just to gauge turning points. As of now the rally still has legs as we are not at all overbought.
SPX stocks at 20-day highs: 
SPX stocks above their 20-day moving average: 
Having said that, the market hasn’t given us many turning point signals since the start of the year and trusting any rally or breakdown has become increasingly challenging.
Next weeks trading plan: Below are a few important points to help guide your trading next week as well as levels to be aware of.
1. The bulls are in control and it looks like we are ready to breakout as you can see below. After months of chop and ratcheting down of earnings expectations, upside earning surprises could give the bulls the catalyst they need to finally take the market higher. Of course that could easily go the other way, but knowing the longer term trend is still intact and the short term trend is higher, going with the path of least resistance seems logical. 
2. Watch for the beginning of the weak to be choppy to down. The VIX expires once a month on Wednesday and as I said last month, I have been gauging the open interest for a little over six months now (so the data is still relatively new). Thus far, the open interest has been a good gauge as to what level the VIX may close near on Wednesday morning. That level would be around 15 or 16. The VIX closed at 12.58 Friday and right on its lower bolinger band, a place where it tends to reverse. Given that information, there is a good chance that we see the VIX creep higher or spike up sometime between Monday and Tuesday (thus be weary of any market rally early in the week). It’s possible the market holds its own with a VIX rise, but even if the market doesn’t go much lower it likely would lead to chop. If the market does drop on a rise in the VIX, then watch for support levels (outlined below) to hold and for a good risk/reward long entry.
3. SPY closed right where the highest calls and puts culminate. Thus 210 will be an important level next week. If we open below 210 or fall below it during the week there is technical support at the 209 area and then 207 (the later of which I outlined was a key area for the last two weeks). Below 207 and there is heavy put support at 206.
If we open below 210 it will likely be difficult to get and remain over that level (at the start of the week) if we were to assume the VIX is to rise. Over 210 and there is a confluence of technical resistance between 211 and 212, but over 212.24 and there is clear skies till the high open interest calls at 215 (albeit the random SPY spike on 12/18/14 at 212.97). 
Bottom line: Based on the evidence I presented above, there is a likelihood we see a choppy to weak environment at the start of the week that will present a buying opportunity for the shorter, intermediate and longer term bullish trend to continue. If that scenario should not play out, I have outlined levels to be aware of to help guide your trading week.
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 This Breakout Be For Real?
If you missed my Benzinga radio interview, check it out here.
Last week here my bias was more bearish; however, I clearly stated that if we got above SPY 207 then the downside would likely be limited. My caution to be ready for multiple scenarios was even quoted in MarketWatch Monday morning. That information proved to be invaluable due to how fast we got above that level on Monday as it allowed me to quickly switch from looking for a washout to bullish. On Thursday in my premium service, having a bullish mindset, I was also able to anticipate a rally as you can see below.
Where are we now? If you are a regular reader then you know I like to look at oversold and overbought conditions just to gauge turning points. As of now the rally still has legs as we are not at all overbought.
SPX stocks at 20-day highs:
SPX stocks above their 20-day moving average:
Having said that, the market hasn’t given us many turning point signals since the start of the year and trusting any rally or breakdown has become increasingly challenging.
Next weeks trading plan: Below are a few important points to help guide your trading next week as well as levels to be aware of.
1. The bulls are in control and it looks like we are ready to breakout as you can see below. After months of chop and ratcheting down of earnings expectations, upside earning surprises could give the bulls the catalyst they need to finally take the market higher. Of course that could easily go the other way, but knowing the longer term trend is still intact and the short term trend is higher, going with the path of least resistance seems logical.
2. Watch for the beginning of the weak to be choppy to down. The VIX expires once a month on Wednesday and as I said last month, I have been gauging the open interest for a little over six months now (so the data is still relatively new). Thus far, the open interest has been a good gauge as to what level the VIX may close near on Wednesday morning. That level would be around 15 or 16. The VIX closed at 12.58 Friday and right on its lower bolinger band, a place where it tends to reverse. Given that information, there is a good chance that we see the VIX creep higher or spike up sometime between Monday and Tuesday (thus be weary of any market rally early in the week). It’s possible the market holds its own with a VIX rise, but even if the market doesn’t go much lower it likely would lead to chop. If the market does drop on a rise in the VIX, then watch for support levels (outlined below) to hold and for a good risk/reward long entry.
3. SPY closed right where the highest calls and puts culminate. Thus 210 will be an important level next week. If we open below 210 or fall below it during the week there is technical support at the 209 area and then 207 (the later of which I outlined was a key area for the last two weeks). Below 207 and there is heavy put support at 206.
If we open below 210 it will likely be difficult to get and remain over that level (at the start of the week) if we were to assume the VIX is to rise. Over 210 and there is a confluence of technical resistance between 211 and 212, but over 212.24 and there is clear skies till the high open interest calls at 215 (albeit the random SPY spike on 12/18/14 at 212.97).
Bottom line: Based on the evidence I presented above, there is a likelihood we see a choppy to weak environment at the start of the week that will present a buying opportunity for the shorter, intermediate and longer term bullish trend to continue. If that scenario should not play out, I have outlined levels to be aware of to help guide your trading week.
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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