What Goes Up Must Come Down – So Opposite True Right?

Last week here I wrote “Taking the open interest at face value first suggests that price will continue to gravitate to the 210/211 level and second, suggests a more neutral to bearish week is upon us.” I also outlined several thorough scenarios of what to expect based on where price goes and if you go back and read it you will see it was pretty accurate. I’m not saying it was easy to trade, but it was a very useful guide if you followed it.

Then on Thursday morning before the open and before SPY fell over one percent, I sent out this tweet: Screen Shot 2015-08-07 at 12.41.47 PM

If you are a regular reader I have been saying for weeks that I don’t think the low is in for any sustained rally into the end of the year; however, that hasn’t prevented me from writing about potential bullish upcoming weeks. This holds true for next week as I am still not convinced the market has bottomed, but overall my main bias for next week leans bullish.

Overbought/Oversold: As a reminder I typically use these to help determine turning points and post them weekly to help gauge if a turning point is near. As of now they aren’t offering many clues toward next week; however, it is worth noting that price has moved lower and these breadth measures have not which indicates potential positive divergence. That alone would not sway me to be more bullish or bearish, but taken into context with other measures it can be helpful confirmation.

SPX stocks at 20-day highs: Inching toward levels that have led to a market bounce this year. The range has gotten tighter in the last couple weeks and where it sits now isn’t offering many clues.Screen Shot 2015-08-08 at 1.00.01 PM

SPX stocks at 20-day lows: Also not very helpful as it doesn’t demonstrate being overbought or oversold.Screen Shot 2015-08-08 at 1.00.17 PM

SPX stocks above their 50-day MA: Just like the market, it’s staying in a tight range.Screen Shot 2015-08-08 at 1.00.44 PM

SPY open interest and levels: Speaking strictly about the open interest suggests a bullish bias next week which is why I started a position in SPY call options on Friday right before the bounce when price was below 207. As you can see below there is a good deal of puts from 210 all the way to 204, with the most prominent strikes at 210 and 205. Due to the open calls and puts at 208, as well as  it being a significant technical level and Friday’s close, it should be deemed as a valuable pivot point next week. Given the high strike puts at 210, historical precedence suggests high odds that price gets there at least once next week and possibly closes above it depending on how the open interest changes throughout the week. Having said that, if price falls early in the week, those puts may close down leaving the odds much less likely. Below is a small guide to next weeks trading. As always it’s important to gauge the changes in the open interest throughout the week because they can change things and often give major clues (as you can tell from the above tweet). I sometimes post the changes on twitter and stocktwits, but for guaranteed daily updates and analysis come join my premium service.spy

Here is a guide for SPY next week:

  • SPY below 208 and not able to get above it – First support will be Friday’s low of 206.87. Below there and good chance 205’ish gets tested. That level has a lot of technical support as well as put support and a good place to buy the dip.
  • SPY above 208  – Very good chance price finds its way back to 210. If it can hold above 210 then it has plenty of room higher with no call resistance till 214 (although has lots of technical resistance on the way). If 210 cannot hold or price can’t get there, expect it to fall back toward 208.

In sum, if price stays above 208 at the start of the week, I expect 210 to be reached and possibly higher. If price stays below 208 early in the week, my expectations for a bounce will become dependent on how and if the open interest changes, but will consider 207 and 205 as definite possibilities.

Good Luck next week. For daily updates and analysis, real-time option trades of individual stocks and ETF’s consider subscribing here.