B-E-F-D Until Bulls Fumble


Last week here I proposed that the chop would likely continue and that any gains that came before better oversold readings would likely not hold. The caveat was if we closed and had follow through over 2084. As you know the premise was wrong and the exception instead came into fruition – which hopefully some of you played. At this point it’s easy to see the path of least resistance is higher, so until bulls fumble, don’t fight it.

Breadth updates: Last week I showed that the certain breadth readings had not yet hit typical oversold readings that lead to a cycle low. Perhaps this time won’t be “typical” – or said another way, maybe this time is different. The bottom line is I don’t know the answer to that. It would be rare and perhaps the market is setting up for a blow off top or is strong enough that the “typical” scenario won’t play out. Or perhaps there is just too many bears that keep shorting and piling into puts to get a formidable bottom. In the end I don’t care and neither should you. The market got out out of the chop zone and put the bulls in charge.

SPX stocks at 20-day highs: Working its way back higher having never hit a washout bottom. Only time will tell if that matters, but price looks strong for now.Screen Shot 2016-05-28 at 1.11.13 PM

SPX stocks at 20-day lows: Getting crushed again with the bulls in charge, but having never reached a washout low. Some may interpret that as a sign of strength and in the bigger picture I would agree; however, I also see this as a caution looking out several weeks. Looking back five years (the longest index indicators tracks it) the longest stretch that 20-day lows stayed below 30% was a little over 4 months. We are currently approaching that four month timeframe. Keep in mind moving above 30% would only mean a minor pullback (unless it got way over 30%), so the caution is more for very short term traders to not get complacent, but to buy the dip. Screen Shot 2016-05-28 at 1.14.20 PM

Overbought: Although I do believe the market will continue higher keep in mind the QQQ closed outside of its Bollinger Band four days in row. Furthermore, three of those days it traded completely outside of its Bollinger Band. I take that as a sign of strength in the bigger picture (looking out the next few months), but also that there might be some sideways chop or a bit of giveback in the next couple of weeks.

SPY Open Interest: Taken at face value the best pin would be between 209 and 210; however, this can easily shift if the strength continues early into next week. The high put strike at 209 and the strong technical support near 208.30 makes any pullback below 209 a good long opportunity next week. spy

SPX technical levels:

Support below 2099: 2093, 2089 and 2084. A close below 2084 with follow through puts the bull case at jeopardy and would threaten much of April and May’s gains.

Resistance above 2099: (we’ll just say 2100): 2103, 2111, 2116, 2126, 2134.

In Sum, the current path of least resistance is higher and pullbacks above 2084 SPX should be bought. Given that all three indices closed outside of their Bollinger Bands on Friday, any further gains early next week could be limited or given back. Most importantly, BTFD is back until bulls fumble.

One final thought: I don’t believe any two time frames will ever be exactly the same, but for those that don’t believe the strength can continue and in a powerful way, I suggest you look at this weekly chart below. I know, I know, earnings, the Fed, blah blah. This is not a suggestion to blindly go long; this is a suggestion to keep an open mind. FullSizeRender

For more analysis set-ups and real time entries and exits come join us. Last week had a total of ten trades. 1 breakeven, 3 losses 4 gains (166%, 111%, 85% & 64% all taking into account scaling) & 2 still open that are in profit . See here for sample weekend posts that get us prepared for the week.