Bear Bear Go Away, Come Again Another Day?

Last week here I stated that the SPY open interest suggested “that the market will be rangebound next week, with very little room to move higher, but room to give back some of last weeks gains.” I also thought that shallow dips would be bought, but laid out a game plan in case that failed to work. The market did stay in a narrow range until Thursday when my game plan came into play, namely that below 211 would likely lead price to 209 and below there, price would likely see the highest puts near 207.

Last week I also stated that I was still not convinced that the lows for the year were in and after last week am more convinced that they are not. Having said that, I do think the market will bounce first before moving lower.


SPX stocks at 20-day highs: After reaching 2015 style* overbought readings a week ago price did indeed head right back down and is now near (but not quite there yet) oversold readings that typically lead to a bounce.Screen Shot 2015-07-25 at 12.26.36 PM

SPX stocks at 20-day lows: The selling last week has led 20-day lows to 2015 style oversold readings, but notice that they have been expanding more frequently and reacher higher percentages before bounces occur. This is often a pre-curser to a deeper price drop.Screen Shot 2015-07-25 at 12.32.43 PMSPX stocks above their 50-day MA: This has also reached 2015 style oversold readings, but again notice that bounces are coming at deeper oversold readings than typical of this year and making lower highs on each bounce. This is often indicative of new lows and a deeper correction looming.Screen Shot 2015-07-25 at 12.39.14 PM

*2015 style refers to the tight range of overbought/oversold readings that have led to bounces or pullbacks this year as opposed to previous years that saw much larger ranges before reaching overbought or oversold.

SPY open interest and levels: Typically, taking next weeks open interest at face value would suggest the risk/reward favors the bulls next week. The caveat to next week is price closed Friday in the middle of all those high put strikes (closing price = 208). That is very atypical and leaves a much more murky picture of what to expect next week. Price would need to either gap over those put strikes to open near 210/211 or quickly recover off Monday’s opening to avoid being at risk of dropping further (and possibly with speed) due to delta hedgingspy

Based on being near to oversold readings and all the put strikes stacked up, I believe there will be a bounce next week. What I am more ambivalent about is when and at what price that bounce will come.

  • If SPY opens over 209 on Monday or can quickly get above there, then my bias will be to the upside and think 211 or higher would be a first target. Call resistance doesn’t come in till 214.
  • If price opens below 209 or falls through 209 on Monday, I am more inclined to think we revisit 207 and possibly 205 where I would then need to re-evaluate. Below 205 and my idea that the market will reach new lows (and finally lead to a washout) becomes forefront with targets at 202, 200, and possibly 198.

Much of next week is going to depend on if and how quickly price can recover. Failure to snap back over all those puts leaves price much more vulnerable to a sell-off and thus checking open interest changes during the week will be of significance. SPY is more vulnerable to large moves when price is in between a row of large open interest strikes that are all call or put strikes as opposed to within a range of high strikes that are more separated (which in next weeks case is currently from 211 to 214).  To get further analysis as this develops and see how I am going to play it join my premium service where I give actionable trades and analysis daily.

Good Luck next week!