Breakout, Fake-out, or Something Else?

Last week here I wrote that I expected a dip toward the beginning of the week and that it was a buy for a rip into the end of the week. I also stated that I thought come Friday or Monday we would begin to sell off again which would start a larger correction (more than the one or two percent that is a 2015 norm). Regarding last week, I completely nailed it; however, based on how Friday played out I think I need to tweak my expectations a bit about the correction starting imminently.

Overbought/Oversold: Essentially in no-mans land.

SPX stocks at 20-day highs: It is still following the normal 2015 range that rarely exceeds 25%, but does get a bit below 5% (which results in a bounce). Screen Shot 2015-06-20 at 1.14.31 PM

SPX stocks above their 50-day MA: Also back in it’s 2015 range from about 40% to 65% after breaching the 40% mark for the first time since February. Screen Shot 2015-06-20 at 1.17.07 PM

SPY open interest and other stuff: Friday the market did begin to pull-back as I was expecting and I think that there is likely more downside to come next week; however, I did not yet see the evidence I need to think that the dip won’t be bought. Thus, as things stand right now, I believe the uptrend is still intact before a more meaningful drawdown. The open interest itself does not provide strong enough information to the downside that can serve as a pivot point, but I do outline important levels below. To the upside there is clear resistance at the 213 calls. spy

My first bias for next week is continued weakness that began on Friday that resolves into a buyable dip. I had begun to scale into SPY puts late last week and they are currently profitable, but as of now I intend to sell them early next week and possibly flip long. Having been range bound for most of 2015 there exists a plethora of support below, but to simplify it I have outlined three levels below (give or take a few decimal points) to guide my trading.

  • Magnet area = 210/211
  • Support = 207.5’ish (level 2). Also note that 208 also has some put support from the open interest
  • Support = 205’ish (level 1). This also comes with a lot of put support from the open interest.
  • Resistance = 212.50/213 (level 3)

Falling below 210 with no swift recovery and my first aim will be the 207.5/208 level. If SPY gets below 207.5 and does not get bought up, then my next target is 205. Should that occur, I would also be more inclined to think my first inclination from last week was correct and that we are indeed at the start of a more meaningful pull-back (as of right now I would only suggest 4-5%, but would need to see how things unravel).

Screen Shot 2015-06-20 at 1.38.34 PM

Final notes: Last week the market played out exactly how I described. Because next week isn’t as clear cut to me, having a plan and knowing where I am wrong will be key. Above SPY 212 without a dip to at least 210 will have me change my outlook with a target of 213 or a little above (possibly new highs). However, should that occur I would not bet on it sticking unless the high calls on SPY shifted to a different strike (something I monitor all week).

For the bears that were getting excited about a potential for a correction, I am not convinced that one is not near; however as of now I think it has been delayed.

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Good luck!