Breakout or Fake-out, Again?

Last week here, I candidly admitted that I had no real bias coming into the week. That changed Tuesday morning at around 10:30, right about the time the market rallied higher never to look back. I even sent out a tweet right before the rally began to highlight what I was seeing. Screen Shot 2015-05-16 at 2.21.17 PM


Overbought/Oversold: I typically use these measures to find bottoms and tops. We have had short term bottom and tops, but none that have been extreme enough to signal a larger trend change (hence the range bound environment of 2015).

SPX stocks at 20-day highs: On Thursday we got to the highest level since early March (about 25%), which is still considered meager, but higher than anything since pulling back from the February rally. When we got there on March 2nd SPX precipitously dropped 3.7%. There are a couple differences from that high to the most recent. The first is we had just come from a higher breadth reading of a little over 40% making 20-day highs. The second is that SPX failed to go higher the next day as the ‘mildly overbought breadth’ backed off (seen in context of 2015 type breadth) . Last Friday, as the mildly overbought breadth reading pulled back, SPX did not. That is typically seen as bearish since we made a higher high with less stocks making 20-day highs; however, I caution jumping to that conclusion until we see how 20-day highs look on any further gains next week. Screen Shot 2015-05-16 at 3.24.05 PM

Stocks above their 50-day moving average: For months stocks above their 50-day moving average have been waning, hence not supportive of any higher market movement (or seen as a divergent to price moving higher). That changed on Thursday and while I think it’s premature to make much of this, breadth has finally broken the trend of moving lower while price moves higher.Screen Shot 2015-05-16 at 3.15.36 PM

Open Interest on SPY: The open interest below has typically resulted in a pullback rather than a rally. There isn’t much put support albeit the small amount at the 210/211 area, which is also the area we broke out from last week. On the other hand, the only call resistance is seen way above at 215. From my experience, if we don’t go higher early in the week then price has very little chance of ever visiting the high calls on this type of open interest UNLESS the open interest shifts and many more puts are added during the week. If we do move higher early in the week then it likely isn’t prudent to fight it until you see evidence of a trend shift (extreme high ticks, a topping candle, etc) or we hit the 215 level (where all the calls are). If the market shoots higher right out of the gate and gets close to or hits that 215 area then it would likely signal a capitulation by the bears and an opportunity to go short. spy

For several weeks I have used 210 as a pivot. For next week SPY 211/212 is the first area that becomes an important hold for the bulls. Anything below 211 threatens to put the market back in the box, where SPY has spent its predominant amount of time since March (or even mid- February).Screen Shot 2015-05-16 at 3.47.32 PM

So which way are we going next week Sassy? Good question. Last week as I said I was completely neutral. This week doesn’t provide me with much more edge; however I am slightly biased bullish (a close below 211 would have me question my bias). Because we have yet to have any extreme market washout, any further rallies I will continue to be skeptic of (which also means trading lighter and ready to bail at a moments notice). However, if the market continues higher and there is follow thru on the recent higher breadth readings then I will become a more confident bull despite the rally not coming from typical oversold readings. The extreme oversold readings followed by a rally (and often a V-shape rally) have conditioned technicians that rally’s without that are subject to giving back gains. Perhaps there is a new normal in town. I don’t know, but I would be remiss if I didn’t at least keep my mind open to that.

For next week I believe the strongest sector will be the QQQ’s, followed by SPY, and the weakest being the IWM.

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.