Did Friday’s Reversal Give the All Clear?

Apologies ahead of time, but this post will be brief due to my best friends birthday and Mothers Day.

Last week here I said that if Friday (4/29) was a reversal and the market traded higher, it would likely be given back and that below 2052 opened the door to more selling. I also highlighted support levels that each time were hit held really well (maybe too well). For that reason (and some that I outline below) it’s hard to make the case that the pick up in selling is panicky in nature and would open the flood gates.

I mentioned that under 2052 the next support was 2043 then 2039. It took three tries to get to 2043 after breaking the double bottom low (2045) from both Wednesday and Thursday. Then Friday we bounced right off of it and made one more final low at 2039. Also, except for Tuesday, breadth was never very bad during the selling. Thus, to reiterate, the selling thus far is weak and it’s going to be hard to get the market much lower until that picks up. However, I do believe Tuesday’s down day is a caution sign that this pullback/correction is likely not over.

Some reasons to be bullish:

  1. Reversal off the 50-day on Friday with a close above key support of 2052.
  2. The momentum stocks participated in Friday’s late day rally.
  3. As you will see below under the SPY open interest section, there are lots of puts that start right at that 205 level similar to last week.

Some reasons to suggest Friday’s low was not a swing bottom:

  1. Although the the market got short-term oversold, it never got to levels that would indicate a washout for a swing long to new highs in the current cycle from the February lows. Furthermore, although the put to call ratio ticked higher, it again didn’t get to levels that would be more consistent with a washout.
  2. Financials and healthcare did not participate in Friday’s rally.
  3. SPX is still below its downtrend line.Screen Shot 2016-05-06 at 5.47.57 PM
    4. Purely anecdotal: bottoms are rarely made on a Friday.

Breadth: not yet at oversold levels that are typically consistent with a washout:

SPX stocks at 20-day highs: Getting below 5% and closer to zero is a more consistent bottom signal.Screen Shot 2016-05-07 at 8.09.38 AM

SPX stocks at 20-day lows: Typically a pullback/correction doesn’t bottom until there is a washout in 20-day lows that gets above 50%. Thus far 20-day lows barely reached 20% and not typical of a washout. Perhaps the case can be made that the market is ‘that’ strong, but I would be weary of making that assumption. Screen Shot 2016-05-07 at 8.12.50 AM

SPX total put/call: It has reached levels that marked short term reversals since the February lows, but not levels that typically get the market to new highs. Screen Shot 2016-05-07 at 8.14.12 AM

SPY Open Interest: After seeing all these puts lined up starting with 205 and after Friday’s rally, it it is difficult to make the case for a very bearish scenario in the short term. It also suggests a buy the dip mentality should we breach 205. However, given the caution signs written above, there is also the likelihood that higher highs will not be made and that any future gains from Friday will be given back over the next few weeks. Also, it would be remiss of me not to mention there is more to the story than the first graph below and thus I show two. The first one I narrowed the range to cut off the 212 and 215 strikes because when they are present, they trump every other strike making the puts look negligent. I don’t know if that makes the 205’s and other puts less relevant or not and thus I am presenting both. Interpret as you will. spy


SPX Technical Levels:

Support under 2052: 2045, 2043, 2039, 2033, 2022

Resistance over 2052: 2060, 2065, 2073, 2083, 2095

In sum, consider the path of least resistance higher above 2052 and neutral to bullish over 2039. However, be mindful that without a washout, a swing long to new highs from the February lows doesn’t have the same risk to reward potential as in the case when there is a better bottom. That doesn’t mean we can’t or won’t trade higher next week, but betting on new highs from here is premature. A close above Monday’s high of 2083 would help build the case for new highs.

 For more thorough analysis and updates on all the internals throughout the day come join SassyOptions. Members receive two thorough posts each weekend along with intra-day analysis and real time trade alerts during the week.

Last week we had a total of twelve fully opened and closed trades. Six losses (minimal losses after being stopped out), three breakeven and three wins (105%, 47%, 20%– all taking into account scaling out). Let’s just say it was choppy!

For a sample of last weekends premium SassyOption posts see Open Interest for Expiration 5/06/16 and Set-ups and Game plan for 5/2/16  which I have unlocked.

Gotta run! Happy Mother’s Day!