Going Against the Grain

In case you missed it, I had the privilege of being a guest to Anthony Crudele’s futures radio show. Tune in here.

Last week here I went through reasons why I did not think the lows were in, but highlighted that the market will often rally into and after the FOMC meeting. My thoughts were if we did not move lower prior to FOMC and instead rallied, that new lows would likely come within a few days to a week after. My thoughts have not changed and although we (SassyOptions) played strength last week in some of the momentum stocks, we have also begun scaling into longer term shorts.

Next week is end of the quarter and whether window dressing is a real thing or not, a lot of the stocks that have done well over the quarter have recently been making some large moves and that may continue next week. With that said, I also think there is a high chance the market begins to drop next week and thus, I would be more inclined to be patient or sell into strength. One sign that the market is tiring out is many of the high interest short names have begun squeezing. In some ways the market is doing a great job squeezing every last short out and not a place I want to be heavy long in.

Thus, I am taking a bearish stance here with the knowledge that the market is always right and could absolutely prove me wrong, but in the meantime that is my view.

Breadth: Last week here I wrote that breadth for SPX was at a point that either the market continues lower to put in a bottom or instead a bounce comes to relieve the markets oversold condition. I also showed breadth for the QQQ’s (which had just made a new high) to highlight the divergence with individual QQQ stocks and the index. The market has now relieved itself from being oversold, but thus far the divergence is still there as you will see below.

SPX stocks at 20-day highs: It’s no longer oversold, but it’s going to need more participation for the market to hold its strength and continue higher.screen-shot-2016-09-24-at-11-53-43-am

SPX stocks above their 20-day MA: This may change quickly, but for now individual stocks are not keeping up very well. screen-shot-2016-09-24-at-12-12-35-pm

SPX stocks at 52-week highs: Things that make you go hmmmm. SPX is near all time highs, yet look at individual stocks at 52-week highs. Could it be argued that it’s bullish because once stocks get involved the market has a huge move coming? Yes it can; however, that would be the exception and not typically how things play out.screen-shot-2016-09-24-at-12-13-09-pm

QQQ stocks at 20-day highs: Last week price made an all time high, but as you can see below there is a lot of lag from individual components.screen-shot-2016-09-24-at-12-27-41-pm

QQQ Stocks above their 20-day MA: This was able to improve relatively well. Individual stocks are still lagging, but to take the other side of my bearish stance, if this markedly improves I would have to rethink my bearish position. screen-shot-2016-09-24-at-12-28-27-pm

QQQ 52 week highs minus 52 week lows: While price is making higher highs, 52-week highs minus lows is making lower highs.screen-shot-2016-09-24-at-12-41-17-pm

In 2015 many of the measures above were also diverging from price, however, it took a very long time for price to correct. Thus, it’s possible the market continues to grind along with no real progress. As I stated above, my bias is that we begin moving lower within the next couple of weeks (likely sooner but I can see a scenario where things hold up into quarter end), but will also be keeping an eye on individual stock participation to confirm my stance.

Technical levels of interest: With regard to risk taking, as long as 2150 SPX holds,  patience and or scaling into shorts will be my modus operandi. Below 2150 would better support the bears and then of course a break of 2120 as well.

MACD: Thus far the bearish weekly cross is still there, but perhaps a rally reverses this to a bullish cross next week (?)screen-shot-2016-09-24-at-2-11-42-pm

Open Interest:

SPY-W: Next week is the 4th week of Wednesday expirations. Thus far 3 out of 3 have worked out. The way I define “worked out” is not necessarily closing at the perfect pin, but price closing either below the highest call strike (in the near vicinity) or above the highest put strike from that day’s open interest (not necessarily how it looked at the start of the week).

At this point the best pin would be between 216 and 217.5, but it’s not very prominent yet. The highest calls are at 220 and thus price likely closes below 220 on Wednesday. spyw

SPY-F: Currently the best pin is also between 216 and 217.5 with a lot of put support at 215 and then between 210 and 212. There is call resistance from 220 to 225. Because there is a lot of support at 215, as long as price remains above there, patience or scaling (if you are also bearish) is the best strategy. If price gets below (and importantly) stays below 215 then delta hedging can make for a swift move down to 212 (which again is important support both technically and from the perspective of the high put strike). Below 212 and we likely quickly head to 210 and possibly lower. Recall that delta hedging drops are typically the exception rather than the rule; thus, as a bear I would not become too confident until 215 was breached and price remained below. Also note this is quarterly expiration so there are more open options than on a typical weekly. spyf

In sum, although on the surface the path of least resistance looks higher, underneath the surface is definitely cause for concern. In the end, price is more important because breadth is not a timing tool; however, my stance continues to lean bearish with any further upside being limited before moving lower first. As long as SPX remains above 2150 there is no technical evidence that bears will gain control. A break and hold below 2150 opens to the door to new lows coming. One last thought – trade your own plan or join my service if you are looking for guidance trading both the index and individual high beta stocks. Trying to trade off of my bearish post without knowing at what levels and what options I’m trading with during the week is not recommended. This post is meant as a guide not an exact trading plan. :-).

Good luck!