Mayday! Mayday! Or Just May?

Last week here, I discussed the bulls having the edge, but that any edge they had would likely be limited and possibly given back at the end of the week (I mentioned to look for clues in the SPY open interest). I also mentioned possible rotation into the QQQ’s. I was right about the former and very wrong about the latter. One other important point that will be carried forward into next week is that for the short term bullish trend to remain intact SPX should close above 2053 and 2020 for the intermediate term. SPX made a double bottom at 2052 and change Friday, but was able to hold the line into the close.

As of the close Friday, there was a hammer (or reversal) candlestick, however, it’s not a reversal candle unless it’s confirmed next week with follow through to the upside. Regardless if it’s confirmed or not, there has definitely been damage to the short term bullish case that likely will take more time and further lows before it’s resolved.

Breadth Update:

SPX stocks at 20-day highs: For several weeks this has been diverging from price and finally price began to catch up a bit. Once the market finally begins to pull-back in what has been a very strong bullish run, this is usually helpful to watch for oversold signs. It’s very close now, but getting below five percent and closer to zero is a much stronger signal.Screen Shot 2016-04-30 at 3.00.37 PM

SPX stocks at 20-day lows: A few weeks ago I mentioned that we had seen our first uptick in this breadth measure and that tends to lead to a few more weeks of gains as the upticks come more frequently and with higher highs. Of course it’s not something that can be timed precisely, but knowing where price is in the cycle is helpful in having realistic expectations of how much further the market can go. At this point lows still haven’t picked up in a meaningful way, and this pullback (whether it be through price alone or time and price) is likely not over until more damage is done with higher upticks in new 20-day lows.Screen Shot 2016-04-30 at 3.02.26 PM

Total put/call ratio: This is currently at the higher end of the range since the lows made in February. Now that the current market cycle is showing signs of weakness, it would be better to see more elevated levels of puts to calls before expecting the market to go too much higher.Screen Shot 2016-04-30 at 3.03.13 PM

Thus, although there was a potential reversal candlestick on Friday that may lead to gains next week, keep expectations in line with the above information. Most likely any further gains next week will be limited and/or given back until there is more of a washout in price, breadth, and sentiment.

SPY Open Interest: At this point the range is 205 to 212. The low on Friday was 205.03 and thus a breach of that would not only cancel out the reversal candle, but it would likely breach the 205 puts that could lead to a sharp and quick sell off due to delta hedging and the puts lined up at 204 and 203. There aren’t many high call strikes yet except for 212 so in terms of just open interest there isn’t much resistance. At this point (very subject to change throughout the week) the best SPY pin is between 208 and 209.spy

SPX Technical Levels:

Above Friday’s close (2065) resistance levels: 2074, 2083, 2093/2095, 2100, 2104, 2111

Below Friday’s close support levels are: 2052, 2043, 2039, 2033, 2020. A close below 2020 would very much hurt the bullish case on an intermediate bases.

In sum: There was a potential reversal candle on Friday that needs to be confirmed next week. Should prices continue to move above 2065 there are high odds that gains will be limited or given back in the next couple of weeks and thus enthusiasm on the long side should be curbed. Below 2052 opens the door to the next major support level of 2020, but likely not in a straight line. Thus swing trading should take a back seat under 2052 as there will likely be tight and choppy range movement. A cleaner washout of breadth and sentiment would give bulls a better signal for swing trading.

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 eleven fully opened and closed trades. Six losses (mostly stopped out early on), one breakeven and  four wins (485%, 60%, 43%, 29%)– all taking into account scaling out). For a sample of last weeks weekend posts see Open Interest for Expiration 4/29/16 and Set-ups and Game plan for 4/25/16  which I have unlocked.

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