New Month! New Quarter! New Range?

If you missed my interview with the Futures Radio Show, please check it out here, where Anthony and I discuss options, psychology, and current markets. 

Last week here I discussed a more bearish thesis looking out a couple weeks with the idea to sell into rips. I also pointed out that due to the end of the quarter and the large puts at SPY 215 the market had a decent chance of holding up. When all was said and done SPX did spend most of the week lower and selling the rip worked; however, so did buying the dip. When the market closed Friday it closed right at the prefect pin. screen-shot-2016-09-30-at-4-06-09-pm

I’m sure many of you are wondering if I am still leaning bearish. The answer is yes, but with a bit more of an open mind to the bullish side due to the improvement of breadth. I think keeping a close eye on breadth will help to confirm my views or push me into the other direction. With that said, I also want to suggest that is is possible the market continues to remain rangebound until the election is over. If that is the case we unfortunately will only know in hindsight, but it doesn’t hurt to have that idea in mind if the last couple weeks is a barometer of things to come. Although the market has been rangebound, intra-day volatility in the market and individual stocks has picked up and can provide lots of opportunities if that should continue.

Breadth: With the market remaining rangebound there has been some improvements under the surface that have my attention.  The improvements are not enough to change my current perspective yet, but continued improvement does have the potential to detour me back to the bull side.

SPX stocks at 20-day highs: thus far this is uninspiring, but it’s also a very sensitive measure that can easily change on a large rally day with a lot of individual participation.screen-shot-2016-10-01-at-11-27-09-am

SPX stocks above their 20-day MA: There has been steady improvement here worthy of attention. Should the market resume higher along with this measure it would give credence to the bullish case.screen-shot-2016-10-01-at-11-27-53-am

SPX stocks above their 50-day MA: This is a bit slower, but also with some improvement that should be watched for continuation or failure.screen-shot-2016-10-01-at-11-28-52-am

SPX stocks at 52-week highs: This is still a bit of a lagger considering SPX is fairly close to all time highs. Any future rallies in the SPX will want to see this expand or gains will likely be given back.screen-shot-2016-10-01-at-11-29-27-am

QQQ stocks above their 20-day MA: Again, the improvement is good. Further rallies will need to continue to see further expansion.screen-shot-2016-10-01-at-11-30-03-am

QQQ stocks at 52-week highs: Similar comments to SPX 52-week highs in that they are lagging based on how close the QQQ’s are to highs. This will also need to see improvement on future rallies.screen-shot-2016-10-01-at-11-30-52-am

Regarding the above breadth:

  1. Next week is the start of Q4 which is often met with investor fund flows. Be mindful that a lot of buying early next week could be money that has to be put to work. That doesn’t mean that a rally early in the week is going to fail, but it’s probably not the same as a rally mid quarter and mid month.
  2. The breadth can also be used in another way than described above. Should price move lower, but the above measures hang tight, it would demonstrate positive divergence worthy of attention.

After the Fed: This chart was posted about a week ago from Urban Carmel. He wrote: “SPX up >1% on FOMC. Here are the last 10 instances and retracement percent from the close over next few wks.” As you can see below, the retracement doesn’t always start immediately, but the lowest retracement is 1.8% (and that was the rarity). The lowest we went last week was only 1% from the Fed day close. Thus, either this will end up being the lowest retracement after a >1% Fed day or there is still lower to go. screen-shot-2016-09-22-at-10-15-37-am

Open Interest:

SPY-Wednesday: It has now pinned 4 out of 4 times (I define pin as expiring between the highest call (or cluster of calls) and highest put strikes. Taken at face value Wednesdays expiration suggests a close over 214 and under 220. No surprise there as it would just suggest the status quo in terms of the two month range SPY has been stuck in. Note below on Friday’s expiration there is a bit more of a narrow range.spyw

SPY-Friday: The current best pin is around 216, also near Friday’s close. There is call resistance starting with 217, but gets more prominent at 218 all the way up to 220. To the downside, there is small put support at 215 and then again at 214 similar to Wednesday. For now, Friday’s open interest has less put support than call resistance. Taken at face value the two open interests combined would suggest further range bound action that would essentially land us in a similar spot to where Friday closed. Note that because this is a weekly expiration, there will likely be shifts as the week progresses.spyf

In sum, the improvement in breadth is something to keep an eye on if the the market continues higher, but the rally at the end of last week has not changed very much just yet. The open interest for next week continues to suggest a rangebound market. Finally, recall that after a >1% FOMC day there is typically a retracement plus some within a few weeks that has yet to come to fruition. Thus, at this point, selling future rallies still may provide the best risk/return.

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