OPEX and One Strike Domination

Last week here I wrote: “I am still not convinced the market has bottomed, but overall my main bias for next week leans bullish” and gave a guide on SPY and what to expect (how to play it). Below is what I wrote:

“Here is a guide for SPY next week:

  • SPY below 208 and not able to get above it – First support will be Friday’s low of 206.87. Below there and good chance 205’ish gets tested. That level has a lot of technical support as well as put support and a good place to buy the dip.
  • SPY above 208  – Very good chance price finds its way back to 210. If it can hold above 210 then it has plenty of room higher with no call resistance till 214 (although has lots of technical resistance on the way). If 210 cannot hold or price can’t get there, expect it to fall back toward 208.”

If you followed that guide you could have done very well even with the news driven volatility. To illustrate here is how we played it (and you can see with the game plan above why it made sense to play it this way):

  1. As I wrote last week we had come into the weekend with SPY calls (you can read why in that post). I scaled out of them Monday above 210.
  2. Tuesday when price gapped down and was not able to get back above 210 I bought SPY puts.
  3. I scaled out of them over the next couple days and when SPY went below 205.5 I began to buy calls with the intention to buy more under 205 if price further dropped (which never happened).Screen Shot 2015-08-14 at 2.42.20 PM

Next week:

Overbought/Oversold: I use these measures primarily for turning points, not as a trading method. However, I find they can help serve as one form of confirmation a possible trend change is taking place with either improving or deteriorating breadth. None of the measures below are overbought or oversold, but they are showing improvement, which at the very least demonstrates that individual stocks are strengthening.

SPX stocks at 20-day highs: Below you can see that earlier this year when SPX was making new highs, 20-day highs of individual issues continually fell below 5%. Recently however, during the markets pull-back, 20-day highs made a higher low. imageedit_9_2765080425

SPX stocks at 20-day lows: It has remained subdued since July’s pullback. Note it did not spike to oversold readings during last weeks pull-back as it did when SPX was at similar levels earlier this year.imageedit_25_6004573211

SPX stocks above their 50-day MA: Staying near the 50% level and not yet confirming much; however, again note that during the pull-backs in May and June when prices were near last weeks lows, stocks above their 50-day had shown more deterioration. imageedit_18_4001742605

SPY open interest and game plan: Taken at face value this leans bullish. Having said that there is not much put support except for 205. For that reason, technical support levels will be our only guide until (if it does) SPY falls to 205.

  • SPY price stays above 208 – bias is long with targets at 210, 211 and 212.
  • SPY pice below 208 – bias is neutral and odds increase that it heads back down to 205.36 (last weeks low). Best thing to do is watch to see if SPY can put in a higher low with confirmation the next day.
  • SPY below 205 – begin to buy that dip and look for a bottom (hammer candle, high ticks, etc) because very highs odds SPY closes above 205 next week.

Without more strikes on the open interest giving clues, you can see next weeks game plan isn’t as straightforward as some of my other posts. If you are interested in how we will play it throughout the week come join my premium service.spy

VIX tidbit: When VIX expires Wednesday morning it is highly likely to be under 17, and likely below 15. For that reason, if SPY is going to drop below 205 next week it would either happen very early on (and then recover quickly) or after Wednesday morning.vix

Takeaway: The bias for the market leans bullish and thus take dips as opportunities to buy – especially if price gets near or below 205.

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