Last week here I discussed that the market had lower to go, but was in a good position to begin looking for signs of a swing long. First, I admittedly had no idea that swing would come Monday. I highlighted that the market was short term oversold and likely had a bounce coming, but a swing long wasn’t my initial thought by any means.
With that said, we did get long on Monday and for those looking to educate themselves, I wrote up a post as to why.
Will this last cycle low from Monday lead to new highs? At the present moment price action is telling me that is the likely scenario and to buy any dip you can get. Remember BEFD? If you read last weekends post the signs that would tell me we were at a swing low (as opposed to just a bounce) were not met; however, at this point in time (and pretty much every point in time) I prefer to go with price action than breadth indicators. Also, at the February lows, the typical criteria I look for with regard to a high probability swing low to new highs wasn’t met either. In that case the market did not get to new highs (and perhaps that will once again happen this time around); however, being both a flexible and adaptable trader, I am open to the possibility that the signs that used to work have morphed. In other words, measures that have worked for the last six plus years aren’t set in stone and thus, neither will be my strategy.
SPX stocks at 20-day highs: As I mentioned last week a cycle low to new highs typically occurs when 20-day highs get near zero and often on more than one occasion. That did not happen in February; nor did it happen this last time. Will that end up leading to a failure to get to new highs? For now I am leaning to a no, but hey, anything is possible as last week demonstrated.
SPX stocks at 20-day lows: As I mentioned last week, seeing this at 80-90% is what has typically led to a swing long to new highs. On Monday this got to 70%. The fact that it got higher than the February low in such a fast manner, in addition to the quarterly open interest, got us long Monday (as you can read here). Whether it was enough to take the market to new highs is the bull/bear battle right now.
SPX stocks above their 5-day MA: Last week I mentioned that we were short term oversold and that I expected a bounce soon, but that the oversold can and sometimes does stay oversold for a bit. This week I will say the opposite. We are short term overbought, but the market can get more overbought or digest gains through time and work it off. That would also likely be the pain trade.*
SPX stocks making 52 week highs minus lows: Last week this reached its highest level since February 2015. As you know, not much progressed from there except sideways chop for over a year. If you look at stocks above there 200-day MA (shown below) they began deteriorating after that February 2015 push. If this time is going to be different, we want to see stocks above their 200-day MA continue to expand with higher prices.
SPX stocks above their 200-day MA:
Is it possible last week was just short covering and new monthly funds being added? Sure. However, based on the bullish price action as well as the participation of individual stocks, I would be surprised if there was much of a pullback next week. At this point it would seem the pain trade is higher – both to the shorts and to those that missed last weeks move – and dips will be shallow.
SPY Open Interest: For the moment the open interest suggests limited upside due to the 212 calls. There is some put support below at 210, 208 and then 205. I will update this through twitter if there are changes.
In sum: Based on all the above, my thesis next week is choppy sideways to up. I think pullbacks will be small, but at the same time believe gains could be limited as the market consolidates. Thus, individual stocks or sectors may be more in play for short term traders than indexes (unlike last week). As always please be reminded that this is a thesis not a set plan. As a short term trader, I remain flexible (seems ridiculous that I have to put that disclaimer out there, but there is always an egg-head or two that ends up upset that I might switch strategies as the week progresses and not inform them).
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