Pick an adjective, there are a plethora to choose from in the English language, but they all describe the market environment we are trading in. The bull isn’t winning, the bear isn’t winning, although premium sellers are likely winning.
Last week here, I wrote that the likely scenario would be a choppy to lower start to the week, which would present a good risk/reward buying opportunity. That worked out well as there was a buyable low on Tuesday that then moved SPY up to 211 by Wednesday. I also wrote last week that the 210 level was important and then tweeted out Wednesday morning that 210 had become support. That support came into play on Thursday and although it held into the close giving bulls the edge, it was taken back by a gap down Friday morning. Importantly, 207, which I have outlined for a couple weeks as support (and had many puts at that strike) once again held; the low Friday being 207.01.
Overbought/Oversold: As usual I like to look at breadth for overbought and oversold readings in order to find market turning points. It has been a while since markets have had extreme readings among different measures at the same time, thus lending to the trend-less market environment. We are currently at a minor oversold reading (as you can see below) where we have recently seen a bounce, but not a sustainable one. Thus, unless this latest Friday drop can accelerate further down without much of a bounce it’s unlikely we get that extreme reading that typically sets up a major buy signal.
SPX stocks making 20-day highs: Recently we have bounced from this area after reaching about 5%, but it has not been sustainable. 
SPX stocks making 20-day lows: inching higher, but not yet oversold.
SPX stocks above their 50-day MA: We have recently bounced from this area since March, but it thus far remained unsustainable. 
Next Weeks Trading Plan: Based on both the technical picture and the open interest for next week I have outlined a few scenarios. I fully understand that what I present leaves a murky and unclear outcome, but that is the situation at hand so I would appreciate no sarcasm related to how I’m not providing very useful information.
Scenarios:
1) We remain rangebound within the open interest ranges. As you can see on the SPY chart below we are in a wedge that appears to be becoming more narrow. The open interest range (if it sticks) would further suggest an even more narrow range for next week. In this scenario, 208’ish would be support and 210’ish resistance. If this were to play out it would lead to an even more coiled and trend-less market and likely closer to a big move in one direction.
2) If we open and remain below 208 or later break 208 (if price were to get above) then there is support at 207, which has been significant support for much of April. Below there and due to the heavy open interest on the put strikes of 207, 206, and 205 there is an increased chance of delta hedging that would lead to an accelerated move down targeting 205 (an important support level the first week of April). That level also coincides with the bottom of the wedge (seen in the above chart) and an area that a bounce would in effect keep the market in a tight wedge. Finally, if 205 doesn’t hold, then the next target is 203 where there is many open puts. Dropping there would undercut the three lows already made between March and April. And of course below there would target the 200-day moving average at 202. If that all happens next week it would possibly be our capitulation washout needed for a swing long. Or it could be a washout similar to the one we had between December and February that would take us another leg higher, albeit a small one. 
3) If we open above or get above 208, then there is call resistance at 210, technical resistance at 211 and then open interest resistance at 212. So basically everything is resistance :-). Anything above there and we likely get new highs.
Therefore, as you can see above, next week there is a plethora of scenarios that can take place. If there was a more likely scenario then it would be a continuation of a tight range due to that being the 2015 pattern of 1) a bounce at these slight oversold readings 2) the open interest and 3) the similarities to the most recent two month consolidation period. Finally, and this is purely anecdotal, two weeks ago I titled my post “Market in Need of a Washout” and my bias was that we would be going lower with the caveat that all bets were off above 207. Monday morning we opened a little above 205 and quickly rallied to close above 208, never to look back that week. Once again, the market is in a similar predicament in which lower seems like the path of least resistance and that further downside would present a much needed washout. Unless the trend is ready to break, this could be a similar set up to the week starting April 6th and ending April 10th in which any early weakness is a buying opportunity back to the top of the range.
Good Luck next week. If you are looking for specific option or stock trade ideas (short and long term), daily market commentary, and open interest analysis on momentum stocks consider a subscription.
Stuck, Trend-less, Choppy Markets
Pick an adjective, there are a plethora to choose from in the English language, but they all describe the market environment we are trading in. The bull isn’t winning, the bear isn’t winning, although premium sellers are likely winning.
Last week here, I wrote that the likely scenario would be a choppy to lower start to the week, which would present a good risk/reward buying opportunity. That worked out well as there was a buyable low on Tuesday that then moved SPY up to 211 by Wednesday. I also wrote last week that the 210 level was important and then tweeted out Wednesday morning that 210 had become support. That support came into play on Thursday and although it held into the close giving bulls the edge, it was taken back by a gap down Friday morning. Importantly, 207, which I have outlined for a couple weeks as support (and had many puts at that strike) once again held; the low Friday being 207.01.
Overbought/Oversold: As usual I like to look at breadth for overbought and oversold readings in order to find market turning points. It has been a while since markets have had extreme readings among different measures at the same time, thus lending to the trend-less market environment. We are currently at a minor oversold reading (as you can see below) where we have recently seen a bounce, but not a sustainable one. Thus, unless this latest Friday drop can accelerate further down without much of a bounce it’s unlikely we get that extreme reading that typically sets up a major buy signal.
SPX stocks making 20-day highs: Recently we have bounced from this area after reaching about 5%, but it has not been sustainable.
SPX stocks making 20-day lows: inching higher, but not yet oversold.
SPX stocks above their 50-day MA: We have recently bounced from this area since March, but it thus far remained unsustainable.
Next Weeks Trading Plan: Based on both the technical picture and the open interest for next week I have outlined a few scenarios. I fully understand that what I present leaves a murky and unclear outcome, but that is the situation at hand so I would appreciate no sarcasm related to how I’m not providing very useful information.
Scenarios:
1) We remain rangebound within the open interest ranges. As you can see on the SPY chart below we are in a wedge that appears to be becoming more narrow. The open interest range (if it sticks) would further suggest an even more narrow range for next week. In this scenario, 208’ish would be support and 210’ish resistance. If this were to play out it would lead to an even more coiled and trend-less market and likely closer to a big move in one direction.
3) If we open above or get above 208, then there is call resistance at 210, technical resistance at 211 and then open interest resistance at 212. So basically everything is resistance :-). Anything above there and we likely get new highs.
Therefore, as you can see above, next week there is a plethora of scenarios that can take place. If there was a more likely scenario then it would be a continuation of a tight range due to that being the 2015 pattern of 1) a bounce at these slight oversold readings 2) the open interest and 3) the similarities to the most recent two month consolidation period. Finally, and this is purely anecdotal, two weeks ago I titled my post “Market in Need of a Washout” and my bias was that we would be going lower with the caveat that all bets were off above 207. Monday morning we opened a little above 205 and quickly rallied to close above 208, never to look back that week. Once again, the market is in a similar predicament in which lower seems like the path of least resistance and that further downside would present a much needed washout. Unless the trend is ready to break, this could be a similar set up to the week starting April 6th and ending April 10th in which any early weakness is a buying opportunity back to the top of the range.
Good Luck next week. If you are looking for specific option or stock trade ideas (short and long term), daily market commentary, and open interest analysis on momentum stocks consider a subscription.
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