The New 2x Expirations for SPY + Breadth

Last week I was taking in the last bit of summer so let’s get right into next week.

Breadth: The two potential themes I am seeing are 1) some signs that could be considered the market being short term oversold and 2) some caution signs of underneath deterioration. A quick recovery of breadth and expansion likely makes it the first theme. On the other hand, without that expansion than any higher moves in price would likely fail to hold and give credence to the latter theme.

Before showing these measures as being oversold, I want to note that I would only consider them oversold when taken into context of two things. 1) they reached their lowest levels since Brexit and 2) had a decent expansion lower when viewing it in light of relatively little SPX and VIX price movement. Thus, they would not be considered oversold on a more threatening pull-back.

Finally, one other thing to consider is that after such little movement over the last couple months, relatively little price movements can make these breadth measures more pronounced (that would also be case if they became quickly overbought as well). If moving averages have caught up to price and 20-day price movement has barely changed then it doesn’t take much to push around these measures below.

SPX stocks at 20-day highs: Last week during the sell off on Wednessay this measure hit levels not seen since Brexit, but recovered before the close. Here is how it looked intraday. Screen Shot 2016-09-04 at 9.35.31 AM

Back to how it looked at Friday’s close, there isn’t much that can be read from this as long as price remains rangebound.Screen Shot 2016-09-04 at 9.34.28 AM

SPX stocks at 20-day lows: this continues to bounce around off lows, but shows little in terms of a timing tool without a large spike. The failure to make a meaningful jump even when many individual stocks are now below 20 and 50-day moving averages demonstrates that moving averages may have largely caught up to price. Screen Shot 2016-09-04 at 9.36.18 AM

SPX stocks above their 20-day MA: is got to its lowest level since Brexit while SPX is still meandering near highs. Any new price highs without a recovery and expansion of this measure would likely fail to hold for very long. Screen Shot 2016-09-05 at 7.19.09 PM

SPX stocks above their 50-day MA:Screen Shot 2016-09-05 at 7.15.07 PM

From several other traders, it seems this is likely a data feed error by index indicators SPX stocks above their 200-day MA: this is the most startling one to me if it was correctly measured (could be a bad print) because of its stark drop and failure to recover by weeks end. Thus far it has kept up very well with price since Brexit confirming the longer term bullish thesis.

Screen Shot 2016-09-04 at 9.37.23 AM

Updated version – via @JKrinskyMKM.  looks like that percentage above 200 DMA may have been a bad print. Bloomberg still has 80% as of Friday.Screen Shot 2016-09-05 at 11.30.41 AM

So longer term bullish thesis still intact.

Open Interest: starting this week SPY now has Wednesday and Friday expiration. For the time being I will post both and write comments for both with the assumption they will work similarly to how they have in the past. I have no more way of knowing than any of you if they will pin as well or if high strikes will have similar effects as the past. Thus, understand that I’m entering this new territory with everyone else.

Also, I won’t bore you with too much detail about my option, but a quick note that I believe this is negative for short term traders. I think all these new shorter term derivatives (SPX now expires 3x a week) are partly to blame for the very tight ranges lately. With constant pinning taking place, it seems price always needs panic or FOMO to make any range breaks hold. Furthermore, with high strikes piling up on so many short term vehicles, range expansions (when they finally occur) can have an exaggerated affect due to all the delta heading.

Taken at face value, both Wednessy and Friday expiration support a more bullish backdrop for next week.

SPY-W: 217-218.5 carry the majority of the puts and should nothing major push price lower, the expectation would be a close above 218 on Wednessay with the current best pin at 218.5. Not much in the way of calls to stop price above 218.5spyw

SPY-F: again the stacking of puts taken at face value suggests a SPY closing price above 217; however, as usual I will point out that with so many puts stacked any strong push lower could lead to delta hedging and a quick move to or below 215. That is typically the exception not the rule, but important to know for short term traders. There is some call resistance near 220, but not much just yet.spyF

In sum: taking the small oversold readings into account with the more bullish looking open interest there is more evidence pointing to a better week for the bulls (or at least a failure to breakdown) than the bears. Watch breadth to see if it can recover because a failure to would become a more meaningful divergence. As long as price stays above all the high puts, the status quo or higher prices are likely in the cards. A breach of them without a swift recovery could change things rather quickly to bearish on a short term (weekly) time frame.

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