Volatility or Rotation & Grind

Last week here I had little to say except that SPY would very likely not close over 220 and that as long as SPY remained above 217, it would be difficult to make a bearish case. The low last week was 217.02, the high 219.50. Perfect range for any short term bulls and bears to go crazy in.

Now that OPEX is over let’s take a look at where things stand.

Breadth: The biggest thing that happened with breadth last week was that we got short term oversold on 20-day lows. I pointed this out on Tuesday over Twitter, which was very close to the 217 level….a very good place to get long (and not a hindsight thought as I mentioned it in my post last week). Screen Shot 2016-08-19 at 4.39.14 PM

That 217 SPY level correlates to the 2168 SPX level and the breakout from the jobs number a few weeks ago. That information should be carried forward because a breach of it will likely bring in sellers. Screen Shot 2016-08-19 at 4.41.30 PM

There isn’t much else that has changed with regard to breadth, but will keep you up to date regardless.

SPX stocks above their 20-day MA: It was falling behind as I mentioned a few weeks ago and still may be behind a bit; but with a flat market and rotation, the divergence has begun to clear up.Screen Shot 2016-08-20 at 2.51.05 PM

SPX stocks above their 200-day MA: A bit of a longer term perspective shows that there isn’t any divergence developing and both the market and the majority of stocks are currently working off being overbought through time. That doesn’t guarantee the next leg will begin without a correction, but it does demonstrate that under the surface it is much healthier than it was during the highs made all through 2015.Screen Shot 2016-08-20 at 2.51.45 PM

SPX stocks at 20-day lows: This has begun to get a bit noisier and although it is not a timing tool when it remains low, it does show that their is some rumbling going on beneath the surface. When these begin to show up more frequently and/or with higher highs it’s often the foretell to something a bit bigger not to far away (i.e. look at the spikes that started showing up before the Brexit spike). Screen Shot 2016-08-20 at 2.52.31 PM

SPY Open Interest: There isn’t much interesting here. The smaller range of noticeable puts and calls are similar to the technical range we have been in since the jobs number. The two smaller open interest ranges are 218 to 220 and then 217 to 221. The technical range is 217 to 219.50. Thus anything within 217 to 220 is chop. Above 220 and there may be some call resistance at 221, but for now it’s fairly irrelevant. Below 217 and there isn’t much put support till 215. That level has a decent amount of technical support as well, so anything near or below there is likely a long play (at least for a bounce). spy

In sum: Thus far SPX has been consolidating through time as individual sectors rotate under the surface. As long as SPY remains in the 217 to 220 range the best plays will continue to be in individual stocks that are benefitting from rotation. If the range breaks to the upside it may be difficult to sustain itself just because of the psychological 220 range that often can be a road block (see here); but, there have been many firsts recently so it’s not a reason by itself to go against the grain. A break of 217 may bring 215 into play, but price likely will hold there or bounce back if it gets below it.

If you are looking to stay ahead of sector rotation consider joining us here where you will get daily analysis, set-ups and real time trading alerts.

Also, If you missed last weeks post that went into detail on the importance of open interest and how it can be used with high momentum stocks, be sure to check it out at the bottom of this post.