Will Bears Finally Catch a Break?

Last weekend here I was biased toward a bounce, but after further weakness.  That plan was shattered right from the get-go with a gap up Monday morning. Knowing I was wrong had me quickly adjust my expectations and for the most part sit on my hands. With all the Greek news, potential for window dressing, as well as closing right at 210 (which has been a pivot for some time now), the best approach to next week is wait and see with scenarios in mind (that I highlight below). Overall however, my bias is bearish.

Recall, that two weeks ago here, I believed we were approaching a correction. Last week when I expected a bounce I also stated that it did not negate my belief that we would get a pull-back larger than the 2-3% we have been seeing in 2015 (don’t get too excited bears; I’m not thinking a swoon either). Last week helped reconfirm the likelihood of that.

Overbought/Oversold:

SPX stocks making 20-day highs: Once again we aren’t getting anything different from what we have already seen in 2015. Note however that after reaching ‘2015 style’ oversold readings on Thursday, the market still closed down on Friday (still to early to mean anything just yet, but good to keep an eye on).Screen Shot 2015-06-27 at 1.31.01 PM

SPX stocks above their 50-day MA’s: It is currently near the oversold area that it has bounced from before in 2015. Also worth keeping an eye on next week to see if this follows the same 2015 path or finally drops below 35%.Screen Shot 2015-06-27 at 1.31.24 PM

Open Interest and SPY Levels: Taking the open interest for next week purely at face value, it does not appear bullish. In this scenario, the risk/reward suggests that SPY does not close above 211.5 come Friday (unless of course it changes during the week).* With that in mind, an early rally to 211.5 or above would be a good place to consider fading the market. Minus that set-up and the game plan would be to be patient and wait for a good risk/reward set-up. Here are some scenario’s to help guide you.

  • Opening around 210 and staying there: nothing to do
  • Opening above 210: See if it can hold and if breadth is positive. If so, bullish bias with potential for 211.5 or 213; however curb expectations here as breakouts tend to be small and short-lived. Any major rally and I would think it was a short term blow off top (not calling for a major top or anything).
  • Opening below 210 but Friday’s low: Determine if price can get above there. If not and price gets below last weeks and Friday’s low of 209.16, the set-up is bearish with support roughly at 207 and then 205.
  • Opening below 209.16: Determine if price can get back above there and to 210. Then use the above scenarios. If it cannot, find a good bounce to short!

spy

*Possibly of significance, most of the 211.5 calls for next week were purchased on Friday afternoon with what appears to be a roll-down in which the 211.5 calls were bought and the 213 calls sold to close (I could be wrong and it was a call spread being opened). Regardless, there is no way to really know the meaning of it, but may be something to keep in the back of your head).

Correction? Two weeks ago (as explained in the link above) I was looking for a rip higher (which we got) and then the beginning of a correction. Based on how things ended up resolving themselves that week I had postponed my thought on an imminent correction.  Currently however, I am leaning more in that direction for next week. With all the Greek stuff and potential window dressing  there isn’t much to do but wait for more evidence before making a trade (with regard to short term trades of course). Having said that, my first idea is that any rally next week is a gift to fade.

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Good luck!

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