Will the Bears Cheer or Jeer Next Week?

For the last few weeks, I have been writing about a looming small correction. Last weekend here I was bearish biased and that turned out to be correct, but if you hadn’t come into Monday short it was definitely difficult to play. I would be surprised if the low for 2015 was in; however, my main bias for next week is bullish. In that regard, the best scenario would then be a gap down Monday morning. The naysayer in me is currently thinking, ‘a gap down would be a gift so we probably end up with a huge gap up.’

Overbought/Oversold: I am going to display the same breadth readings I do every week. Note, however, there are some other measures that are showing oversold readings, but not presently displayed below (because I want to put this computer away and enjoy my long weekend).

SPX stocks at 20-day highs: We got lower than 3% last week, which usually leads to either a secure low or a very strong bounce. Since the bounce we go last week never got 20-day highs above even 10%, shorts are still facing the potential for an immediate large bounce. Screen Shot 2015-07-03 at 12.47.48 PM

SPX stocks making 20-day lows: This got above 50% last week which is higher than any other time during 2015. During larger corrections there are typically at least two spikes above 50%; however the latter one(s) tend to come after a strong bounce (which we haven’t yet had).Screen Shot 2015-07-03 at 12.51.17 PM

SPX Stocks above their 50-day MA: Last week this reached close to 25%, which is further than it has any other time in 2015. As you can see this can get more oversold (look at Oct 2014), but it doesn’t necessarily have to before a secure low. If the market does get that second spike in the 20-day lows then a reading below 25% would be a better set-up for a swing long. Screen Shot 2015-07-03 at 12.59.01 PM

In sum, we are oversold enough where the market typically has a stronger bounce than it thus far has had. If the market does go lower without a bounce it would be much closer to a secure bottom. If the market bounces first than it remains vulnerable for further downside in the near term (even if the market does make a new high).

SPY Open Interest: Last week the open interest looked almost opposite to this and the set-up was definitely bearish. Based on historical precedence, and taken at face value, this open interest suggest a bullish week. The largest strikes are the 205 and 200 puts. A gap down near or mainly below 205 I believe would be a gift and it’s possible price would swiftly recover. However, if there are no signs present of a quick recovery then the next major support comes first at 202 and then 200. Either of those could also be the set-up for a swing long. A gap up above 207.5 on the other hand would be a more difficult trade with resistance at prior levels, mainly 208.5, 210.5, and 212.*


*Opening between 206 and 208 would keep things very neutral, but with the Greek referendum it seems more likely there will be a decent sized gap in one direction.

I’m keeping this brief because I want to go enjoy the sun. If you want a more thorough analysis, more guidance on how to play these levels next week,  and daily guidance/updates during the week, then head over to my premium area and consider subscribing.

Good luck and Happy Independence day!