Last week here I continued to provide evidence in support of the bearish case and suggested to sell all rallies. That worked every day last week as every rally failed. So where are we now? Below I will present the facts of breadth and the open interest with the caveat that the election is next week and is a wild card.
SPX at 20-day highs: This continues to fail to make higher highs on rallies and then gets oversold fairly quickly. This can stay oversold for several days before it rebounds and thus doesn’t tell us much currently except the market is weak (no surprise). This will be useful when we see our first rally that gets 20-day highs above 25% because it could signal a trend change coming.
SPX at 20-day lows: This is still not indicative of a capitulation bottom. Typically more lows will be made when the market has reached or is very close to a bottom. It’s not a full proof measure, but definitely a good one to watch with any further lows in the market.
SPX stocks above their 20-day MA: As I have been saying for over a month, this continues to suggest that rallies will fail to hold until it improves with rallies or begins to show positive divergence.
QQQ stocks above their 20-day MA: I had pointed out the negative divergence for weeks and price finally caught up to it. Although it’s not a great short term indicator, it did a great job informing us to 1) sell rallies and 2) not fall for the trap of buying breakouts or thinking a new QQQ high was going to lead the rest of the market higher. Until this shows a positive divergence to the QQQ’s price or improves substantially with rallies, it bears repeating, rallies will likely fail.
Bearish Weekly MACD crosses: I’ve been tracking the main indexes and discussing that all indexes except the QQQ’s had already crossed. Last week I pointed out that it was threatening a cross. By now I’m sure you can guess that it has indeed joined the club which leaves the NYSE, DJIA, SPX, IWM and QQQ’s with weekly bearish MACD crosses.
SPY-W Open Interest: (7 for 8 pinning since the Wednesday expirations began)* Next week there are some puts near the 208/209 area but the heavy put support is at the 205 strike and below. That is also a level of technical support and if price gets there it should hold, at least on the first touch.
SPY-F Open Interest: (2 for 4 with pinning since I officially started keeping track)* Below there is some puts stacked at the 210 level and then heavier puts starting at the 208 level. Keep in mind this will very likely change throughout the week. Both the Wednesday and Friday open interests have very little call resistance. I mentioned last week that in the past when there is little call resistance it tended to be bullish; however, recently price has been gravitating toward the highs strike puts. If that continues next week consider it more bearish.
In sum: the current trend favors the bears and the market environment continues to favor selling rallies. With that said I do believe the election is a wild card. Should there be a large rally next week bulls would want to see significant improvement in breadth or the rally will likely be given back plus some before year end.
Good luck next week. If you want significantly more commentary regarding the overall market every day as well as real-time trade alerts consider joining us here.
*SPY-W: For the first time it failed to close above all the high strike puts.
SPY-F: The 208 puts were not breached.