Will the Open Interest Stall the Uptrend Next Week?

Two weeks ago here I discussed the likelihood of news highs. That indeed came the following week and then continued on into last week. At this point there is no reason not to expect another new high to be made as the edge continues to reside with the bulls.

Open Interest: I have pointed out before in these posts and over Twitter that when price closes above its high calls on expiration, it tends to be a very bullish sign leading to continuation higher. I pointed out over twitter that it happened Friday 2/10 and then again Wednesday 2/15. Although Thursday and Friday saw a bit of a pullback (yes I know a tiny bit), I think it had a lot to do with OPEX. The market got a little overheated, there were lots of open calls, and more often than not, that is a recipe for a raid on premium. By knowing that OPEX was most likely the reason for Thursday and Friday mornings price action, it enabled me to stick with longs I had as well as buy some dips. It’s also why I was fairly confident we would see a move higher into the close on Friday as you can see in the tweets below to subscribers. Should read shorts’ with an apostrophe 🙂

Screen Shot 2017-02-17 at 3.46.48 PM

I even gave a target even though as an option player I wasn’t interesting in trading it that late in the day. Point is I offer a lot of general commentary that isn’t necessarily related to options.

Screen Shot 2017-02-17 at 5.26.35 PM

Next week:

SPY-W: (18 of 23 pins since Wednesday expiration inception – last week failed).* Based solely on the open interest it would suggest that Tuesday and Wednesday will be consolidation days because the current best pin is between 234.5 and 235. SPY closed at 235 Friday so if it opens above there and stalls it will likely be pulled back under 235 before expiration. With that said, the last three expirations SPY has had the strength to remain over its high calls; thus I wouldn’t automatically assume it can’t stay above the 235 calls if it opens above them and continues higher. The best way to approach it is to use other measures (such as intra-day breadth and price action) to measure the strength of SPY and if it has the strength to remain above the 235 calls. If it does remain above, the next call resistance is 237. Of course if it opens below 235, then those calls will act as heavier resistance then if price gapped above them. To the downside there is put support from 234 to 235, but it isn’t as strong as the potential call resistance. Under 234 the next put support is 232. SPYW

SPY-F: (12 of 18 pins since I began tracking – last week failed).* Currently SPY is fairly far from the two strikes that would offer as good pins (230 and 232). The current best pin closer to where price is now is similar to Wednesdays between 234.5 – 235. There is small resistance at 235 should price fall back below it, but if it stays above that level there is nothing but sky for now. Because the highest amount of open calls and puts is further down, it would be remiss of me not to at least mention that should we see a meaningful drawdown in price, it would not be out of the question for SPY to fall back and pin around 232. However keep in mind that 1) that would be the exception in this situation where price is already meaningfully above those strikes and 2) the open interest can easily change as the week progresses.spyF

In sum, for the time being there is nothing to suggest that the market won’t at the least consolidate near the highs, if not move higher. SPY has closed above its high calls three times in a row suggesting abnormal strength. Should price fall and close below SPY 234 then perhaps it would be worth considering a 232 pin. Until definitive cracks show up in price then go with the path of least resistance (or at least don’t fight it).

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*An explanation as to how I define pinning can be found here.

Wednesday 2/15: FailedScreen Shot 2017-02-15 at 7.35.30 PM

Friday 2/17: FailedScreen Shot 2017-02-17 at 4.00.55 PM