Yellen, OPEX & Bears Oh My!

Last week here I made the case for a likely pullback/pause. Indeed, the market did pullback, but by the end of the week recovered some of its losses to close 10 points lower than last Friday. Next week is Quad witching/OPEX, which tends to have a bullish bias. Although I do think it’s possible for SPX to test a bit lower than 2357 in the coming days, for the most part I don’t think any substantial pullback will come about until SPX makes a new high or at the least gets close to the previous high.

In case you missed this interview with Anthony Crudele, it’s worth a listen if you want to learn about some of the things I look at throughout the day and what I was looking at last week.

Open Interest:

SPY-W: (19 of 26 pins since Wednesday expiration inception).* Last week was the the first pin to fail to the downside (meaning price closed below high puts) since the election. That can be seen as the very start to a trend change. Note trend changes after such a strong move can take a while, but it is a change of character that should be noted, especially if more of those failed pins to the downside occur. As for next week, the current open interest is very supportive of the bulls. There is lots of put support that begins at 237. The current best pin is 237.5, but there is much more room to the upside with regard to not much call resistance. The FOMC announcement comes out just 2 hours before expiration. It seems the market has already priced in a March rate hike and is waiting to hear comments as to how many hikes this year we will see and at what basis points. Of course a wild card can send price down through those puts, but at this point it’s best to give the benefit of the doubt to bulls given the open interest and predominate trend. Finally, if price does close below some of those puts then it begins to strengthen the idea of a trend change coming sooner rather than later. (For those wondering if this could cause a big fall because of delta hedging – I don’t know for sure; but if I had to guess, I would say no because this is a Wednesday expiration with less open puts than a normal Friday – especially a normal monthly Friday). 

SPY-F: (14 of 21 pins since I began tracking with last Friday being a successful pin).* Friday’s open interest (which don’t forget is somewhat stale since many of these calls and puts were likely put on over a long period of time since it’s a monthly expiation) doesn’t show much except for a large range from 230 to 240. If there was a current best pin it would be from 234 to 237, but it’s really not all that defined so it’s not something to hold your breath for. What it does suggest, is it will be difficult for price to close above 240 or under 230 at Friday expiration, unless it gapped over/under that price.

In sum, based on the longer term trend being bullish and Wednesdays open interest, the path of least resistance for next week is higher (at least for the first 1/2 of the week). Should SPY close under 237 on Wednesday, it would be further evidence of the bullish trend shifting. Friday’s open interest doesn’t suggest much except good support at 230 and heavy resistance at 240.

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

Wednesday 3/8: Failed pin to the downside.

Friday 3/10: Successful pin.

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