A Thanksgiving Stock Market with Open Interest

“Until we have evidence of a shift taking place in this market, continue to do what is working: buy dips, sell on the way up, rinse and repeat.” That is taken from last weeks blog and since it is still valid it ‘bears’ repeating. Now you may ask, but how do I know which dip to buy and that it won’t go lower. The truth is, you don’t, but you can look for clues and put the risk/reward in your favor. On Wednesday we dropped below the 10 day moving average late in the day, but before closing we got back above it. It was our third down day in a row, a rarity in 2013 and if I’m not mistaken we have not had four in a row (correct me if I’m wrong). You also had clues from some respected traders such as @optionshawk, @harmongreg, and me (I’m sure there are people I’m missing here, but you get the point).

I’m not saying that you should of taken a trade or immediately got long. I’m pointing out that there are clues if you are looking for when to buy the dip (or cover your shorts). If that however is not your trading style then waiting for more confirmation and riding trends works as well. At the very least, keep an open mind so that you don’t short right there.

Next week:
Given that 2013 has been on a monster bull run and seasonality favors an up week, I’m continuing to favor more upside next week. Last week I wrote that I felt neutral about the SPX and that

     “I wouldn’t be surprised to see a small pullback as well next week to shake out some people
      before Thanksgiving and months end.” I also wrote, “I also like the look of the small caps 
     (IWM), biotechs (IBB) and finacials (XLF).” 

I think for the most part that is still valid. Although $SPX technically looks sound to continue higher, I tend to favor the other three more (although I will give extra time for financial trades in case they decide to consolidate some of their recent gains.) Don’t forget that next week is a shortened week with markets closed on Thursday and a half day on Friday. So if you are trading weekly options know that you are going to lose a lot of premium between Wednesday and Friday.

Open Interest: The following are are all for expiration on November 29th. Note that open interest is a helpful tool to act as an asset to more formal technical analysis, not an exact science.

SPY: This year there has only been a few times where we see the highest open interest strike be the calls. Currently the 181 calls stand out. Half of them (about 30,000) were added on Friday. About a third of those were bought in large chunks at the very end of the day. This is just speculation on my part, but if 181 is quickly taken out at the start of the week it was likely someone that knew something. If it isn’t, then it may act as resistance all week.

AAPL: Well the good news for bulls is that according to Schaeffers research firm, $AAPL has  been positive nine of the last 10 years throughout Thanksgiving week with an average return of 5.81%. The bad news is once again the calls are leading the put open interest. Last year, despite the down trend it did close positive on the week, but most of the gains came in the form of a Monday morning gap up.

AMZN: Closed at all time highs and looks good. May also get a boost from Black Friday anticipation, but needs to get above the 375/380 calls.

BIDU: Not a great week, but managed to close right above its 10-day moving average. The volume on the open interest is low so I would wait and see the direction it wants to take next week.

FB: Currently holding right above the 45.50 area, which has been support since the middle of August. Regarding the OI, I don’t know when or how these were purchased, but there is big volume on the 45 put strike.

GOOG: Another week of consolidating gains from its earnings gap. It would seem in our current market environment that it would soon be taken higher. Note that it is not often we see such large spikes in GOOG calls. If it can’t get above 1040 then you will likely know why, but as I have mentioned before, GOOG is one of the stocks in which open interest is less important.

LNKD: Not looking amazing technically, but is still holding support around the 216 area. The highest open interest range is 200 to 225, but the volume is low so far. I think it’s more of a wait and see.

NFLX: Still grinding higher. Needs to break above 350.50 and stay above. It helps that next week the highest open interest is the 340 puts.

PCLN: Every week I say the same thing…what a beast! Goldman added it to their conviction buy list last week with a $1500 price target. It remains to be seen if they are looking for liquidity to get out. What is encouraging for the bears next week is the outstanding calls.

TSLA: It held where it had to last week. The 200 day is sitting just beneath it at 109.  If you are inclined to trade this, note that it is very headline driven right now. Highest open interest is the 130 calls.

TWTR: Well first week and already it did close below its highest open interest calls. I am still a believer that this will surprise people to the upside, but I won’t be stubborn about it if it doesn’t. Like last week calls outweigh puts, but at least this time there are a decent amount of puts.
Happy Thanksgiving!