If you want to survive as a trader you need to be able to adapt to market conditions. What has 2013 taught us? Dips are fast, feel harsh, and are short lived. If you have not adapted to that yet, then you are behind the curve. If you have adapted to that then one of these days you will probably get hurt thinking the pattern will repeat itself when it doesn’t. But so what? You did well the rest of the time and one small bite won’t kill you as long as you once again quickly adapt.
Last week I wrote here that dips would be shallow and bought and that “I would not be surprised to see 1740 tested soon or even a bit lower, but I think if we hold it on a closing basis then that is a good sign that we are digesting gains through time rather than price.” So far so good. The size of the drop on Thursday took many by surprise and it’s good to try to learn from it. I believe part of why the drop was rather heavy has to do with the options market. Now this is just one theory, but I think it’s interesting to explore if you haven’t already. On Wednesday evening I posted this…..
SPY 176 did break and we just kept going. Here is a link to that tweet if you want to see what the open interest looked like and read the explanation. Oddly enough we then fully turned around and got back above 177 for Friday’s close. Some minor damage has been made to the high beta stocks that I graph open interest for. I personally believe it’s a shakeout before taking them higher and that when they start going, it will be quick making it difficult to get back in without chasing higher. Guess we will find out.
Next week: After Thursday’s sell off and Friday’s come back, there is less bias in terms of the near term direction. If we continue going sideways to higher early on next week then look to break the previous high of 1775.22. If we fall below Thursday’s low of 1746.20 then watch for downside support and a reversal candle possibly at 1740, 1734 or 1711.
Open Interest: the following are monthly open interest graphs that expire Friday November 15th.
SPY: Not too much to glean from this, although you could make the case that 176 will hold and 179 will act as resistance. However, no real outliers.
AMZN: Now into its earnings gap, it has some work to do to prove itself again. Highest open interest is the 355 calls.
CMG: Keeps going, but getting a bit frothy for my taste (put intended). Highest puts 520 and highest calls 550.
FB: Has not been able to close above the high open interest calls at 50 for a few weeks. Probably going to have the same issue next week if it even gets there.
GOOG: So far just consolidating gains from earnings. Highest open interest is the 1000 puts.
LNKD: Really not looking pretty. Next support area on chart is 200. Not much to take from the open interest graph, but here it is.
NFLX: So far has not broken down post its earnings reversal candle. I would wait and try to play the breakout above 344 or below 325. Highest open interest is the 300 puts, which I imagine were mostly bought close to the day it had that large reversal.
PCLN: My darling girl :-). Love when fundamentals back up price. Highest open interest is 1000 puts and 1100 calls. You know my bias, but need to be precise since it’s hard to trade with large spreads and wild swings.
TSLA: Yikes, some definite selling pressure and getting pretty oversold beneath its lower bollinger band. I expect it will bounce real soon, but be mindful there is a gap not to far away at 124.75. Not sure how helpful the open interest will be, but here it is.