Some Market Direction for Next Week and SPY Open Interest

The rally we had toward the end of last week was surely impressive. Was the 5.8% correction we had enough to take us back to all time highs? It definitely was a good start, but I don’t think we are out of the woods just yet. The best scenario going forward would be for us to remain range bound making higher lows while consolidating the recent move. Last week, here,  I showed you the weekly charts of the SPX, IWM, QQQ, and XLF that were holding above their weekly 20-day moving averages (the XLF was slightly below). In a similar manner to 2013 the SPX  dipped below it during the week only to reverse higher and close back above. What I find concerning is that the IWM closed below its weekly 20-day moving average. Throughout this bull run the small caps have been an area of strength and outperformance. To see them now underperform and not lead us out of the correction gives me a little pause. Here is a look at the RUT versus the SPXScreen Shot 2014-02-08 at 1.46.15 PM

Maybe this is a sign that the bull run is on its last legs (or said another way, that we are at the beginning of the end)? Based on the evidence I deem valuable, I don’t think that current market and economic conditions meet the requirement to call the bull run over, but am keeping an open mind to trend changes. Perhaps after an amazing run by the small caps they will now take the back seat to the large caps. This would also let the NASDAQ, which has yet to get back to its all time highs, take on the full spotlight position. As you can see below the NASDAQ already began taking over the RUT as the leader starting late last year. You can also see its outperformance the second half of last year by viewing how different the trend line I drew on the weekly chart of the QQQ‘s below looks in comparison to the other ETF’s displayed. Screen Shot 2014-02-08 at 2.26.43 PM

Here are the updated weekly charts of the SPX, IWM, QQQ, and XLF.

Screen Shot 2014-02-08 at 1.57.11 PM

Screen Shot 2014-02-08 at 2.03.41 PM

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Finally, what would help support the notion that the worst of this current correction is over, I would like to see the consumer discretionary sector continue to move back up. I believe the XLY houses many stocks that resemble investor confidence toward the health of the economy. Screen Shot 2014-02-08 at 1.50.30 PM

Open Interest:

Here is what the SPY weekly open interest looks like. I know that I am going to get questions asking me if the put buyers “know something” since I thought the call buyers might have last week. My response will be I’m not sure, but I don’t think so. Why? In the couple years that I have been tracking open interest, “USUALLY” (notice my attempt to really emphasize “usually”) large call buyers often know or think they know something, whereas that doesn’t translate as well with put buyers. Perhaps that is because puts are used as hedges or people are more quick to be bearish than bullish?

Based on the below open interest as well as the old support trendline at 177’ish, I think a good sign that the worst part of the correction is over would be if we can remain above 177 on a closing basis next week. However, I would not think it necessarily bearish or surprising if 177 failed to hold and we got back to 175’ish. Failing 175 would get me more bearish. Staying above either 177 or 175 would also be the higher low I discussed above.  SPY.2.7


See here for stock ideas going into next week.

Stay tuned for open interest on the usual high momentum stocks.