Too Many Bulls Going to Ruin Ben’s Party? + Open Interest for Dec 6th.

 Too many bulls going too far too fast?

1. Is sentiment getting a bit frothy? Yes
2. From a historical perspective, is eight straight up weeks in SPX getting a bit extended? Yes
3. Are we going to get a correction sometime in December? My psychic is on vacation this week so will have to get back to you on that.

You probably have already asked yourself the above questions or have seen versions of them on twitter. They may even give you a bit of an uneasy feeling if you are long. And if it does, then just that by itself already tells you that although sentiment may be bullish, it is fragile. According to Todd Salamone (@toddsalamone) from Schaeffer’s investment research, SPX component short interest is up 3.04% in the latest report and highest since mid 2012. So even though people say they are bullish, doesn’t mean they are actually acting on it or committed to it. You have heard it a million times, but I will say it again anyway…..follow price, not your opinion, not your feelings and not someone’s resentment that they have not been long.

Friday’s Sell Off:
Last week SPX basically went sideways allowing individual stocks to break higher. The IWM and QQQ took the baton and ran with it.  Under any other circumstances (other than our current infamous “bubble” backdrop) most would consider that to be a sign of higher prices to come. We had a small sell-off late Friday. I wouldn’t take it to mean much without confirmation next week considering it was a half day with very little trading going on. Moreover, there was likely a bit of portfolio re-balancing. 

Next Week:
Monday starts the new and final month of the year. Seasonality favors a bullish December and we have only had two red closes on the first trading day of the month in 2013, April and July. Both closed only slightly lower and were up the following day. However, according to @paststat  

 You can find his post here:  http://wp.me/p3tnm2-MM

Should SPX continue to go sideways to up, I will look for where leadership shows up next. Both the biotechs and financials rested last week so I am going to see if they get going again. Social media names also had a nice reversal last Tuesday after a few weeks off as well as some China momentum names. If, however, we do get confirmation to the downside and that much anticipated pull-back, I may try a quick short or two, but will mostly wait for a turning point to buy the dip.

Next week may be an important week in determining how the month ends. Not to steal thunder from Rocky White’s (@Rocky_SIR) excellent work, I will let him tell you why:

     If the week after Black Friday is positive, the SPX has averaged a gain of 1.90% for the rest
     of the year and has been positive 87% of the time. When the week after Black Friday has 
     been negative, the average is only 0.69%, with 75% positive returns.

Open Interest:
The following are are all for expiration on December 6th. Note that open interest is a helpful tool in gauging risk/reward in conjunction with more formal technical analysis, not an exact science.
 
SPY: 179 and 180 are the highest open interest puts. This tends to be bullish and if we fall to 180 or slightly below, I would look for a quick reversal candle and then for it to to move back up. However, if we break 180 with authority and stay there for a while, then I would wait before buying any dip.

AAPL:  This is the most bullish I have seen the open interest in longer than I can remember. On a technical level it would be good if AAPL paused to consolidate gains, but with little open calls in the way this may be its time to shine. News over the weekend could also help keep it going.

AMZN: The open interest range is 365 to 390. AMZN closed Friday at 393.62 and there seems to be some anticipation of good retail sale numbers and the stock to be bidded higher. However, by now that could be priced in and if it can’t stay over 390 then look for the open interest range to hold.

BIDU: All time closing high on Friday and above the highest 165 call strike. Bidu has had a couple months of basing so currently it looks very bullish.

FB: As I mentioned above, I like the turn around in the social media names last week and will look to see if they can continue their strength. FB’s first test is getting and staying over 47. Doing so will be extra confirmation of strength.

GOOG: It’s been slowly creeping higher and I still think it looks good. Nothing in the way regarding open interest and graph below looks more bullish than bearish.

LNKD: Another social media name looking to get its mojo back. The open interest often isn’t much of a deterrence for LNKD (probably cause of the low volume in options), but if you are looking for that kind of confirmation than 230 is the number to get over.

NFLX: Looking good as it climbs out of its hole. It will likely face some resistance if it gets to 375/380, but has 10 points before it reaches there.

PCLN: Beast. Sadly I missed the last 40 point move (and it was my stock of the year). Anyway, looks similar to last week with 1200 being the predominant call strike.

TSLA: Struggled last week at the 129 and 130 high open interest calls. Let’s see if this week it can get through the 130 calls this time. The earlier in the week it does, the less relevant the open interest at that strike becomes. If it keeps failing there, it just may not be ready to resume its beast-like nature.

TWTR: Two for Two pinning perfectly to cause max pain. I am still bullish and still believe this will ultimately be chased, especially if social media starts to run into the year end. And I think it helps that there are so many bearish on the name (i.e. on stocktwits sentiment is 72% bearish). For week three we finally get more puts :-).

Happy Trading!

2 Enlightened Replies

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  1. Good Analysis!! There have been two sharp sell offs on SPY on 30 min chart;I am cautious!! As they say, stocks take stairs to head up and elevator to come down!! Keeping fingers ready for stop loss!

  2. michael dell says:

    HI rachel, u forgot $BIDU & the “chis” (what we call the dragon group QIHU SFUN YOKU SINA) the pullback in the solars (been fading pops on JKS) and the bounce on $SCTY, what else, oh took fades on ISIS near 40 twice thurs/fri for nice $1+ scalps & just enjoying lil fade scalps on BIIB since its bid up so much. Always look to the TRAN for signs of topping , FDX UPS & the rails like UNP testing a dub top here now. LUV LCC DAL etc all look to be topping

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