Where Is the Market Headed Next Week + SPY & QQQ Open Interest Clues

2014 - Stairs Down --> Elevator Up

2014 – Stairs Down –> Elevator Up

I was certainly not expecting another V-shaped recovery similar to those we experienced in 2013, but hey, I’m not complaining. The question going forward is will we make new highs on SPX or was this a huge bull trap that will develop into a lower high and retest the lows of 1737 or lower. So far the evidence leans toward the former with some evidence presented below.


  • The Nasdaq, which began taking the lead over SPX in April/May of last year was able to make new highs last week. Below you can see when the Nasdaq began to outperform the broader market and why seeing it continue to lead helps confirm the recent rally.Screen Shot 2014-02-15 at 3.35.04 PM
  • Below is a chart showing stocks (in the S&P) that are currently above there 50-day moving average (red) compared to SPX (black). Each time in the last two years that it dropped 2 standard deviations, SPX went on to make new highs. If you notice, there is still a lot of room left before we get above one standard deviation, which often marks short term tops. What would be confirming and bullish moving forward is for stocks above their 50-day MA to continue to expand along with price and not to make lower lows (as it had recently the back half of 2013 and this year). Screen Shot 2014-02-15 at 3.00.37 PM
  • In a similar vein, below is a chart of the 20-day moving average of stocks above their 50-day moving average (you got that?) against SPX. You can see that all through last year, once it began turning back up (June, September, October, December) the market went on to make new highs. Screen Shot 2014-02-15 at 3.03.56 PM

Next Week

  • Next week is monthly expiration and there are several factors to keep in mind.
  • We are getting a little overbought and just had a monster rally. That doesn’t mean we can’t get more overbought and blast to new highs, but if we paused that wouldn’t be a negative or bearish thing.
  • VIX expires on Wednesday and the market tends to perform less well when VIX expires the same week as the overall market. Below is VIX open interest. It would be surprising to see VIX fall too far below 13 before Wednesday morning expiration. It closed Friday at 13.57. VIX.2.15
  • There were very bullish option trades that took place a week and a half  to two weeks ago when we put in a bottom. Here are updates on them:
    • February monthly expiration (i.e. this Friday) the 184 SPY calls saw huge buyers a couple days before we put in a bottom that resulted in about 355,000 OI. Some took profits, but the majority are still there. I imagine they are expecting more upside before expiration Friday unless it was to hedge their shorts (a less likely scenario). As I stated last week regarding the high open interest puts, often they are hedges or overly eager bears; hence, I wouldn’t put as much merit in the 180 puts as I do the 184 calls. Having said that, I think staying above 180 next week will be very important in preventing a possilbe waterfall event (read this post here to understand what I mean by that).spy.2.14
    • Also, right around the time we put in a bottom (I think it was the day after), the February 90 QQQ calls were hot. I don’t have the exact number of how many were bought, but there is still a massive amount left as you can see below. We closed just below 90 and whomever timed that bet so perfectly is obvioulsy expecting more upside by Friday. QQQ.2.22
    • Furthermore, at a similar time about a week and a half ago, an enormous amount of April QQQ 90 calls were bought. The OI still holds 290,000 of them so clearly they are also still expecting more upside.

In summary, the majority of the evidence points to more upside from here. Stay tuned for open interest posts on momentum stocks.

2 Enlightened Replies

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  1. LT says:

    Im a bit confuse, with that much OI in calls at 90 for QQQ are MM or power to be going to pay out. I always find it the opposite. I understand with that much option bought for call it show people are bullish, are the MM willing to pay out. For OI at 90 total is over 500k OI contract between next week and April. If I bet wrong that QQQ will not go further up with this much OI than I’m in trouble on Tuesday.

    • admin says:

      Usually when there is very heavy call buying by one or two institutions (which happened for those 90 calls) it’s because “someone knows something” and it usually works out. The MM’s stay delta neutral so are hedged. So as stock moves closer or into the money the MM’s have to buy more stock to stay delta neutral. That sends the stock even higher. Basically, I don’t agree with you. It’s different when bunch of different people buy a certain strike. When one or two funds do (as in this situation) buy a certain strike it usually goes in the money before they sell them. Read the posts under education section to understand more.