Last week here I discussed having to be neutral due to the impenetrable range, but described myself as having a bearish lean due to many red flags that I outlined in the post. I also discussed the SPY 212 area that had both a lot of put support and technical support. The range finally did break, but 212 held like a champ.
The evidence presented below continues to be bearish and going into next week I continue to be bearish. With that said, as much as it would be great for price to drop fast and hard creating a bottom to trade off of, it’s very possible the market continues to slowly grind lower with many bounces and choppy action for reasons I describe below.
Breadth: The breadth continues to demonstrate what I have been writing week after week in these posts; that rallies in price were not sustainable and selling rips would likely continue to work. The same is still true, but recently every time the market gets even mildly oversold a bounce ensues. For that reason, I think it is best to keep an open mind that even though all signs point to further downside, it may take a more gradual approach then just dropping fast and hard creating a capitulation low.
SPX stocks at 20-day highs: Currently in oversold territory, but this measure can stay oversold for about a week or two before getting a decent bounce. Regardless, it does show the weakness in SPX stocks despite the index being able to hold support.
SPX stocks above their 20-day MA: As I pointed out over TWTR last week, breadth was deteriorating even when the market bounced on Thursday. As you can see not many stocks are holding the SPX up anymore.
SPX stocks above their 50-day MA: Similar comments to the above.
SPX 52-week highs minus lows: This is the level it continues to bounce from, but definitely threatening to break range (2 year look to see how that level is often where things bounce).
QQQ stocks above their 20-day MA: I have been showing this for several weeks to point out that while price was at or near all time highs, breadth was showing some major divergence. Nothing has changed in that regard and while the index continues to look the best on the surface, it looks awful underneath the surface.
Bearish MACD Crosses: The last few weeks I have pointed out how SPX, DOW and the NYSE all had bearish MACD weekly crosses. Last week I updated it by adding that the IWM was threatening a bearish cross. The threat is now real and the only major index holding out are the QQQ’s, but that too is starting to get a threatening look. 
Open Interset:
SPY-W: 5 for 5 now regarding pinning.* This is a weekly and has less influence then the one below which is a monthly. Below, the strikes that stick out the most are the 213.5 and 214 puts. These closed in the money, but only mildly so (unlike last week in which the highs puts were solidly in the money). My point for bringing this up is that if SPY opens Monday below 213.5 and cannot get back above that price then it increases the odds of further selling to at least the most recent low. However, if price opens above or is able to get back above 214 then it increases the odds that by Wednesday expiration price closes at or above 214. Also (and I know this is getting complicated, but don’t shoot the messenger), if price vacillates between the recent low and 214 next week and the 214 puts do not close out then it also increases the chances of a close Wednesday at or above 214. Thus, if you are bearish you want to see price open below 213 and then drop below 212. The longer it stalls, the more it increases chances price gets back above 214 by Wednesday’s expiration (assuming those puts don’t close out).
SPY-F: 2 for 2 now regarding pinning.* Next week is monthly OPEX so these options have less chance of changing and for now suggests that price will close above 212 and maybe 215 by Friday. I say maybe 215 because when a week starts with price already under high strike puts it doesn’t always come back (as I was pointing out above). With that said, if price moves below 212, there will likely be sellers that take it down to the 210 area (yes delta hedging could play a role – but typically delta hedging happens more at the end of the week). Thus, if price falls below 212 early in the week and those puts do not close out, it increases the chances that by the end of the week price is back over the 212 puts. If, on the other hand, price falls below 212 late in the week it could lead to a more significant drop especially if 210 is then also breached. But again, before bears get too excited, just be open minded that price could get stuck again next week by all the put support and even get back over the 214/215 puts if the selling pressure isn’t strong enough and if things get oversold. 
In sum, all evidence points to more downside; however, with monthly OPEX next week price may struggle to get below or stay below all those puts. It does sometimes happen and typically the times it happens is during monthly OPEX, but it’s usually the exception not the rule. There is a lot to take in and tons of scenarios with the two open interests above, but I am going to attempt to easily sum it up: If price drops through 212 early in the week and the puts do not close out then it increases the chances that price will bounce back strong by Wednesday or the end of the week. If price cannot breach 212 or gets back above 214 it also increases the chances that the status quo of being stuck in a range continues. Finally, and likely the best scenario for bears, is if price held near the bottom of the range for most of the week and then later in the week broke through 212 hard. Anything above 214 would put the bulls back in control (at least in the near term) to close over 214 Wednesday and then 215 Friday. And, of course to make it more complicated, keep in mind the open interest can change during the week and shift the likelihood of what is to come.
Anyone who wants up to date analysis on this each day and during the trading day I would suggest subscribe to my premium service. Not only will you get real time commentary about the market and its likely next move, but you would receive open interest analysis on individual high momentum stocks and real time trade alerts.
*I am defining pinning as closing between high strike puts and calls or if only one strike is high then below or above them respectively. I began tracking Friday’s 10/7/16
It actually only got to 213 in the last few minutes, but still managed to hold above it to hurt all those put holders.
Evidence Points to Lower, but then there was OPEX
Last week here I discussed having to be neutral due to the impenetrable range, but described myself as having a bearish lean due to many red flags that I outlined in the post. I also discussed the SPY 212 area that had both a lot of put support and technical support. The range finally did break, but 212 held like a champ.
The evidence presented below continues to be bearish and going into next week I continue to be bearish. With that said, as much as it would be great for price to drop fast and hard creating a bottom to trade off of, it’s very possible the market continues to slowly grind lower with many bounces and choppy action for reasons I describe below.
Breadth: The breadth continues to demonstrate what I have been writing week after week in these posts; that rallies in price were not sustainable and selling rips would likely continue to work. The same is still true, but recently every time the market gets even mildly oversold a bounce ensues. For that reason, I think it is best to keep an open mind that even though all signs point to further downside, it may take a more gradual approach then just dropping fast and hard creating a capitulation low.
SPX stocks at 20-day highs: Currently in oversold territory, but this measure can stay oversold for about a week or two before getting a decent bounce. Regardless, it does show the weakness in SPX stocks despite the index being able to hold support.
SPX stocks above their 20-day MA: As I pointed out over TWTR last week, breadth was deteriorating even when the market bounced on Thursday. As you can see not many stocks are holding the SPX up anymore.
SPX stocks above their 50-day MA: Similar comments to the above.
SPX 52-week highs minus lows: This is the level it continues to bounce from, but definitely threatening to break range (2 year look to see how that level is often where things bounce).
QQQ stocks above their 20-day MA: I have been showing this for several weeks to point out that while price was at or near all time highs, breadth was showing some major divergence. Nothing has changed in that regard and while the index continues to look the best on the surface, it looks awful underneath the surface.
Bearish MACD Crosses: The last few weeks I have pointed out how SPX, DOW and the NYSE all had bearish MACD weekly crosses. Last week I updated it by adding that the IWM was threatening a bearish cross. The threat is now real and the only major index holding out are the QQQ’s, but that too is starting to get a threatening look.
Open Interset:
SPY-W: 5 for 5 now regarding pinning.* This is a weekly and has less influence then the one below which is a monthly. Below, the strikes that stick out the most are the 213.5 and 214 puts. These closed in the money, but only mildly so (unlike last week in which the highs puts were solidly in the money). My point for bringing this up is that if SPY opens Monday below 213.5 and cannot get back above that price then it increases the odds of further selling to at least the most recent low. However, if price opens above or is able to get back above 214 then it increases the odds that by Wednesday expiration price closes at or above 214. Also (and I know this is getting complicated, but don’t shoot the messenger), if price vacillates between the recent low and 214 next week and the 214 puts do not close out then it also increases the chances of a close Wednesday at or above 214. Thus, if you are bearish you want to see price open below 213 and then drop below 212. The longer it stalls, the more it increases chances price gets back above 214 by Wednesday’s expiration (assuming those puts don’t close out).
SPY-F: 2 for 2 now regarding pinning.* Next week is monthly OPEX so these options have less chance of changing and for now suggests that price will close above 212 and maybe 215 by Friday. I say maybe 215 because when a week starts with price already under high strike puts it doesn’t always come back (as I was pointing out above). With that said, if price moves below 212, there will likely be sellers that take it down to the 210 area (yes delta hedging could play a role – but typically delta hedging happens more at the end of the week). Thus, if price falls below 212 early in the week and those puts do not close out, it increases the chances that by the end of the week price is back over the 212 puts. If, on the other hand, price falls below 212 late in the week it could lead to a more significant drop especially if 210 is then also breached. But again, before bears get too excited, just be open minded that price could get stuck again next week by all the put support and even get back over the 214/215 puts if the selling pressure isn’t strong enough and if things get oversold.
In sum, all evidence points to more downside; however, with monthly OPEX next week price may struggle to get below or stay below all those puts. It does sometimes happen and typically the times it happens is during monthly OPEX, but it’s usually the exception not the rule. There is a lot to take in and tons of scenarios with the two open interests above, but I am going to attempt to easily sum it up: If price drops through 212 early in the week and the puts do not close out then it increases the chances that price will bounce back strong by Wednesday or the end of the week. If price cannot breach 212 or gets back above 214 it also increases the chances that the status quo of being stuck in a range continues. Finally, and likely the best scenario for bears, is if price held near the bottom of the range for most of the week and then later in the week broke through 212 hard. Anything above 214 would put the bulls back in control (at least in the near term) to close over 214 Wednesday and then 215 Friday. And, of course to make it more complicated, keep in mind the open interest can change during the week and shift the likelihood of what is to come.
Anyone who wants up to date analysis on this each day and during the trading day I would suggest subscribe to my premium service. Not only will you get real time commentary about the market and its likely next move, but you would receive open interest analysis on individual high momentum stocks and real time trade alerts.
*I am defining pinning as closing between high strike puts and calls or if only one strike is high then below or above them respectively. I began tracking Friday’s 10/7/16
It actually only got to 213 in the last few minutes, but still managed to hold above it to hurt all those put holders.
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