Last week here I summed things up with: “Currently, the market is near or already oversold and likely to bounce soon if that has not already begun late Friday. Should price immediately go lower it will become even more oversold and not a place to initiate shorts.” Furthermore, I discussed that the open interest suggested that the close would be above 234 by Wednesday expiration, thus that gap down Monday morning was a gift. Was it easy to buy Monday morning? No, it never is; but the information available gave buying the higher probability trade. If you struggle with pulling the trigger at times like that consider joining SassyOptions where we were dip buyers.
As I stated a couple weeks ago, I continue to believe SPY will get near old highs and likely exceed them before a larger correction takes place. If you also believe that, it makes smaller pullbacks (similar to the one two weeks ago) buying opportunities. With that said, it’s not likely that those new highs will come next week, which you can read about below.
Breadth: If you missed comments from last week on what you should be looking for regarding breadth on this market move higher you can go back and read it here.
SPY-W: (22 of 29 pins since Wednesday expiration inception).* Next weeks open interest has both good news and bad news for bulls. The good news is the current best pin is around 237, which is higher than Friday’s close. The bad news is that there is a lot of resistance starting at the 238 level and less put support than call resistance. Should price fall below 236 and get all the way through the puts to 233 there is no put support till 230. To the upside, price would have to push through 238 to continue higher. If that happens (perhaps because of new quarterly money inflows), it would likely fall back by Wednesdays close unless the open interest shifted prior to expiration (I post updated open interest over twitter during the week).
SPY-F: (17 of 24 pins since I began tracking Fridays).* Similar to above, the open interest is suggesting that any upside next week will be limited to 238. If price got above there, the open interest would need to shift or price will likely be back below there by expiration. The downside currently doesn’t have much put support. What does exist begins at 236, but doesn’t get strong until 232. Based on that information, should SPY be very weak giving back all of last weeks gains plus some, then one could look to buy SPY before Friday’s expiration where it likely closes at or above 232. Similarly, if price gets over 238 and the high calls are still there, then one could short SPY for it would likely close at or below there. If the open interest does shift or if SPY is able to get over 238 the next large resistance is 240. The current best pin is between 236 and 237, but it can easily change at this point.In sum, the longer term trend is still up and price is likely to see higher prices sometime next month; however, it is unlikely to see new highs next week and if it does then it is a fairly high probability shorting opportunity given the open interest. Even if new quarterly inflows are strong and lifts SPY, price is likely to close at or below 238 for both Wednesday and Friday’s expiration (unless those 238 calls close out prior to). There is much more room to the downside should weakness seep into the market, but SPY has high odds of closing at or above 232 by Friday.
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Wednesday 3/29: successful pin.
Friday 3/31: successful pin.