Even with Thursday’s bounce I remain net bearish on SPY for reasons I outlined yesterday, but that doesn’t mean I won’t participate if we get a continuation of the bounce on Friday. The easy price level to watch is $165.83, as that is last weeks close and if SPY can remain above it it will avoid posting its first 3 week losing streak in over 14 months (and also negate one of the bearish reasons I cited in the article linked in above). That sets up a nice over/under trade to consider at the open on Friday.
If SPY is able to hold over $165.83 then that sets up a test of this weeks high around $166.20. Above $166.20 and SPY $167 (site of peak open interest on the weekly call strike) comes into play with resistance at $166.63 (last Friday’s high). If SPY holds over $165.83 but isn’t able to break $166.20 resistance convincingly then it’s more of a neutral set up. Considering that Friday is expiration day, you have to be wanting to see momentum if you’re going to play same day expiration. This is where time frames are incredibly important.
Many people think that simply identifying your stop loss and target is all that goes into buying an option, but time frames are equally important, perhaps even more so on expiration Friday due to the sensitivity of premium to time decay. For example, on Thursday SPY was able to break above its 9:30-10:00 high by 10:15 and make a nice move higher over the next 30 minutes so 10:15 could be when you want to see a move higher happen by if that’s your set up.
As for the under $165.83 set up you would then have SPY on pace to register its first 3 week losing streak since May 2012, something I’d consider bearish. A break and hold below $165.83 target $165 with key support being between $165.30-$165.50. $165 is home to peak out of the money open interest on the put side so if the set up is there you could see it act as a magnet ahead of Friday’s close. The $165′s were also the most actively traded put on Thursday.
Regardless of what happens Friday though my outlook going into next week remains bearish biased, but if SPY closes the week green one of my reasons as to why I’m bearish will be negated so I’ll have to reevaluate this weekend if that is the case. Another over/under set up to be mindful of from a more general long/short perspective is Dow 15,000. That is an obvious psychological level that helps simplify your outlook, in an otherwise whippy, volatile, and complicated inflection point for the markets.
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