If you didn’t make money shorting this market today then you must not have read my market take from last night. After initially gapping higher right into the 1,520′s resistance zone the S&P500 got walloped. SPY stayed green until about 11:30 but once it went red it did not stop. The only thing that saved this market from moving even lower was the closing bell, as all the major indexes closed at the lows of the session.
- Take your pick — Doesn’t matter where you look, everything took it on the chin today
- AMZN short gets going — The short trade I outlined last night is off to a good start, now it needs to sustain the downward momentum
First of all, today was the widest range day in the SPY ($3.86 total daily range from high to low) that we’ve seen in over a year. In addition, the S&P500 also broke key support at 1,495. Combine those two together and its no surprise the VIX had the day it did, rising 34% and now sporting a gain of 5% on the year. Today’s action leaves a lot of bag holders (at least that’s what they look like at the moment) sitting above 1,510 in the S&P500. Should SPX fail to regain 1,500-1,510 by the end of this week and the bears will retain the upper hand in my view.
Leading the sell off today was XLF, which went its lows of the last month in one day today. XLF is now back at a former important level: $17.20. You may recall that $17.20 was key resistance early in the year so now it is to be seen if this level can provide support. In the immediate term you could have some bounce players here, but overall the financials looks due for a definite consolidation period. I would not be surprised if XLF moves towards $16.40-$16.60 before establishing an overall bottom. The best case scenario though would be if XLF avoids going below $17.
Technology, as measured by QQQ, was also a big time culprit today. QQQ settled at its lowest closing price of the year and is in the midst of a more alarming long term head and shoulders topping formation. There is still a lot that needs to happen, but if QQQ continues to trend towards $65 and breaks down there this formation could gain some serious momentum. That would not be good for the markets as the head and shoulders pattern would point to a price level of $55 for QQQ, or about 16% away from current levels. There is a lot of support before that even becomes a thinkable possibility, mainly at $63.50 and $61.30.
AMZN faded hard today along with the rest of the market, ending off of its high of day by over 3%. Moreover, AMZN closed below the mid point of Friday’s range and was probing $259′s into the closing bell. For this short to stay in tact I now want to see AMZN remain below $263-$265 and test and break $255 by the end of this week. If $255 breaks I expect my $250 target to trigger with the possibility of an even deeper pullback to $240 in play the sooner a move lower occurs, if at all (i.e. the sooner AMZN falls to $250-$255 the more bearish it is).
For those wondering where the market might be heading next, I strongly encourage you to review the latter paragraphs of my market take from last night in which I analyzed the various open interests in the S&P500. You can find them below:
“In determining where the S&P500 might fall too in the event a break below 1,495 does play out, I wanted to examine some open interest on SPX option strikes. Open interest represents the amount of contracts that have been bought to open (long) or sold to open (short) on a particular option strike, be it puts or calls. The greater the open interest levels, the more likely it is such strikes can act as supports or resistances the closer the index gets to them, or ‘magnets’ if you will.
Looking at March 16th expiration on the put side of an $SPX option chain and you’ll notice that peak open interest resides at 1,500 with over 188,000 contracts open. The 1,450 put strike is home to 3rd most open interest of 171,000 (behind 1,400 around 175,000 contracts). My thesis is that that 1,500 has acted as strong support due to the huge open interest on the puts there. This is tricky because it involves counter intuitive thinking, but bear with me.
Funds and institutions are the most active participants in $SPX options and they will often buy puts to hedge long positions. The fact there is huge open interest at 1,500 is supportive because as long as SPX remains above 1,500 they are not worried about their long positions and can endure the losses they’ll receive from their hedged position on the 1,500 put premiums they are holding.
Should 1,500 start to give way though ahead of March 16th expiration, as in a move below that key 1,495 support then you could see this open interest turn into a headwind for the market. Why? Because those same hedged positions on the premiums will become profitable, and the holders of them will become even more so if they start dumping their long positions, causing a deeper market pullback. In that scenario I’d expect SPX to pullback between 1,450-1,475 as that is home of the 3rd & 4th most open interest on the put side.
Looking at calls for the same expiration, peak open interest is also at 1,500 with 1,550 also boasting a hefty amount of contracts opened, 98,854 to be exact. So just like you have longs using the 1,500 puts as a hedge you also likely have shorts using the 1,500 calls as a hedge. If the market is able to remain above 1,500 and push above 1,520 short covering could fuel a greater rally.
All the while the open interest on the 1,550 strikes would likely increase as shorts hoped to cover some losses by betting on premiums that will do well in the event of a move up towards the all time highs. This to me is one of those ‘magnet’ scenario’s where you could see the open interest at 1,550 act as a magnet should the market be able to advance beyond the 1,520-1,530 resistance zone established this last week. Bottom line, my analysis of open interest on options expiring March 16th for $SPX has me targeting a move to 1,450-1,475 on a 1,495 breakdown or 1,550 on a 1,520 breakout. This would be based on either the breakdown or breakout happening with enough time before expiration, say the next 7 trading days or so.”
-Stockhaven’s Market Take 2/24/13
Note that the 1,495 breakdown happened today so 1,450-1,475 seems like a very realistic destination by March 16th expiration.
Did you know that you can watch Stockhaven trade live in real time?
Learn how to daytrade by watching someone else trade! Watchhimtrade.com is the only site that lets you look over the shoulder of a professional daytrader.
Watch this video now where he shows you how it’s possible to make 100% in just 5 minutes!