Are Storm Clouds On The Horizon For SPY?

The second half of last week was crucial for market direction going forward. We had the Fed meeting where they updated their policy stance and kept interest rates unchanged along with stating they had no intentions of cutting back on their measures to support the economy. We also had many of the big tech stocks release their quarterly earnings and for the most part those earnings were very good. However, we didn’t see many of those stocks sustain rallies after the earnings were released.

Why was that the case?

We have to put into context what the overall market has done over the last few months leading into earnings season. Most stocks, especially the tech names, have rallied to new all time highs. As a result, there was a tremendous amount of good news already priced into the market. It was a prime buy the rumor and sell the news event opportunity and that is what we started to see late last week.

We aren’t expecting the market to crash anytime soon. However, we have to realize that the current levels that we are seeing are unsustainable. A healthy pullback in the near term would better set the market up for another leg higher. The problem with the slow never ending move higher that we have seen the last few months, is that the daily volume has decreased by 30-50% and the average true range has contracted to down below 4.00. In other words, the boat is completely loaded on the bullish side. When this happens, trading becomes more difficult because traders are left chasing the new highs every day.

With volumes low, intraday range tight, and just about every stock on our watch list at overbought levels what is the best approach for trading next wee? Let’s take a look.

SPY Support and Resistance

We like to start out our Market Outlook by covering the technical level on the S&P 500 ETF (Symbol: SPY). We love SPY as a trading vehicle but it is also a good barometer for overall market conditions. SPY did make a new all time high last week at $420.72. That is our new reference point on the upside. Should price continue higher next week and that level breaks, we will be looking at $421.50, $422.00, and $422.50 as the next areas where price could stall out.

We did finally get some selling on Friday but we didn’t break any key support levels as of yet. We tested the 8 EMA on the SPY daily chart both Thursday and Friday last week. Each time that level held as support. That level is currently sitting at $416.86 going into next week. If we are going to get anything going on the downside that level will need to break on a closing basis. Below that level, and we could see a push down to the 20 EMA at $413.53.

The key to these support and resistance levels is to see them broken on a closing basis and on good volume. A poke through these levels intraday is not enough. We need price to close through these levels and would like to see it happen on a spike higher in volume.

SPY Volume and ATR

We would like to see the daily volume on SPY closer to the 100 million share level. With the selling late last week, we did see 85 million shares trade on Friday. That is a good start but we would like to see that number continue trending higher into next week.

The Average True Range (ATR) has also contracted down to 4.00 on SPY. That indicates very tight price action intraday and makes for tricky trading conditions. We would like to see that ATR start trending back up to 5.00 or above. In order for that to happen we will need to see some selling pressure next week.

Stocks Setting Up For Next Week

While we would love to jump all in bearish at these levels looking for a pullback, price has not confirmed to the downside as of yet. Ideally, we would like to see a few closes near the lows of the session early in the week next week. Should this happen, it would confirm a near term change in trend and allow us to get more aggressive with bearish positions.

While we aren’t looking to buy long puts just yet, we continue to see opportunities to sell out of the money call credit spreads. These allow us to lean bearish but in a more conservative way. The credit spreads put the time decay in our favor which is ideal given the tighter range and slower conditions that we have been seeing the last few weeks.

Call Credit Spread Opportunities:

  1. CHWY
  2. YETI
  3. SFIX
  4. FSLR
  5. FB

Put Credit Spread Opportunities:

  1. NFLX
  2. INTC
  3. MU

Long Put Opportunities:

  1. DKNG
  2. CHWY
  3. XRT
  4. AMAT
  5. BIDU

News Events Next Week

Going into next week, we have a handful of market moving events to keep a close eye on. First, we have a number of Fed speakers on tap including Fed Chairman Powell speaking Monday afternoon. Don’t fight the Fed has been the theme of this market for months now. We know at this point they are not going to rock the boat too much. However, given how overdone equities are at these levels, we do expect them to start talking about slowing down their emergency measures to prop up the economy. Let’s see if that starts next week.

We also have the employment report that is out on Friday before the market opens. We know the Fed is watching the jobs market closely and basing their policy decisions off this number. Most are expecting a very strong report so we will see how this impacts markets going into the end of the week.

While most of the heavy hitters have released their quarterly earnings, we do still have a handful of names releasing next week. We will be looking to see if the sell the news trend that we talked about earlier continues.

Weekly Recap Video

In this week’s Options Recap video we take a look at our Overnight Pop Trades that were closed out on Friday for nice winners. We also cover a few of the setups that we have our eye on going into next week. Take a look and let me know if you have any questions that we can help with.



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