Market Direction and Stock Trends

[DiscoverGold]

Options Suggest Market Indecision and Market Rotation Not Finished
By: Joe Duarte | May 23, 2021

Last week, I noted that the presence of a large number of "amazing price charts and bullish directional movement in the options of a good number of stocks outside of the mainstream" and decided to "stick my neck out and suggest" that we were seeing "a rotation out of the larger stocks and into smaller and mid-cap niche stocks."

I also noted that I was "still cautious, because options expiration data from the week ending on 5/14/21" suggested "that the 415-420 strike price areas for SPY" still held the key for the market. All of which meant that "if put buyers and stock sellers [took] over again, we could see an acceleration of the selling." Finally, I added that "a sustained and well-supported break above 420 on SPY is likely to lead to higher prices. Meanwhile, a failure at 420 and a break below 415 will likely lead to resumption of the down trend."

In fact, what we saw on the week that ended on 5/21 was more of the same, with SPY ending the week just below 415; it failed to take out the 420 area convincingly while breaking down to the 406 area temporarily. Moreover, as has been the case of late, by week's end, the put buyers again overwhelmed the call buyers at 415, leaving SPY to close at an indecisive 414.94. This type of action suggests that put buyers forced market makers, who sold them the puts, to sell stock index futures and stocks in order to hedge against losses. And, on a cautionary note, the Monday May 24 weekly SPY expirations could be more of the same, as put buyers ended the week well ahead of call buyers.

NYAD Recovers After Midweek Rout

The New York Stock Exchange Advance Decline line (NYAD) remains in a volatile consolidation pattern, but the uptrend has not been broken yet.



This is because, as long as NYAD continues to make new highs, remains above its 50- and 200-day moving averages and its corresponding RSI reading remains above 50, the trend remains up. This combined set of observations has been extremely reliable since 2016 and shows no signs of becoming unreliable as of this writing.



The story is slightly different in the Nasdaq 100 index (NDX), which ended the week just below its 50-day moving average. This is very disappointing as the index failed to fully capitalize on the oversold reading of 30 RSI on the prior week. Still, NDX is still trading above the 13,000 area and there is a potential W bottom in place if NDX can move higher without a retest of the recent lows.



The S&P 500 (SPX) showed a bit of resilience during the recent selloff, as it held at its 50-day moving average and the Accumulation Distribution (ADI) and On Balance Volume (OBV) indicators did not break down. The index remains above its 20-, 50- and 200-day moving averages.

Joe Duarte

In The Money Options

Read Full Story »»»

DiscoverGold