Saturday, December 28, 2013

It's Over! Move Along + First OPEX of 2014



I bet I got some bears excited with that title. What I mean is 2013 is over, not the bull market. Jan 3rd expiration is now in the forefront.

From Thursday evening (12/26):


Anyone who has been following me this year knows that I have been a huge bull, so those words coming from me may sound alarming. I am here to tell you they should NOT be. I am still a longer term bull and do believe we will go higher in 2014; however for the short term, I think things get a little tricky up here. Here are some of the reasons for my caution:

  • The market is making new highs, but the VIX is not making new lows
  • The percent of stocks above their 20-day MA is starting to get into overbought territory 
  • The put/call ratio continues to be very low expressing excessive bullishness
  • SPX is getting very extended from its 20-day MA. It's close to an area that usually concludes in a pull-back
  • I am noticing more calls than puts on the highest open interest strikes of momentum stocks (in contrast to what I saw most of the year)
Having given my reasons, I now have caveat to that. I think it is still too early to call this current rally over or to go short. First, seasonality tends to be very strong both in the last few trading sessions of the year as well as the first few trading sessions of the new year. Second, many of the indicators I mentioned above could be worked off by going sideways. Third, breadth is very strong signifying that the rally has legs. Fourth, we still have not been given a more definitive signal that this current rally is over. And finally, I think it's possible that we see a parabolic move higher before we get a meaningful pullback. 

Due to all the above, I have raised some cash and am holding smaller positions, but not exiting completely or shorting yet. Any trading positions (not including my longer term investments) that I am currently holding are swing trades as I still believe there is some rotation taking place right now. When I see a more definitive signal that we are going to pull-back, then I will look into shorting. For now I am going to stick with seasonality and concentrate on individual stocks and rotation.

Open Interest: Keep in mind volume will once again be light next week and that the market will be closed all day Wednesday. If you are new to my blog and reading my notes and open interest for the first time, please note it should be used as an asset to your other technical tools and I would advise against making trade decisions solely based on these. 

Note on Quarterly Expiration: I typically don't track the quarterly expiration so this can be an experiment for all of us. Quarterly options on SPY expire on Tuesday December 31st. Quarterly options are made available far in advance so many of these options were likely bought or sold a long time ago. I condensed the graph just to show the current price range we are in. If* (the asterisk emphasizes 'a BIG if') quarterly options will affect the close on Wednesday, than the most painful pin to buyers would be 180. However, there is also a wide range from 177 to 186 that would also hurt the majority of buyers. 


SPY: Last week price was already above the highest call strike of 181 and I said that if it stayed above it was bullish and I wouldn't be cautious unless we closed below. We managed to stay above it the entire week. The same goes for this week. We closed Friday at 183.85, above the current highest call strike of 183. Staying above it tells me the rally is not over. If we close below, I would interpret that as a signal that the rally is running out of steam.


AAPL: Perfect 560 pin last week. If you missed this tweet by my buddy Greg on Friday, check it out:

Last week we started 10 points below the 560 highest OI. This week we are already above the highest call OI of 550 so staying above it is a good first step to getting it going again. If it indeed rally's then next battle area is around 570. 


AMZN: Really did nothing all week, but so far maintaining its bullish trend. The good news for bulls is that the highest call strike is now at 405. If the bulls want to take this higher, this would be a good week. If it can get through that round number stocks tend to consolidate around, perhaps momentum will keep pushing it higher. 


BIDU: I was bullish on it last week, but it took till Friday to really move. I'm still bullish and hoping it follows through next week as there appears to be rotation into China names. Once it gets through and closes above 175, then I say rally on.


FB: Began the week strong, but then gave everything back. The highest call strike at 55 this week is the same as where the highest call strike started last week. It's also very close to where price closed Friday. I would like to see this get to 60 next week, but currently it seems like a better wait and see if 55 holds as support.


GOOG: Made an all time high on Friday and right at the last minute of the day also managed to make an all time closing high. It's a little overbought right now, but doesn't mean it can't or won't go higher. Some healthy digestion would be good. The 1,120 is the obvious strike that sticks out and I noticed from the options sales and time that most of them were sold to open late in the day Friday. So perhaps someone is expecting it to get above that price or maybe they are selling them against their current stock position. No way to know, but I will keep an eye on them next week.


LNKD: Continues to be an under performer and taking the "mo" out of momentum stock. Perhaps we finally see some progress next week if open interest can play a role. The highest puts at 225 is above the current price. Let's see if it can close there or above. Currently, I see no edge in terms of risk/reward. 


NFLX: Not a pretty ending to the week; however, it could just be profit taking after a monster year. We need more evidence. Currently, there is a wide range between the highest put and call strikes. Again I see no edge. 


PCLN: Still holding up well. Even if it went all the ways down to its 50-day MA from where it currently sits, I would still say I think it is fine. After such a huge year, a little retracement is healthy. Having said that, it might get chased into year end and/or bought up at start of year because it's a hot stock for institutions to own. I personally hope it goes lower because I think the company will continue to do well and would like to get it cheaper. The highest strikes are the 1,190 and 1,200 calls. 


TSLA: The 150 strike has posed quite a challenge for TSLA, but next week the highest call strike is 160. Bulls, now is your chance to shine, make it happen.


TWTR: What an entertaining stock. Currently, the best pin would be 65, but I would completely disregard that for now as I think much stronger forces are working here. I personally do not feel the run is over and believe we have more to go; however, be warned that my conviction is not as strong as it was when I first thought it would be chased. 


Happy New Year!!!! Looking forward to 2014 and the changes I will be making to the information I provide. 

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