Equities Finish Off Of The Lows On Options Friday

The S&P managed to complete a two day rally for the first time this month with Friday’s close of 1271.50 on the S&P, 12,003.04 on the DOW, and 2616.48 on the Nasdaq. The 12,000 level on the DOW makes sense as round numbers are generally the case for an options expiration and additionally, the 12,000 level is a huge mental support and is not likely to be taken out with just one attempt. On Thursday I said that we would likely close higher Friday, which we did, and now I believe that the market has put in a short term bottom and will rally for the next week or so, but ultimately this down cycle is not at all finished.

So yes, I do expect this market to go lower fairly soon, but to give you an idea of how overdue for a rally we are, yesterday AAPL closed below it’s 50, 20, and 200 MA’s for the first time since April 2009. What’s more is that it was trading above all three of those moving averages just 10 trading sessions ago and since then has lost nearly 10% of the stock’s value. That to me, is simply screaming oversold.

The tag of the 200 MA and the 1257 support on Thursday was an indicator of a bottom as evidenced by the bottoming tail on the daily candlestick. Yesterday, we closed well off of the highs but still managed to tough out a rally to follow up Thursday’s action, and it had significant volume behind it.

Given the oversold condition, and the belief that so many traders are most likely waiting with their orders open below support, the contrarian might believe that the market is not ready to attempt another test of 1257 quite yet. The best way I can explain this is that when everyone is expecting the market to move one way, most often is does the exact opposite and it is clear that everyone has been doubting the market’s strength as of late what with the fear of a Greek default, which translates into what was the highest put to call ratio in 18 months. I think it makes sense that we see a minor rally in the next week or so, not an overly significant one, but enough of one to even out the lopsided short trade.

It also appears that the weekly chart confirms that a pause in the selling is up ahead. I have trouble believing that a doji candle would have been made last week if we were about to flush once again. Hedge funds, iBanks, and HNWI’s do not short charts that go straight down, nor do they buy charts that go straight up. So here’s an old equity trading 101 saying – “buy the dips, sell the rips”. In other words, never chase charts and always wait for a pullback before entering any stock that is in a confirmed up or down trend. We will get a shorting opportunity, but if you are thinking about opening new shorts at this level, you are doing so when it is already down 7.5% in the last 45 days and down 5.5% in the last 21 days.

I would look for it to gain back at least half of the 5.5% lost in the last three weeks which would make our upside target between 1290 and 1299 which are the levels that I have drawn in the daily chart above. The 20 MA is currently at 1299 and a tag or pierce of that MA could potentially be the time to go short but it won’t be clear to me until we get there. I think that it is safe to play this from the long side but I would limit those longs to stocks that are close to or at support and have lagged the market on the way down. And as always, be sure to use prudent stops as even though we are oversold, the markets are still extremely weak and are subject to any new news that comes out of Greece and the EU.

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About Aaron Basile
Market Technician, Equity/Commodity Trader, Austrian Economist, Contrarian Investor

3 Responses to Equities Finish Off Of The Lows On Options Friday

  1. Rene from Cape Cod says:

    You have really got this stuff together. One of the best analyst out there. Once the word get around, it will travel like water.

  2. eduardo says:

    Thanks Aaron, Good stuff !!

    • Aaron Basile says:

      Thanks Eduardo!

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