Is the SPY Positioned for More Gains?

The SPDR S&P 500 ETF Trust (SPY) could make a run at $210

Senior Vice President of Research
Apr 4, 2016 at 9:45 AM
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Last week, we discussed the "call wall" at the 205 strike prior to the expiration of March 24 weekly options. The 205 level indeed marked a peak in the week prior to Easter. By mid-week -- after the expiration of March 24 options -- a call wall was most visible at the 207 strike in last week's "double expiration" of weekly and quarterly options, per an observation I made on Twitter. And it was this call wall that marked the SPDR S&P 500 ETF Trust's (SPY – 206.92) weekly peak the day after Fed Chair Janet Yellen made dovish comments in a speech.


With last week's "double expiration" past us, keep in mind that standard April expiration comes extremely early, since Friday was the first day of April. This means we are within that two-week window in which stocks are most vulnerable to exaggerated moves, given that standard monthly expiration usually sees the biggest open interest in both calls and puts. Exaggerated downside moves are more of a possibility, as put open interest on equity index and exchange-traded funds (ETFs) usually towers above call open interest due to speculative bets against the market being complemented by long portfolio hedges.

Unlike January and February, and more like March expiration, the SPY is currently situated comfortably above most of the heavy put open interest strikes, when combining open interest that expires both this week and next. In January and February, the SPY was trading just below some put-heavy strikes, and there was still a ton of put open interest stacked at lower strikes, which we identified as potential magnets, which actually occurred. As April expiration approaches, we don't appear as vulnerable to put delta-hedge selling as we were in January and February.

A call wall is visible at the 207 strike, but again this open interest is minimal and thus should have a minimal impact in the days ahead. If the SPY moves through $207, a quick move to $210 -- equivalent to S&P 500 Index (SPX - 2,072.78) 2,100 -- would not be surprising.


"In addition to the many observations I have made about the current SPY pattern resembling the SPY's behavior in the August-November 2015 period, I have also pointed out the pessimism that continues to greet the advance from the February lows. It is the pessimism that looms that makes the present rally from the February lows different from the September-November double-digit percentage advance."

-- Monday Morning Outlook, March 28, 2016

For three months, we've been discussing the striking similarities in the SPY's price behavior with that of the August-November 2015 time frame. As the SPY moves toward the aforementioned $210 level, the pattern continues to hold. Note the encircled areas in the chart below (late October and late last week), particularly the gaps higher followed by a couple days of selling before another rally. Coincidentally, or perhaps not, both were Fed-driven. In late October 2015, there was a Federal Open Market Committee (FOMC) meeting that was well received. And as I said above, last week Janet Yellen came across surprisingly dovish in a speech to the Economic Club of New York, on the heels of hawkish talks among other Fed governors the week prior.

The good news in the chart below is that if the pattern of August-November continues to play out, we could see a sharp move higher during the next few days up to the $210 level. The bad news for bulls is that if the pattern continues to assert itself after a move to $210, a top would be in place, followed by a month of choppiness that precedes another huge double-digit decline (think "sell in May and go away").



The good news for bulls, as we've been discussing the past couple of weeks, is that the sentiment backdrop is still supportive of a major rally from these levels, even after a double-digit percentage rally from the lows.

For example, whereas short covering was evident in the September-October rally that ended with a great big THUD, short interest on SPX component stocks has risen 3.6% since the February low, according to figures released last week and updated through mid-March.


Moreover, going into last week's trading, note that large speculators in the weekly Commitment of Traders (CoT) report were net short SPX futures. This group was well entrenched in a net-long position ahead of the decline that began in late-November 2015 and lasted into January-February 2016. Strong price action could force large speculators out of these short positions. In other words, buying could beget more buying in such a scenario.


SPDR Gold Shares ETF (GLD) follow-up

"… [L]ong-time readers know that we emphasize monthly closes. GLD popped over its 36-month moving average intra-month, but after last week's sell-off, it enters the last week of March below this important trendline that marked a key low in 2008. The declining 36-month moving average is now at $118.48, so we still advise a monthly close above this trendline to confirm that a change in the longer-term trend is probable."

-- Monday Morning Outlook, Monday, March 28, 2016

Per the chart below, gold disappointed in the latest week, failing to close out March above its longer-term, three-year moving average. So, from a technical perspective, the jury is out as to whether its rally from the fourth-quarter 2015 lows is a longer-term change in trend or one of many fake-out rallies since its peak in 2011. Potential support from a trendline drawn through lower highs since the third quarter of 2013 sits at $114 and presents a lower-risk entry point than $120 for anyone speculating that SPDR Gold Trust ETF (GLD - 116.93) has reversed its misfortunes over the past few years.


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