Dear Trader,

There is currently a substantial number of stocks trading up and above their RSI. If you are unaware the RSI or Relative Strength Index is an indicator that I use which tells me when a stock is over bought or oversold.

Now, the RSI is going to take into account the % change from day to day for a given period much like other indicators we use. So if you see a stock that is going only in one direction without any pull back, this is when you should be stopping and thinking to yourself, Is this position a bit too crowded to see any real profits?

Check out a talk I did on RSI and be on the lookout for more details on this in the coming days as we start to see the FOMO traders get unraveled

How the QQQ gets Pinned This week

Let’s look at the QQQ OI chart, because it nailed the market activity last week and why you may want to hold off on any long QQQ positions over the next week

If you look closely youll see the $330 is the first time on the chart that you start to see call open interest that isnt really challenged by the puts.

Now when you see a peak in call open interest and there isnt much put interest to challenge it, it becomes a point of resistance for the stock.

What is interesting to me is there was a reduction in the open interest on the call side yesterday. In order for open interest to go down there has to be more people selling off their positions than any other activity. This is the reason it typically happens at the end of an options cycle.

Now if we go up and touch that $330 level again and turn back around, you know just as well as I do that we have a bit of pinning activity in store for us next week as the options get closer to expiration

Using this data I expect to see QQQ get pinned 300 this is because we are seeing the call and put interest start to balance out and that point of contention will have QQQ teetering right at that level as both sides are fighting to be right.

It is the reversal that is key here. If we break past that $330 mark you should expect moves higher once resistance is out of the way. If we see the reversal I expect once it gets to about $310 it will start to drawl itself closer to that $300 price.

There’s soooooo much more to the technicals behind yesterday’s move. If you have been around I’m sure you are seeing the same Idea play out in your head.

Maybe your new, if you are stick around I’m happy to open my technical tool box and show you how to use each and every tool inside, all you have to do is show up.

Check out this Chart Action

I was toying around with a spreadsheet that I made nearly 15 years ago that I use to compare periods one day at a time for any stock, ETF or Index.

Opened it Wednesday and started pulling the charts for the SPY and QQQ and low and behold the SPY rang the bell for an 89.7% match for the six-month period from 2008.

Here’s why it matters….

We’re in the middle of a bear market rally that matches these charts. Back then we saw a 20% decline followed by a 15% rally. It’s all a part of the denial phase of the sentiment cycle.

Now there is something else that I found astonishing. It comes from an indicator that I havent used in a while, the Fibonacci sequence.

Here is your Fibonacci retracement levels from the market top in January to the bottom last month. We just hit the 50% retracement on Thursday as the SPY tapped $420.

Here is something interesting I the other night about the significance of this level? “While stocks did manage in early trading to break above the closely watched level of 4,220 which is the 50% Fib retracement – which matters as there has never been a bear market rally that closed above the 50% fib that subsequently went on to make new lows”

We are here this is the big test – you know my rules 1 time is an event, 2 times makes a break and 3 is a trend – if we don’t close above the 50% Fibonacci retracement level youre going back to the bottom. If you do close above the 50% its never had a subsequent bottom.

Now as of Friday we did close above the 50% retracement so if we see a close above today and Tuesday we should expect the market to continue its run higher, if we dip back down then we are just one step closer to that treacherous acceptance phase.

Remember we also have that point of resistance in QQQ that’s going to work on pushing it back down.

Let’s see how this week plays out and we might just see some big changes coming in the market soon, only time will tell.

Talk soon,

Chris Johnson
Quantitative Specialist, Penny Hawk


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