Major US equity indices are once again under pressure, likely eyeing recent lows. In the event they are not breached, options can offer an opportunity for nimble traders.
Bears were looking at decent odds to get aggressive last week. The rally that began late October came to a screeching halt a week ago (Chart 1). Right where it could ideally have for them.
On the S&P 500 large cap index (2726.22), between the all-time intraday high of 2940.91 on September 21 and the low of 2603.54 on October 29, the index fell 11.5 percent. A 0.618 Fibonacci retracement of that decline comes to 2812.03. Fibonacci followers take this golden ratio very seriously, hence these numbers are always worth a close watch. For the past eight months, 2800 has also proven to be an important horizontal level where bulls and bears fought several tugs of war. This area also approximates the underside of a broken rising trend line from February 2016. All in all, resistance at 2800 was tough, and it held.
Last Wednesday, post-Tuesday’s mid-term elections, the S&P 500 shot up 2.1 percent, but then the momentum stopped dead in its tracks. The intraday high of 2815.15 in that session essentially tested 2816.94 on October 17 – unsuccessfully.
Arguably, shorts anticipated this, expecting either a test of recent lows or worse. In the latter scenario, overbought monthly indicators can continue to unwind.
In the October 16-31 period, short interest on SPY (SPDR S&P 500 ETF) rose 3.3 percent period-over-period to 186.3 million shares. In all of October, it jumped 23 percent. As early as mid-August, short interest was 143.3 million.
NYSE and Nasdaq short interest shows a similar trend. On the Nasdaq in particular, shorts have been persistently adding all this year (Chart 2). The mid-October high of 8.9 billion shares was the highest since mid-March 2016.
If longs can regroup in time, the rather elevated level of short interest in due course can end up helping them as shorts begin to lock in profit. As a matter of fact, on the S&P 500 they are staring at one such opportunity. The volatility over the past month has created a potentially bullish reverse-head-and-shoulders pattern. For that, two things need to happen – (1) hold 2700 and then take out 2800. Should things evolve this way, technicians would be eventually eyeing 3000.
