What a Run, Now What?

From holding the SPX 2,740 to the intraday high around the 2,900 area in one week is a fantastic rebound! It was a classic rip your face off short squeeze in my opinion. The squeeze was magnified by underlying equities like the Beyond Meat (BYND) euphoric run and carried over into other names, especially software. While many will contribute this to the acquisition of Tableau Software (DATA) by Salesforce (CRM), as the reason for cloud software's gains, the fact is they were already ripping off their lows. 

So, what now? The SPY put in a shooting star candle today, which could indicate a change in short-term sentiment. While the market doesn't have to pullback and could continue higher, not allowing market participants to enter the market, it's unlikely that we don't get some form of consolidation to digest these rapid gains. This can be either done by a pullback or through time and going sideways.

SPY Options Open Interest Through June Expiration

SPY OI through June 2019.png

Looking at the open interest configuration, we could have a tough time getting above the 290-strike and easily trade down below SPY 285-strike call options before we find support in the event of a pullback. Moreover, I can even see us trade down to the 280-strike as we near expiration, which will look to be supportive. If we were to break the 280-strike, we would once again be at risk of a delta hedge scenario as I discussed last week and a risk we could see throughout the summer if we're not destined for new highs in the near-term.

A prudent speculator should have started taking some profits today and raising stops on swing positions here as we traded up to the round 2,900 century level in the SPX. Not only will this protect some of your gains, but it will give you dry powder in case we do get another pullback.  Markets throughout history love to retest bottoms or at the very least a support level on their ascent back to all-time-highs, and while that hasn't been the case in the latter parts of this bull market, we should be mindful of history because it will happen when we least expect it. 

We saw some bearish engulfing candles in restaurant stocks today, which was the leading industry going into this rally and shooting stars throughout sectors, industries, and many individual names. So, some short, tactical opportunities will likely present themselves starting tomorrow. However, I will only view these as very short-term opportunities. Weekly charts on the broader indices and many individual equities look great, so while taking some profits on positions that may have gotten ahead of themselves is fine, I will continue to have an overall long bias while we remain above 2,800 and look for opportunities as we likely will see some market rotation among sectors.