Top Advisors Corner

At the Edge of Chaos: More to Come as Options Push SPX to New Highs, The Fed Pumps and Shorts Capitulate – A Potential Monster Breakout Looms

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"I go to parties sometimes until four. It's hard to leave when you can't find the door" – Joe Walsh.

As I've said here many times, I'm not bearish, but there is something quite unusual going on in this market and it's worth exploring in some detail. Certainly, my call last week for higher prices was correct as the S&P 500 made a new high nearly confirmed by NYAD – see below for details.

In addition, the current move has the feel of what could be a major capitulation rally in stocks, as those who have fought the Fed and the tape for years and short sellers decide to finally throw in the towel and buy. Thus, while a continuation of the rally would be a positive for those of us on the long side of the market, there is the flip side to consider, which means that eventually there may be a significant correction or price consolidation that follows. In other words, enjoy the party, but don't stay too long and don't lose sight of that door.

Options, Options, Options and More Options

The stock market continues in its 2021 uptrend, and the options market remains a significant influence on stock prices. This, of course, is a total reversal from the historical standard, where stocks, also known as the underlying, were the major influence on stock prices. Still, that's the reality of the moment, and in order to trade this market successfully one must have at least a basic understanding of how that relationship has evolved and how it works.

So here is a quick overview:

  • When a trader buys a call, the dealer (most likely a computer/algo) sells a call.
  • In order to protect himself (itself in the case of algos) in case the underlying stock upon which the trader bought the call goes up in price, the dealer buys stock or stock index futures.
  • This has the effect of raising stock prices. In addition, when it happens billions of times per day, the net effect is to influence the price action of the whole market as call buying leads to stock purchases by dealers.
  • The reverse is true for puts, which means that put buying leads to put selling, which then requires stocks or index futures to be sold, which pushes prices down.

In other words, because of this interaction between options and stocks when the market goes up, it goes up big. Of course, that means that when the market goes down, it goes down even bigger and faster.

Thus, as we saw last week, once again heavy call buying on the 3/29/21 SPY weekly options expiration was followed by lower volume call buying on 3/31/21, and again on 4/1. So even on relatively low volume expirations, the activity remained directionally bullish, meaning that the number of calls still outnumbered the number puts purchased by nonmarket makers, a fact that likely contributed the S&P 500 to a new record high.

Check out my upcoming options presentation on StockCharts.com. More details here

Monster Breakout Looms

Earlier this year, I suggested that shares of energy drink company Monster (MNST) would be interesting as they were engaged in a caffeine war with Starbucks (SBUX). At the time, it seemed as if Monster might get a bit of an edge on Starbucks. Alas, so far, both stocks have been range-bound, and the caffeine wars – well, they've been tame to say the least.

However, this may be about to change, certainly for Monster, and perhaps even for SBUX. But in this article, I want to focus on the former, given its interesting chart pattern and the rumblings of tight supplies in the coffee market, which may or may not play out, but would likely be more of a negative on SBUX.

So, here's what I like about MNST. The stock tumbled earlier in the year, but has slowly come back, and is now reaching a key decision point near the $95 area. Moreover, as summertime approaches and the world adjusts to the new COVID reality – whatever that is - expect more outdoor activities in the city, such as a return to skateboard parks, and so on as well as an increase in construction, and perhaps even outdoor music events and a return of the X games where Monster rules. In other words, as the weather heats up and major events and activities that cater to the energy drink crowd return, Monster's sales are likely to kick up.

On the technical side, the Accumulation Distribution (ADI) and On Balance Volume (OBV) are very constructive, as is the raw volume data. Moreover, the Volume by Price (VBP) indicator shows a key resistance level at $92. If that gets taken out, as I'm expecting it well could, the stock should be off to the races.

Certainly, the directional data for MNST options suggests a very bullish bias and the implied volatility (IV) is well below the historical volatility (HV) – all very positive signs. A move above $95 would likely lead to an extended uptrend over the next few weeks barring a major market event.

I just recommended an interesting option trade based on MSNT. You can access it and the rest of my model the portfolio with a FREE trial here.

I own shares and options in MNST as of this writing.

S&P Makes New High while NYAD Nearly Confirms

Last week in this space, I wrote: "If you're wondering why the stock market is suddenly so volatile, look no further than the options market. Moreover, the way things ended up in Options, the NYAD and the major stock indexes last week, the odds are for a big move in stocks next week – and it could be to the upside."

Well, the S&P 500 (SPX) made a new high and the New York Stock Exchange Advance Decline line (NYAD) is within a whisker of confirming it, while remaining in its long-term uptrend. Moreover, we still have support at the 20- and 50-day moving averages for NYAD and the RSI is nowhere near overbought, which raises the odds of a confirmation.

Remember, it's important to note that as long as NYAD continues to make new highs, remains above its 50- and 200-day moving averages and its corresponding RSI reading remains above 50, the trend is up. This combined set of observations has been extremely reliable since 2016.

The Nasdaq 100 index (NDX), again as I expected, made a big move, but still has a long way to go before making a new high. It did take out its 50-day moving average and it does have significant upside momentum.

The S&P 500 (SPX) is now leading the market after making a new high. As can often happen, we may see some backing and filling near the 4000 round number for a few days. However, look for support between 3930 and 3970.

Good news! I've made my NYAD-Complexity, Chaos chart featured on my YD5 videos, and a few other favorites public. You can find them here.

Bond Consolidation Remains Friendly to Stocks

Stocks are benefitting from what may be an intermediate-term consolidation in what is now the quietest bear market in U.S. Treasury bonds. So the trading range now for the U.S. Ten Year note (TNX) between 1.4 and 18%.

Still, the dominant factors for bonds remain in place with one new potential factor – the infrastructure bill, with its nearly $3 trillion price tag and the potential stress it could add to the supply chains.

  • Supply chain disruptions may be worsening
  • Falling inventories may worsen due to supply chain issues
  • Rising product demand – as economies recover rapidly from COVID restrictions
  • Potential for rising labor costs – as demand increases and businesses open

So, the key remains what happens if and when TNX reaches 2% and TYX reaches 3%, how the Fed responds, and then, of course, how stocks respond.

To learn more about bonds and more check out my recent MoneyShow presentation "The Trade of the Year" here.

Have you thought about where to invest as bond yields fluctuate? Find out with a Free Trial to my service (click here).

For more on how to deal with the current market, check out my latest Your Daily Five video here. For more details on bonds, currencies, and stocks, check out my recent interview with WallStreetReporter.com here.


Joe Duarte

In The Money Options


Joe Duarte is a former money manager, an active trader and a widely recognized independent stock market analyst since 1987. He is author of eight investment books, including the best selling Trading Options for Dummies, rated a TOP Options Book for 2018 by Benzinga.com and now in its third edition, plus The Everything Investing in Your 20s and 30s Book and six other trading books.

The Everything Investing in Your 20s and 30s Book is available at Amazon and Barnes and Noble. It has also been recommended as a Washington Post Color of Money Book of the Month.

To receive Joe's exclusive stock, option and ETF recommendations, in your mailbox every week visit https://joeduarteinthemoneyoptions.com/secure/order_email.asp.

Joe Duarte
About the author: is a former money manager, an active trader and a widely recognized independent stock market analyst going back to 1987. His books include the best selling Trading Options for Dummies, a TOP Options Book for 2018, 2019, and 2020 by Benzinga.com, Trading Review.Net 2020 and Market Timing for Dummies. His latest best-selling book, The Everything Investing Guide in your 20's & 30's, is a Washington Post Color of Money Book of the Month. To receive Joe’s exclusive stock, option and ETF recommendations in your mailbox every week, visit the Joe Duarte In The Money Options website. Learn More
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