Option Investor
Index Wrap

Up into the expiration, down from there

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Examples of things I've heard in the past from professional index option traders about an expiration: the way it was "set up" was that the it (the market) would be down into a major option expiration (a potential up from there was implied), or, like this last one, UP into the expiration, then down from there.

No need to take out a conspiracy theory, but the aforementioned situation was simply a result of the reality of the market money flows - there was a lot of put selling as the floor saw that the institutions were buying stock and would into the Q2 end so they played the market to be up into the expiration and kept selling puts - mostly to individual speculators who were buying, although there was some portfolio hedging going on too. Hey, you get habituated to a bear market after 3 years!

My short-term downside objectives were met last week, save one - the S&P 500 (SPX) got to 980 in SPX; to the 490-495 price zone in OEX; to 1600 in COMPX - the Nasdaq 100 (NDX) Index got into the 1180 "area" if you count an 1186 low, but I suspect we'll see 1180 this week (or lower).

What now and would I play it further to the downside in puts? I took the money and ran myself. It looks that is some more (note the word "some") downside, especially apparent when I look at the QQQ chart. But, I myself don't see a further big down leg developing.

We're in summer doldrums when the market tends to drift. Especially so since a good improvement in earnings in the second half is ALREADY priced into the indices. Q2 earnings announcements are still a ways off, so no help there, at least this coming week.

When (Q2) earnings do start coming in, it seems likely that individual stocks will get plays on better or worst than expected numbers, but the overall market will likely tend to drift - sideways to lower, but not dramatically lower.

It took me a long time to get the BOTTOM LINE with this, but I think the market is in a period of CONSOLIDATION and is giving back some gains from lows to the peaks to date - not surprising after such a good run. I'll visit specific numbers with the index charts below.

The Dow Jones Industrial Average declined about 90 points on Friday (to 8989) on low volume, while the Nasdaq Composite (COMPX) down about 9 points (to 1625.28.) The S&P (SPX) 500 Index was down 9.60 (to 976.22.)

For the week, SPX was off 2%, the Dow industrials in line with this at 2.3%, and COMPX gave back 1.2%.

With the Fed policy review over and some economic reports out of the way, market talk is that there is little incentive for much further buying by investors.


The data overall gave some indications that consumers will continue to do their part - SPEND! - in helping boost the economy, but market participants were not listening.

Just after the opening, my almost alma mater (I ended up going to Western Michigan University instead), the University of Michigan came out with stronger than expected consumer confidence survey numbers for June. The report came in at 89.7, higher than the June's preliminary reading of 87.2, but still below May's 92.1 reading.

Personal income, which is a lagging figure, was released for May by the Commerce Department and that agency indicated income rising by 0.3% in May, which follows a revised 0.2% gain in April. April had first been reported as unchanged.

The uptick in income gave a boost to Commerce's consumer spending estimate, which was indicated as rising by 0.1% after also increasing by a revised 0.1% in April. The April figure was initially reported as a decline of 0.1%. A consensus was for a 0.3% increase in incomes and a 0.2% increase in spending.

Microsoft (MSFT) fell a half percent as tech stocks came under renewed pressure in afternoon trading. CS First Boston raised its Q4 earnings estimate based on stronger PC unit growth and gains in the server market. Hey, no news like good news - well, it was a down day.

General Motors (GM) gained a half percent after pricing its record-setting corporate bond offering late Thursday.

Nike (NKE) was a big story in an otherwise slow Friday and fell nearly 7% after announcing (late Thursday) its fiscal Q4 profit that was a bit less than expectations. Merrill cut its rating on NKE to "neutral" from "buy" following what it considered to be "disappointing results". The sneaker giant reported a 19% increase in earnings and only narrowly missed the Wall Street consensus.

A strong rise in sales overseas offset declining orders in the U.S. Nike also blamed part of coming in under expectations to lower sales from rival Foot Locker. Hey, my dear ol pappy said that anytime you make even 10% more than before, pat yourself on the back - however, he didn't toil on the Street of Dreams.

It's always about the expectations as the stock tends to get prices based on the consensus number. I had a stockbroker friend who used to keep select (consensus) numbers programmed into his watch. So it goes with the "funny"-mentals.

The 10-year Treasury rose just under an eighth of a point ($1.25 per a $1,000 bond). The 10-year yield fell to 3.540%.

The dollar closed against the Yen at 119.58, up from 119.40 late Thursday, while the euro rose against the dollar to $1.1430 from $1.1420 in the prior New York close.

Since currencies trade 22 hours a day - why not 24? - another time grasshopper, but it has to do with the gap before the Kiwi (New Zealand) opening and the international date change line.

Once again, I digress - since the buck trades round the clock (almost), you have to look at closes relative to the time zone you're in - at least that's the convention in the FX markets. I know currency traders who, when they can't sleep, perhaps do a little trading in Hong Kong. I prefer counting sheep!


Opps! - looks like the prior week's "breakout" above the trendline per the Philly Gold and Silver Index (XAU) chart below, may have been a head fake. Now this doesn't surprise me, although I USUALLY figure that the charts are "telling" me something that I don't know, don't know yet, or WILL know later on.

I mean, with very low inflation and with deflation as more of possibility, what incentive to buy gold?! - gold being traditionally a safe haven again puny financial assets (like stocks and money) that are prone to government foolery and devaluation. Of course there is the unrest and turmoil theory of gold's value, such as when undertaking cross border crossings in Afghanistan with gold in your pocket.

Anyway, more traditional investors seemed to want to put some gold profits in the bank (under the matress?) after the run up of the past few weeks. Some sanity creeping in with the U.S. roadmap implementation between Israel and the Palestinians may have helped too.

S&P 500 (SPX) - Hourly chart:

Last week got us to the first area of technical support in SPX based on the low end of the uptrend channel - also, support implied by a 38% retracement. I think SPX can get down closer to 960 if the low end of the channel gets pierced - in which case the whole pattern looks like a complex Head and Shoulder's top.

However, I just ain't that bearish to expect it - the sellers are just not going to be out in that kind of force absent some very unexpected negative like domestic terrorism over the 4th or something like it.

On balance, I favor buying calls in the SPX 950-960 zone for a hold through the earnings period ahead. I would also do a smaller short-term put trade buy on rally failures to the 990 area. It continues to look that even 1000 mark is pretty tough resistance - its going a definitely improving economy to power the S&P 500 through 1000 - ditto, through 500 on OEX.

S&P 100 Index (OEX) - Daily chart:

The extreme reading in my CBOE call to put daily volume ratio both on a daily reading and on a 5-day basis, was the tip off in bullish "sentiment" that was too hot not to cool down. A high American Association of Individual Investors (AAII) percent - furgettabotit! Too hard to read these changes and I studied em for years trying to find correlations.

No, daily call to put volume, CBOE equities - when the ratio of total call volume to total daily put volume gets close to 2.5, the market is "overbought" - down close to 1, the market is "oversold".

Simple! - but of course, any such indicators needs to jive with what else is going on, such as the PRICE/RSI divergence seen below -

Looks to me that the 470 to 480 price zone will be the area to buy calls again if this is realized over the next 2 weeks. Stay tuned.

500 looks to be an area where puts could be bought for a short- term down side play. When the RSI gets back to or near that green line - a reading in the 30/35 area - it becomes a technical consideration as the market is getting oversold at that point. Hard to say what price level, but a low RSI reading does indicate a potential to rally.

Dow Industrials (INDU) Daily & Hourly (DJX.X) charts:

88-89 is suggested as support in DJX. 8750 is support implied by a "line" of prior tops in the Industrial average. This is an area where I will be evaluating for possibly call purchases again.

The Dow especially - less so with SPX and OEX - is known for breaking trendlines, then reversing at some point that is not near any obvious support. On the other hand, for some weeks now, the Industrials have been trending upward within a well-defined channel.

I suggest also watching the Dow's ability to hold its 50-day moving average (at 8775 currently) with a definite bullish plus if it does not pierce this value for more than a single day - the 200-day average is also key in a more major way and I think we can assume that we will not see the Dow below 8400 in the coming month (or wherever the average has risen to - rising or falling quite slowly of course).

Nasdaq Composite Index (COMPX) - Hourly:

The Nasdaq rose further on the run up and it should fall further on the pullback or in this consolidation. The below hourly chart continues to look bearish in its pattern. I think there is another downswing coming - perhaps to 1550, which I mark as support.

COMPX would need to close above 1650, and stay above this area on subsequent pullbacks, to turn the chart more bullish for the short-term. I'll be looking to buy Nasdaq index calls like NDX around 1550 in the Composite and buy puts in the 1650 area, also keying off the COMPX chart levels.

Nasdaq 100 Tracking Stock (QQQ) - Daily & Hourly:

My target in the Q's has been for a move down to the 29 area at a minimum, with an outside chance of eventually slipping to more major support around 27.50-27.0. Hey, tech stocks are "rich" relative to earnings and the big money crowd is unlikely to step in and do wholesale buying of tech stocks while momentum is down as it is currently.

28.50 is a "minimum" downside price target implied by the bear flag on the QQQ daily chart, a target just under the 50-day average. I would happily take profits on short QQQ stock in this area.

Good Trading Success!

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