Option Investor
Index Wrap

I wouldn't even try

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I never developed a taste for hard liquor, but have been known to sip some fine Rocky Mountain spring water on occasion, and after following today's trade, which trader's call a "round tripper," I would have to be inebriated before I could possibly even try to attempt to make sense of what took place in the final hours of trade.

Here's an intra-day chart of the NASDA-100 Tracking Stock (AMEX:QQQ) $33.88 -0.95%, which ended today's trade right where it started on this morning's opening gap lower.

NASDAQ-100 Index Tracking Stock (QQQ) - 5-minute intervals

It couldn't have been more than 15-minutes after I sent out this morning's pre-market update that stock futures fell quickly just prior to the market's open on news that the White House had been evacuated. Later it was learned that a blip on a radar screen depicting an airplane flying into restricted airspace turned out to be a false alarm, but after bombings in Turkey, one can reason that market participants were jittery to begin today's trade.

As the major indices recouped their opening bell losses, a better than forecasted October Leading Indicators Survey help stocks lift from their morning lows, and as the clock struck 12:00 PM EST, stocks were at their best levels of the session when the November Philadelphia Fed report was released, with a reading of 25.9, which compared to economists' forecast of 30.0 (economists' forecasts ranged from 17.0 to 35.0) and October's 28.0 reading.

In today's 01:00 PM EST update, I inadvertently placed a link to the Philadelphia Fed's October Survey, not its November survey. While I've gone back an corrected this error on the web site, the last 3 paragraphs in today's 01:00 PM EST e-mail would be incorrect as information reported there was from the October report.

As market participants perused a generally upbeat Philadelphia Fed report, investors pushed the major indices to their best highs of the session.

While I have no opinion on pop music icon Michael Jackson, it has been written that he has lead an "interesting yet perplexing life," and today's breaking news coverage of Mr. Jackson's private jet arriving at a Santa Barbara, CA airport as he turned himself in to authorities on child molestation charges, that news seemed to catch floor trader's attention at the NYSE and trading seemed to come to a standstill. Not long after, stock began a perplexing and perhaps a Jackson-esk turn lower.

Ahead of option's expiration, there are always some numbers floating around as to where a stock or index might look to finish its day's trade. Two numbers mentioned for the QQQ was $35.00 and $34.00.

It's arguable that both strikes could have been in play ahead of option expiration, but one could also suggest today's late-day declines were driven by selling ahead of the weekend as a defensive move on heightened fears of terrorism.

I said I wasn't going to try and interpret today's trade, but I would have to lead toward option expiration as playing the bigger role (70%) in today's trade, when compared to a more of a defensive move (30%) on concern of terrorist activity. If the markets were going to be more defensive on heightened terrorism fears, then I just don't think the QQQ as a representative index, would have rebounded from the morning low, but more likely remained at or below yesterday's close.

Over the years I've seen enough volatility around an option expiration to think today's trade was highly influenced by option expiration.

Would this interpretation have a trader or investor then discounting current geopolitical events or the impact of terrorism on market psychology? Certainly not! If anything, today's volatility should simply serve as an alert that traders and investors should be practicing some disciplined trade and account management. The starting point for trade/account management is to limit trade size, or look to play both sides of this current market environment.

Treasuries can be a good pulse as to a market being defensive, and just the opposite of stocks, Treasuries found a buying into their close with the benchmark 10-year YIELD ($TNX.X) falling 8.1 basis points to finish with a 4.154% YIELD.

In this weekend's Ask the Analyst column, I'll discuss a recent trade strategy profiled in the market monitor, where on Tuesday I profiled a bearish trade in the S&P 500 Index (SPX.X) 1,033.65 -0.85%, but when I didn't see follow through to the downside on dollar weakness Wednesday, I looked to create a synthetic hedge with a QQQ long.

Today may have been an excellent session for this weekend's column as I took multiple screen captures of how this hedge was trading during the day. Here's what this trade looks like at tonight's close.

SPX put and QQQ long hedge - 11/20/03 (Market Close)

A hedge trade is not a trade you put on, and then forget about and by no means should the above hedge be construed that Jeff Bailey is bullish the QQQ and bearish the SPX and that the QQQ will go up and the SPX will go down between now and December expiration, but with some uncertainty as to what impact a weak dollar, U.S./China trade tensions, terrorist activity being weighted against strengthening economic data, a hedge trade may be appropriate, if managed properly, to get a trader/investor through some volatile times, while generating a profit for the account.

The above trade, is WEIGHTED toward bearish, and in this weekend's Ask the Analyst column, you will see that despite the different dates of trade, the QQQ position was established very close to when the SPX position was established on 11/18/03.

I digress, with the quick discussion of the above hedge trade, but maybe it will turn a light bulb on in an investor/trader's head as to risk management in their account.

Here's a post from tonight's Market Monitor where Jim Brown quickly posted some potential gravitational points where option open interest might have Max-Pain theory at work.

Market Monitor - Theory of Max-Pain

Max pain-theory stated in simplistic form that sellers of options will manipulate stocks or indices around, in order to try and create losses for the bulk of option positions (puts and calls combined). It is this manipulation, which can create high levels of volatility as an option expiration nears.

I've quickly posted today's CLOSING levels, but if you want to review some of the RANGES for the above listed stocks and indices, you will see great volatility. I've drawn some correlations with Intel (INTC) and the Semiconductor HOLDRs (AMEX:SMH) as well as the Semiconductor Index (SOX.X). For INTC to achieve "Max-Pain" it needs to fall $1.83, the SMH needs to fall $1.10 and the SOX would need to fall 15.55 points.

But that might not "add up" if the QQQ needs to gain $1.12 to achieve max pain. But it might make sense for the QQQ to achieve $35.00 Max-Pain, if MSFT were to gain $2.40 to reach its Max- Pain.

Are you a drinker of hard liquor at this point? Do you see how there can be GREAT VOLATILITY that is DIFFICULT to even try and interpret? Was today's trade meaningful in a larger scope of things? What about tomorrow's trade?

Let's move on and take a quick look at the Pivot Matrix for tomorrow.

Pivot Analysis Matrix

Ugh! I stopped making any correlations in the matrix after seeing Jim's Max-Pain post at the QQQ and tentative resistance of $34.13 (WEEKLY S2) and $34.12 (DAILY Pivot). Today the QQQ traded its DAILY R2 to the penny. Is $35.00 a potential Max-Pain point? Heck, there was enough volatility today to at least pose the thought.

My point here is if for every trader that was CERTAIN $35.00 is a QQQ gravitational point and BET BIG on that outcome, is feeling his/her own max pain today.

I've highlighted in PINK some levels that are close to the gravitation points in Jim's quick notes.

Jim posted the DJX gravitation point, and since we follow the DIA in our matrix, you will see if we add the 34-cent difference between the DJX close and DIA close, we could envision a DIA gravitation point at 97.32.

Again... this in only to drive home the point to plan for volatility, and it is nearly impossible to read much into today's trade, let alone tomorrow's trade.

S&P 100 Index (OEX.X) - Daily Intervals

Heck... 515 as a gravitational point in the OEX makes sense, but trader's can't necessarily rely on these gravitational points. I could envision a decline to 508, a bounce back to 518, and a settlement at 515. All I can say is be prepared for volatility and trade small positions, if you're going to trade at all tomorrow.

Today's trade saw a net loss of 1 stock to a point and figure sell signal and has the S&P 100 Bullish % ($BPOEX) falling 1% to 78%. Still "bull correction" status.

The broader S&P 500 Bullish % ($BPSPX) saw a net loss of 1 stock to a point and figure sell signal with the bullish % slipping lower by 0.2%. Still "bull confirmed" status at 79%, and would still need a reversal lower reading of 76% to turn "bull correction" status. The S&P 500 Index (SPX.X) 1,033.65 -0.84% did close just under its 50-day SMA of 1,036.21 for the second time in four sessions. It is difficult for me to want to read too much into today's action, but SPX looks defensive as to the other major indices.

Today's trade saw the NASDAQ-100 Bullish % ($BPNDX) seeing a net GAIN of 3 stocks to point and figure buy signals. Still "bear confirmed" but rising back to 69%.

Today's trade saw the very narrow Dow Industrials Bullish % ($BPINDU) see no net change in its bullish %. Still "bull correction" status at 80%.

I'm out of time on my deadline, but I hope you can see from today's trade, which basically had the indices mirroring Wednesday's range, how I think option expiration has any analysis of today's trade being very difficult to interpret. The main message I can give is for traders to expect and plan for more volatility tomorrow, and even into early next week.

Jeff Bailey

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