All session, I had this peaceful, yet uneasy feeling about my recently bearish profile in the NASDAQ-100 Tracking Stock (AMEX:QQQ) $34.91 +0.17%, as this QQQ bear (me) smells what could be an option expiration trap, which I want all traders to be on the lookout for tomorrow, as this QQQ bear's hide doesn't want to end up on the wall.
The peaceful feeling cam as the QQQ didn't come as close to testing its DAILY R1 of $35.11, where I had profiled bearish stops to be placed just above. Another bit of peaceful tranquility was NASDAQ internals were once again weak, as at no point in the session, did advancers ever outnumber decliners.
In a moment, I'll explain where I get the uneasy feeling from. While I say this is a feeling, this feeling is based on one observation, which doesn't make sense. Actually it does make sense in the broader scope of things, and thus the uneasy feeling for my QQQ short.
Let's take a quick look at today's Market Snapshot / Internals, and you tell me if it makes sense that we would see this type of internal weakening early in the session (especially NASDAQ) flat to lower price action throughout the day, but see the various market volatility indices VIX.X -2.19%, VXN.X -3.9% and VXO.X - 2.22% trade what I consider to be notably lower in percentage terms. I'm going to follow up on the VIX.X, VXN.X and VXO.X in a minute, but today's trade looks to me as being HEAVILY influenced by this weeks option expiration, where institutions may have really started to make some adjustments ahead of tomorrow's expiration.
Market Snapshot / Internals - 12/17/03 Close
The major indices were rather range-bound throughout today's session, and traded lower for the better part of the day, up until about the last two hours of trade. I do not monitor the VIX.X or the VXN.X all that closely, but with Tuesday's trade and nearly 1% decline in the broader NASDAQ Composite Bullish % ($BPCOMPQ), I checked the NASDAQ-100 Market Volatility Index (VXN.X) 25.12 -3.93%, fully expecting it to at least be unchanged or higher, ESPECIALLY when the NASDAQ advance/decline was as weak as it was today.
What? And this is where the BEARISH side of me thought. Oh goodness. All the small retail traders (you and I) are in the options market buying calls on thought that at some point the Q's are going to rebound and play catch up to the other major indices. Hah! They'll learn their lesson. You want to be SHORT this garbage.
But then.... I turned the table and became a bull. Garbage? Are you calling the INDU, SPX, OEX, NYSE garbage? Maybe you'd better not have such a peaceful feeling about things, stick your nose up in the air and sniff around a bit.
Why, make that HOW in the world do the various market volatility indicators decline. The quick and easy answer is.. either put selling, or call buying outnumbering put buying and call selling.
Then I thought... why would ANYONE be pressed to buy calls, or sell puts in such a flat trade and rather weak market internals?
Because they have to!!!!
I didn't give last night's comment about "Max Pain" in the SPX being 1,025 a second thought, but suddenly, today's market volatility, compared with today's internals and price action becomes very suspicious. By the way... SPX "max pain" moved up to 1,030 with Tuesday's trade.
Who is the larger seller of calls and puts? INSTITUTIONS. Gosh! The SPX is trading new 52-week highs at 1,076. While the seller of puts/calls at an average of 1,030 is in good shape on the put side, what about the other part of the equation where the INSTITUTION is nearing a delivery date, but may not have the goods to deliver?
The goods that may be lacking for an institution would most likely be INDU, SPX, OEX stocks, where the nearing expiration creates a more hurried effort to get the mass amount of options positions squared up. Remember, a December contract is for December delivery and with the INDU/SPX/OEX at 52-week highs, the INSTITUTION that has been selling calls, may well have some buying to do in order to make the December delivery.
So where does the QQQ come into play? It's in check. No trouble here for the bear as it isn't as close to its highs as the other major indices ahead of expiration. Right?
That's right. But the uneasy side of me becomes alert to the potential that what the INSTITUION may at a loss in on the INDU/SPX/OEX doesn't have them then trying to make up on in a bullish trade with the QQQ. Remember, the VXN.X fell today as call buyers and put sellers outnumbers call sellers and put buyers.
NASDAQ-100 Market Volatility Index (VXN.X) - Daily Intervals
I've benchmarked the 11/20/03 relative low in the QQQ, where the QQQ traded just below the $34.00 for 4 sessions (11/18-11/21) and where despite a spike lower in price for the QQQ on 12/20/03 to a session low of $34.13, the VXN.X wasn't nearly as high.
What has me alert to some near-term volatility, ESPECIALLY in the QQQ is today's decline, when really, the QQQ when nowhere.
What this has be ALERT to, is that while today's trade was QUIET in the QQQ, the VXN.X fell. A quick note as to today's OPTION volume ahead of DECEMBER EXPIRATION, has the QQQ Jan. $35 put (QQQMI) trading 34,292 contract, QQQ Dec. $35 put (QQQXI) trading 31,398 and QQQ Dec. $35 call (QQQLI) trading 16,796 contracts. These were the three most actively trade options contracts in the QQQ today.
The DECLINING VXN.X suggests SELLING of puts (outnumbering the buying of puts), and the BUYING of calls (outnumbering the selling of calls). All a QQQ BEAR needs to be alert to tomorrow is that INSTITUTIONS didn't set themselves up to BUY the underlying QQQ, where the SELLING of the $35 puts has its premium evaporating quickly (a day or two into DECEMBER EXPIRATION), which would also benefit the DECEMBER CALL side of the trade.
Where's a QQQ have his/her stop?
Pivot Matrix -
Tomorrow's DAILY R1 is $35.08, and WEEKLY Pivot is $35.11, so I still like the BEARISH stop just above $35.11. This should "take care" of any type of massive unfolding to the upside, should a Triple Witching expiration actually be in play.
You would be CORRECT in thinking .... "but Jeff, if the QQQ falls to your target of $34.11, where QQQ max pain is $34, the above mentioned put/call observations would also pay off for a BEARISH trade, if buying the PUTS and selling the call). The potential flaw with this is that the VXN.X fell today, thus my uneasy feeling at tonight's close.
While tomorrow morning's economic data is "key" and may present the catalyst for the move, I think the "key" is really the QQQ $35.11 holding as a resistance point.
If you're an INDU/SPX/OEX trader I would strongly suggest keeping an eye on the QQQ also. Understand how option expiration may be in play, and how the QQQ lagging, in itself, is currently alerting you (if your bullish the INDU/SPX/OEX, you in a leader) that the tail is weak, and trying to pull your trade lower. A SNAP back higher in the QQQ, should be expected to send your INDU/SPX/OEX trade higher still.
My main point with all of the above, it to try and prepare trader for what could be a very volatile session tomorrow. Even as a QQQ bear, I point out the potential negative of my bearish QQQ trade, based on some of today's VXN.X observations. If you should read something like... "these economic numbers stink, and with the QQQ at $35.50 you should be shorting the heck out of it," then just be cognizant of what impact option expiration may be having on the major indices trade over the next two days.
If I were to enter a BULLISH trade tomorrow, it would have to be in the QQQ, but ABOVE $35.15, and it would be SHORT-TERM oriented. Remember that the bullish % are alerter to weakness. How long? I'm not certain, but my thinking is that in January, we might see a pretty good pullback in the major indices. This would make some sense where some of this years gains are booked early in the year, and taxes on those gains aren't paid until April 2005.
S&P 100 Index Chart (OEX.X) - Daily Interval
Institutions that have been selling calls against the OEX may indeed have to be buying calls today and even selling some puts as December delivery comes at tomorrow's close. It at least makes sense that the VXO.X is falling as it relates to OEX price action. Today's range was narrow, but I've added the DAILY S2 and DAILY R2 on the OEX chart to depict what could be the day's range. First sign of any type of weakness is marked at 531.00.
S&P 500 Index (SPX.X) Chart - Daily Intervals
Today's trade in the SPX may also hint of computer buying. Despite weak internals for the better part of the session, the SPX traded 1,071.14 twice, at different hours as if computers were simply saying.... I need to get squared up before expiration. I need to get squared up before expiration. I need to get squared up before expiration.
Dow Industrials (INDU) Chart - Daily Intervals
While it may be "scary" to be short the QQQ, I'd find it more friegtening to be short the INDU/SPX/OEX with no overhead supply, where at least there might be a bull eager to sell strength. First sign of any weakness I can find in the INDU would be back below 10,075 (deduct 10 points and 10,065).
NASDAQ-100 Tracking Stock (AMEX:QQQ) Chart - Daily Intervals
Disparity between QQQ and other major indices has been noted. It is the similarity in the VXN.X and other volatility indices that has me alert that a short-term pop back higher, simply due to option expiration may be at hand. The only way I know how to protect is stick with the levels. DAILY R1 moves slightly lower to $35.08, and again correlates with MONTHLY Pivot of $35.11, thus a level I think bears continue to hold convictions, but protect against potential expiration volatility.