Option Investor
Index Wrap

Triple witch and economic data gives further lift

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The major indices posted strong gains at its end of quarter triple witching expiration, where a dose of positive economic news helped boost the S&P 500 Index (SPX.X) 1,089.18 +1.17% to its highest close in 19 months.

The major indices jumped at their open and never looked back.

Was it today's index expiration that had institutions gobbling up stocks in order to fulfill obligations related to options and futures contracts sold at lower levels? Lower levels mind you that many a bull and bear may not have imagined being traded just during the past three months.

Or was it the better than forecasted weekly jobless claims report that sparked today's strong rally? New filings for jobless claims fell by 12,000 to 353,000, a positive surprise to economists' forecast of 365,000. While economists admit a resurgence in new jobs can't be read in the weekly data, the decline in new weekly claims reversed a 2-week trend of rising claims, and helped dampen fears that corporations were cutting staff levels due to perceived stalling in the economy.

I saw little knee-jerk reaction (up or down) to the November leading indicators report at 10:00 AM EST, which showed an in line with expectations rise of 0.3%.

While the major indices trades rather sideways for the next two hours, the major indices presses further higher after the 12:00 PM EST release of the regional December Philadelphia Fed manufacturing index jumped a higher than expected 6 points to 32.1, where economists had forecasted a decline to 25.0 from November's 25.9 reading.

At the end of the day, I (Jeff Bailey) could make the case that both index expiration along with today's economic news fueled buying.

While I didn't check "max pain" levels, a mathematical theory that suggests an index will gravitate toward a level based on open interest in that month's puts and calls summation, the Semiconductor Index (SOX.X) 493.72 +3.98% reversed it recent slide, and amazing traded a session high of 495.65, where recent max pain calculations were computed at 495. Coincidence? Maybe. After all, many of the major indices and sectors finished today's session at levels nowhere close to computed max pain levels, where many were above such levels.

Market Snapshot / Internals

Today's gains didn't come on what I would consider BIG volume, and if anything, may indeed suggest there were few sellers to be found in today's trade. Few sellers might well tie in with some of last night's Index Trader Wrap "Watch out for this tomorrow!" where the thought crossed our mind that institutions might do some last minute scrambling with today's index expiration.

I do think the market picked out some information from the Philadelphia Fed report regarding manufacturing pricing. While I've only gleaned the report, the notes that prices manufactures received, rose modestly (not a lot of pricing on finished goods) and put a further bid in Treasuries, with the benchmark 10-year YIELD ($TNX.X) falling 4.8 basis points to 4.141%. There were also comments that the slight gain in pricing power was outweighed by a stronger prices paid component, where from the 12:00 PM EST mark, spot gold looks to have done an about face from $408.50 go end its session at $410.75, as if the rising cost of raw materials is inflationary.

Pivot Matrix -

The stronger INDU/SPX/OEX have now taken out their MONTHLY and WEEKLY R2's and the only levels, other than those dating back more than 18- months to be looking for any resistance would be the DAILY R1 and R2. If you were to ask me how much of today's trade was attributed to option expiration, I would say 70%.

Tomorrow we still have further option-related expiration to go. However, with index expiration completed I would still consider the NDX/QQQ the weaker indices, and see correlative support right back where we started today's session. This would be an immediate near-term downside risk assessment. The only correlative resistance I see would remain in the BIX.X at 335.80.

Again... if we were to believe that today's trade was largely due to expiration, and that triple witching is associated with volatility and UNPREDICTABILITY, where today's action suggests there were few sellers, I can only tell traders to try an MANAGE RISK NEART term.

Dow Industrials Chart - Weekly Intervals

With the INDU above what is usually more meaningful near-term levels of MONTHLY R2 and WEEKLY R2 levels where we would look for institutional computers to be selling, the strong move in the Dow now leaves only daily levels. As such, I'm showing the INDU on a weekly interval chart, where a relative high of 10,350 might be a level of technical near-term resistance. Other than the lower MONTHLY/WEEKLY levels in the pivot matrix, the above chart of the INDU would have 10,000 as the psychological support level.

S&P 500 Index Chart - Daily Intervals

The SPX darted to our WKLY R2, and closed just above. To protect against a giveback a trader could snug a stop under 1,080. Once again.

NASDAQ-100 Index Tracking Stock - Daily Intervals

Since I feel, based on recent observations of internal weakening that the QQQ is the WEAKER index (price and internals) I would be more agreeable to a QQQ put with February expiration back at these levels of trade. While I can't prove that today's gains were all attributed to triple witching expiration, at this point in time, I would rather buy a put in the QQQ which hasn't broken to a 52-week high, than buy a put in the INDU/SPX/OEX.

Jeff Bailey

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