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Index Wrap

Sell the news, or option expiration\?

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Semiconductor equipment maker Applied Materials (NASDAQ:AMAT) $22.13 -0.8% surged to a session high of $23.86 in the first 5- minutes of trade, up more than 6% than Wednesday's close, to then give back those gains to finish lower.

The NASDAQ-100 Tracking Stock (AMEX:QQQ) $36.98 -1.51% jumped to $37.90 in the first 5-minutes of trade, up more than 1% from Wednesday's close, to then give back those gains to fish lower.

One could argue a case of "sell the news" as the GSTI Software Index (GSO.X) 156.87 -2.48% traded soft all session after tax preparation software-maker Intuit (NSADAQ:INTU) $45.24 -8.03% lead sector declines as investors "sold the news" when the company's forward guidance didn't add up to Wall Street's consensus estimates.

One could also argue that today's index expiration and tomorrow's pending tracking stock and individual stock expiration played a role in today's reversal of fortune session.

Jim Brown posted some "Max Pain" levels for various indices, trackers and stocks in this afternoon's Market Monitor. I added the Semiconductor HOLDR's (AMEX:SMH) $41.88 -1.96% as well as Newmont Mining (NYSE:NEM) $44.04 +0.93% to the list.

A quick check of AMAT's February Max Pain Theory value was calculated at $22.50. Sell the news, or option expiration related?

Market Monitor - 02:34:42-02:39:33 PM EST

I tend to view Max Pain theory with a grain of salt, but it can certainly have an impact on how the major indices and stocks trade into an option expiration.

Had I been alert to QQQ Max Pain theory of $37, I might have taken some of my own advice this morning at 09:53:00 AM EST when I noted in the Market Monitor that the opening 5-minute bar on the QQQ was $37.85 and today's (Thursday's) DAILY R2. I further noted that one thing traders might be cognizant of is tomorrow's option expiration for the QQQ, where traders might be alert to some gravitation toward the $37.00 level. We had been seeing a lot of trade around the $37.43 level the last couple of weeks and I thought $38.00 was going to be some heavy resistance going into Friday's close.

Again... I take Max Pain theory levels with a grain of salt, but the QQQ certainly seemed to have some type of Star Trekian gravitational force of selling pulling it lower into today's close.

Still, I can't entirely dismiss the thought that today's reversal on "good news" from AMAT can't be in play.

I'm a bit shocked that Biogen Idec (NASDAQ:BIIB) $58.88 +10.61% and Elan (NYSE:ELN) $13.33 +12.96% surged again in today's session. When buyers show conviction, then a February Max Pain value of $45 for such a large-cap biotech like Biogen means nothing, where this would be an example of "buy the news and keep buying!"

Market Snapshot / Internals - 02/19/04 Close

The hourly intervals do show some internal as well as price action that would tie in with broader observations of what indices have been stronger than others in recent weeks.

The NYSE Composite ($NYA.X) 6,715.30 -0.06% did hold strong until the last hour of trade, whereas the NASDAQ Composite (COMPX) 2,045.96 -1.47% found a more steady decline in price action as the session progressed.

The Semiconductor Index (SOX.X), with AMAT as a positive catalyst, matched its December 1, 2003 relative "left shoulder" high of 536.32 with a morning high of 535.55.

If buyers had shown as much conviction for the semiconductors in today's session, or the chip equipment stocks, as buyers have for BIIB and ELN, then we wouldn't have to wonder if today's trade was sell the news, or option expiration related.

Pivot Analysis Matrix -

Some of tomorrow's DAILY S2-R2 point ranges would rival those found in the WEEKLY S2-R2 ranges, and when I consider that much of today's economic data wasn't overly surprising one way or the other (bullish or bearish), I've got to think today's session was heavily influenced by some option expiration activity.

I would have to think there are a heck of a lot more options being traded, or positions being hedged in the INDU, DIA, SPX, SPY, NDX, QQQ and SOX than in the BIX.X or the TNX.X. It should be notable that the S&P Banks Index (BIX.X) 354.43 +0.32% did see a pretty good price swing intra-day, but Treasuries and the Dollar Index (dx00y) were little changed considering the more wild gyrations of the major indices.

I will make a note tonight that QQQ Max Pain for MARCH, which will be a Triple Witching expiration is current calculated at $36.00. This can change in the day's and weeks to come and would ONLY serve as a guidepost of where the bulk of QQQ put/call open interest could be taken to unprofitable levels by March 19 expiration.

Wilshire 5000 Total Market Index ($TMW.X) - Daily Intervals

In last night's Index Wrap we quickly looked at both the NYSE Composite ($NYA.X) and NASDAQ Composite (COMPX). I like to view the Wilshire 5000 as somewhat of a great mixing pot of all stocks large and small, which combines stocks listed on both the NYSE and NASDAQ. The only "level" I really see providing resistance for this broadest of broad index is a spike relative low of 11,290, which dates back to October 1999, where a recent horizontal support level could be tied to relative highs found in January and March of 2002 before the $TMW.X went on to trade its October 2002 lows of 7,273.40.

I didn't show a conventional retracement on the above chart, but if I had taken a retracement from the all-time high of 1,499.60 to that October 2002 low, 50% retracement would be at 11,132.50.

A couple of investors also pointed out that both the NYSE and NASDAQ NH/NL indications could be combined to calculated a "total market" NH/NL ratio. I show the NYSE and NASDAQ NH/NL separate.

NASDAQ 100-Tracking Stock (QQQ) Chart - Daily Intervals

An intra-day chart would show the QQQ edging lower into its MONTHLY Pivot of $37.43, and then picking up some momentum once a 5-minute bar chart close below $37.43 was found. A test for the thought that today's trade was largely option expiration related would be for the QQQ to traded either side of $37 tomorrow, perhaps a range between $36.70 and $37.25, with a Friday close right near $37.00.

Today's QQQ high may also be taken notes on, where its high is tied to the "right shoulder" of the potential head/shoulder top formation in the Semiconductor Index (SOX.X).

S&P 500 Index (SPX.X) Chart - Daily Intervals

The SPX can't make up its mind between 1,143 and 1,157 for six sessions now. Even in the morning updates we see one or two stocks each day generating point and figure buy signals on alternating days.

Dow Diamonds (DIA) Chart - Daily Intervals

With the OEX and QQQ showing some ability to gravitate toward a Max Pain level, I thought I'd quickly slap a fitted retracement on the DIA. Nothing too scientific about the fitted retracement and just anchored it to a December low and placed the 50% at $105, from Jim's notes. The DIA did show the ability to fall from roughly 107 to 105 on January 28th. I went back and checked the Index Trader Wrap archives and found I had discussed that day's trade as perhaps being tied to the markets thought of potential Fed tightening.

Jeff Bailey

Index Wrap Archives