Option Investor
Index Wrap

Almost like an option expiration

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What appeared to be a rather quiet session of trade for most of the day livened up a bit after 02:00 PM EST, and while the major indices ended up relatively unchanged, some of the intra-day swings felt more like an option expiration than anything.

Yes! It's the end of the calendar quarter, and there may be some signs from today's trade that simply suggest some end of quarter rebalancing, but today's trade was a good day for some volatility, to perhaps put traders on edge ahead of Friday's nonfarm payroll numbers.

Market Snapshot / Internals - 03/31/04 Close

The major indices looked as if they might suddenly erupt to the upside just after 02:00 PM EST, when suddenly, and with little notice, the indices make a quick move higher, where the only "news" I could find to really explain the jolt higher, was a rumor that Goldman Sachs had initiated a buy program.

While the NASDAQ Composite (COMPX) 1,994.22 -0.32% looked to be making a break above the 2,000 level, as if by magic, the session's high of 2,004.00 (to the penny) was found, and from there, the NASDAQ Composite (COMPX) traded straight down to the its close, but RIGHT in the middle of the entire day's range.

Pivot Analysis Matrix - (New MONTHLY Levels)

End of calendar quarter balancing? Maybe a little fine tuning? How in the heck the INDU/SPX/OEX/SOX can manage to close right at their NEW MONTHLY as well as tomorrow's DAILY Pivots is beyond my comprehension, other than to think today's trade was largely influenced by computers, which were determined to mark a close at their particular levels. Coincidence perhaps.

It takes me too much time intra-week to get all the new MONTHLY Pivot retracement levels on their charts, so I'm going to really focus in on the SPX tonight. I'll stay up a little later and try and get the other major indices with their monthly levels, but suffice it to say, today's gains/losses for just about everything were fractional.

S&P 500 Index (SPX.X) - Daily Intervals (M/W Pivots)

I've placed the NEW MONTHLY levels and retracement on the SPX chart, and here we are in what may be a rather critical "zone" of resistance. In DASHED PINK, I've circled two prior areas, where the SPX seemed to "juke" around within a zone of 1,125-1,132.

Now, I really get focused on this 1,132 or WEEKLY R2 level. Yes, after Friday's trade, this WEEKLY R2 may disappear, but I'm just noticing this additional observation, from a chart we put together not long ago.

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

I wanted to also quickly review a chart of the SPX I showed in prior commentary (I'm trying to find the article, but can't right now) where as the SPX was breaking below both its MARCH MONTHLY S2 and WEEKLY S2, I used the "Fitted retracement" (fit 38.2% at a relative low or low close) technique for trying to find a potential downside support level. Trader might note that the 19.1% retracement on the above chart, is VERY close to this WEEK's WEEKLY R2.

THIS SUGGESTS THAT 1,131 is a CRITICAL RESISTANCE LEVEL in my opinion. Something may be important about this level.

Two thoughts are BIG RESISTANCE, or BIG RESISTANCE if broken to upside could see tidal wave of buying.

This second thought (tidal wave of buying) could come from the nonfarm payroll data, but could also come if a LOT OF BEARISH HEDGES were put on at MARCH expiration, and those hedges all unwind should 1,131 be a CRITICAL level.

On Friday, the nonfarm data is going to come out, and you, or at least I, can now hear two type of analysis. But here is where I think a trader that "shuts it out" and just honors the levels and manages their risk may benefit.

Bullish Commentary: There you have it folks. The economy created 500,000 jobs in March and that's the big type of number everyone knew was coming from the robust economy. Look at the SPX trading surging to 1,145.

Bearish Commentary: There you have it folks. The economy created 500,000 jobs in March and that's the big number everyone knew was coming from the robust economy. However, this may have already been baked into the SPX as it falls to 1,100 as economists have been forecasting this growth for months, and may also explain the recent rebound in the SPX from its recent lows of 1,088.

How do YOU feel, or perceive the market now? After that BULLISH and BEARISH commentary?

I feel like it could go either way. I can see both of those scenarios right now.

I've said it recently and I'll say it again here. The one thing, the ONE THING that has me more bearish that bullish right now is those darned bullish % showing some internals weakening from high levels of bullish risk (NASAQ-100 Bullish % has fallen quite a bit further than others though).

Now I want to quickly revisit the Market Volatility Index (VIX.X) 16.74 +2.82%, where I continue to keep an eye on things, but really want to update traders on where we are at tonight's close. In the past, we've looked at weekly intervals, but tonight I'm looking at the same chart we've always looked at, but on DAILY intervals, so we can perhaps see how we're at an inflection point yet again, where the VIX.X may give us an indicator of what INSTITUTIONS are doing.

My gut feel is institutions KNOW what they are going to do regardless of the nonfarm payroll data (I think sell), but the VIX.X may give us an indicator to monitor very close tomorrow and FRIDAY.

Market Volatility Index (VIX.X) - Daily Intervals

I think the last time we looked at the VIX.X was in the 03/18/04 Index Trader Wrap and after a brief spike above 21.22 on March 22, 2003, look where the VIX.X has come back to? From a PURELY OPTIONS MARKET MAKER standpoint, and perhaps INSTITUTIONAL LEVEL, I would have to think that selling of put premium (either profiting on long put positions, or selling of naked put premium) may now be REVERSING itself, whereas PREMIUM has fallen, a shift back to PUT BUYING and CALL SELLING may be taking place.

Again... the VIX.X may also be suggesting that CURRENT LEVEL OF TRADE in the SPX is at a rather key, or pivotal level.

If after thinking "both side of the trade" with my bullish and bearish commentary regarding Friday's nonfarm payroll data, an excellent option strategy is to play a COMBINATION put/call strategy, or a STRADDLE or STRANGLE, where a move VOLATILE move either side of the "pivotal point" stands to profit.

From a PURE option profit strategy, the greater profit potential with volatility LOW is for a MARKET DECLINE, put options to profit not only from a directional move lower, but for a surge in option volatility to have PREMIUM exploding higher.

I can't say that I saw anything overly suspicious in today's trade, but with the VIX.X slightly higher, will take note that today's most active options for the SPX were....

SPX Option Chain (03/31/04) - Sorted by most active

The main note, though not overly unusual, is that the June 1,050 puts (SPQRJ) were most active. The only reason for these to trade today, in my opinion, is that they had been SOLD naked at a much higher price (maybe a week ago at higher premium) and that trade is close out, OR, with premium now LOWER, a bet is made on a downside move, where if found, would have premium exploding.

We could go on and on with different scenarios of what is taking place with options, but the June 1,050 stands out a bit (maybe just an end of calendar quarter rollout) at double other contracts.

Could it also be that the June 1,125 Call (SPTFE) action is an INSTITUTION selling approximately $32.15 in the 1,125 strike, with thought that the SPX does NOT trade above

1,125 + 32.15 = 1,157.15?

Good Gravy! 1,157.15 is pretty close to the recent highs in the SPX. A BULL will say. It could also be an OVERLY SHORT bear that isn't all that certain of WHAT the response is going to be to the nonfarm data, and they're hedging on a chance the SPX has NOT put in its near-term highs.

I'm quickly posting a INDU daily interval chart, but it still shows OLD MONTHLY levels. Still, I wanted to get a chart up, as its WEEKLY R1 served support.

Dow Industrials Chart - Daily Intervals

I monitored Caterpillar (NYSE:CAT) $79.07 -1.16%, where its session high was $79.85, and didn't show much follow through to the upside after trading $80.00 yesterday. INDU makes another slight gain above a prior session high, and since the move off the recent low, REFUSES to trade BELOW the prior days low.

As a final note as I run WAY PAST deadline, and Market Monitor subscribers will know this to be true.

If there is ONE SIGN that we've seen that the MARKET is perhaps really counting on, or KNOWS of a strong nonfarm payroll number on Friday, it is the recent bullish move in online jobs poster Monster Worldwide (NASDAQ:MNST) $26.20 +3.96%. Swing traders made a decent bullish gain on the stock but today's rather impressive break above the downward trend of $25.50, is a stock, and technical sign that the MARKET may well be counting on a strong number Friday.

Jeff Bailey

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