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Index Wrap

Gravitational force

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The major indices have that look of continued Triple Witch expiration, where the S&P 500 (SPX.X) 1,125.29 -0.98% looked a bit like a heatseeking missile as it gravitated toward heavy open interest at the 1,125 strike in today's session, where after a rather narrow range of trade last week, the bulk of equity-based indices within our pivot matrix now rest just above this week's WEEKLY S2s.

Market Snapshot / Internals - 06/14/04 Close

Today's internals look very similar to those found Wednesday of last week, and further below, I'll make my case for another session that was largely manipulated into Thursday's index expiration. While both the NYSE and NASDAQ 10-day Average NH/NL ratios slip lower, we have not yet seen a 3-box reversal (6% reversal) to 74% for the NYSE, or 66% for the NASDAQ.

Volumes remain light, thus the thought that it may not be too hard to be pushing things around.

On Thursday, the NYSE NH/NL 5-day Average ratio was even with the 10-day at 80.5%, but moves below the 10-day today at 73.4%. After falling below its 10-day NH/NL Average ratio on Wednesday at 72.2%, the NASDAQ's 5-day NH/NL Average ratio is picking up some downside momentum at 64.6% at today's close.

Pivot Analysis Matrix -

All equity-based indices, except for the Semiconductor Index (SOX.X) 465.47 -2.26% managed to finish Thursday's session above their WEEKLY Pivots, but this morning's open found a gap lower below the WEEKLY Pivots. Some notes made late Thursday afternoon, along with today's gap lower, which would have caught any bull somewhat flatfooted, looks very similar to Wednesday's trade, and smells of additional manipulation into this week's option/futures expiration.

Today's session lows for the NDX/QQQ, SOX.X and BIX.X came just shy of their WEEKLY S2's. I should note that since I wrote last Wednesday's Index Trader Wrap, OEX "Max Pain" edged up one strike to 550 from 545.

I may be splitting hairs on the BIX.X, but I'm showing intra-day bar chart review had BIX.X not quite touching its WEEKLY S2 of 344.29. Still, as I discuss a potential trade in the SPX for tomorrow and selling of SPX June 1,115 puts, I'd be more comfortable doing so if BIX.X were hanging at, or above its DAILY S1.

The most correlative and notable correlative support looks to be within 10-points of INDU DAILY S1 and WEEKLY S1. Should the INDU give up this level, say 10,285, be alert to the potential for "mass dumping" of stock, but keep a close eye on the VIX.X and a sharp move up in the VIX.X. Should the INDU show an aggressive move below 10,285, combined with an aggressive move up in the VIX.X, this could be an alert that a lot of in the money covered calls were written into the recent relative highs, with full intention of selling some positions into this week's Triple Witch.

However, I think we're going to see more of an SPX range trade that is about 5-points either side of 1,125 into Thursday's close.

Market Monitor Observations - 06/10/04 VIX.X /SPX call activity

Today's (Monday) trade is just a bit too similar to what traders were alerted to in Thursday's 01:00 PM EDT update, combined with something I had noted later that afternoon in the Market Volatility Index (VIX.X) 16.07 +6.84%, where volatility spikes. I'd be taking note of the 1,135 strike as correlative with this WEEK's Pivot, and would have to believe the SPX gets "sold hard" on any type of bounce back near that level between now and Thursday. The profitable trade with relatively low risk I see in the making is any type of SPX decline to 1,120 and selling of SPX 1,120 puts.

S&P 500 Index (SPX.X) June Option Chain - 06/14/04 Close

The "dashed BLUE" is where the SPX was trading "at the money" and 1,135 late Thursday afternoon. The "solid BLUE" is not "at the money" with the SPX just happening to close near 1,125 and all that open interest we noted in Thursday's 01:00 Update. If I were an options market maker, I might try and fake a move lower lower to the 1,120 level early tomorrow, but note how our PINK arrows at 1,120 and 1,130 open interest aren't too far off from each other. If options market makers can get the fake move lower near 1,120, they might just influence some 1,120 and 1,115 put buying at both strikes.

Note: Today's high for the SPX 1,125 puts was $7.90, not $34.00, which I did edit to reflect $7.90. However, I scratched out the Avg OHLC calculation for today's trade of $12.10, which would be inaccurate.

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

I'm not certain an SPX drop to 1,115 would come tomorrow, but if it did, I'd be looking to sell an SPX June 1,115 strike as a premium erosion trade into this week's expiration. A quick yet steady drop on Wednesday, a slight rebound and reclamation of about 1/2 of those losses on Thursday, and another sudden and steady drop back to 1,125 and all that open interest at the 1,125 strike just seems like a lot of option-related manipulation in a light volume market to me.

Dow Industrials (INDU) Chart - Daily Intervals

The INDU's MONTHLY R1 now becomes more of a significant level of resistance, but remains a relatively stronger than the other indices. However, we've seen how the INDU, SPX/OEX and QQQ/NDX have had a tendency to "trade off" for weakness and strength the past couple of months, at various times. With the INDU having shows some recent relative strength the past couple of weeks, this may well be the index to be looking for some near-term declines as it plays "catch up" to the downside.

DIA and DJX June Option Chains - 06/14/04 Close

It's "easier" to look at an Option chain in the SPX or OEX to get a feel for just who option market makers are going to try and mess with. With the Dow derivatives, you kind of have to look at both the DIA and DJX option chains, and just kind of eyeball things. Since it is a widely held theory that most call open interest is "long" then a close below DIA $104 wipes out June $104 call gains at this point. There's some "go get'em" at the $102 call (DIAFX), where with rather light open interest at the DIA $103 put (DIARY), an options market maker may have more to gain than lose if he/she can get a DIA back near $102 by Friday's close. A close back near $102 from current levels also eats away at some of that open interest lower at the in the money DIA June $100 call (DIAFV), but does little to harm the options market maker's June 100 put (DIARV) short position (if he/she has been selling those puts to buyers).

However, DJX is a slightly different story isn't it? Note the rather "light" open interest at DJX $102 Call (compared to DIA $102 call). Can never be sure, but probably the difference of just one or two trades at some point, where the DIA was preferred option at that time (liquidity most likely). The "mess with them" trade again looks to be something below $103, where the closer to $102 a market maker can get it, then some erosion to the DJX $100 call open interest of 27,612 for those option contracts that were opened with a bullish bias. Still, we can NEVER know for sure if the whole mess at $100 call wasn't a covered call, where the sellers of those calls are ready, willing and ABLE to deliver $100 strike.

NASDAQ-100 Tracker (QQQ) - Daily Intervals

Today's 52.49 million share volume a slight increase from Thursday's 38.82 million. These are "featherweight" type of volumes. There was a "bad tick" in this afternoon's trade, but it came to $35.20 as the QQQ was trading $36.20, so to answer a couple of questions from traders, I think that back tick was a keypunch error, and may not have been a program being set up. Still, good observations from traders regarding that "bad tick" as being highly correlative with MONTHLY 61.8% retracement, but I'd only grow suspicious near-term, should the SPX fall much below its rising 200-day SMA.

Jeff Bailey

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