Option Investor
Index Wrap

Making a list, then checking it twice....

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I'm going to write today's trade off as being highly manipulated by this quarter's Triple Witch expiration as I thought equities traded very BEARISH relative to how I thought they would trade on any "without-expiration" trade.

To try and prove this, I'll go back to an observation I made in yesterday afternoon's Market Monitor, draw from some comments/observations that fellow analyst Linda Piazza noted today, and still remember those suspicious large block trades I had noted extended sessions where up to 2,000,0000 shares had been blocked out after the market's close, right at tonight's closing level of trade in the NASDAQ-100 Tracker (AMEX:QQQQ) $39.95 -0.94%.

If you're looking for a Santa Claus rally, like I am, then I've got to be making a list, then checking it twice.

Here's a great observation, question, then analysis that Linda Piazza made in this afternoon's Market Monitor. I asked myself many of the same questions during today's trade, but I think I may have uncovered the "answer" in yesterday afternoon's Market Monitor, regarding the Semiconductor HOLDRs (AMEX:SMH) $32.78 -1.67% as I contemplated whether to hold a very short-term day trade short overnight. Here's Linda's comments, and I'll cover the SMH observations, and today's SMH action in a little later.

Linda Piazza (03:41:24) - Why is the advance/decline line so contrary today to what TRIN and the volatility indices are showing us? Those aren't bearish, but the advance/decline line and its trend have been. As of a few minutes ago, adv/dec ratios, something I like to study now and then, were 10:23 on the NYSE and 11:20 on the Nasdaq. Up/down volume showed that down volume was 1.54 times up volume on the NYSE but a stronger 2.28 times up volume on the Nasdaq. If the advance/decline ratios didn't show such bearish patterns, we'd have a situation in which we were just seeing a lot of concentrated selling of a few issues, but that doesn't appear to be what's going on.

Market Snapshot / Internals - 12/16/04 Close

We can see what Linda was talking about today, in regards to the TRIN. It stayed below 1.00 the entire session, below its DAILY Pivot, and during the session fell to a rather bullish low reading of 0.51, which did NOT take place right at the open like it will often do if stocks open higher early in the morning. Yet the advance/decline lines never really coming close to reaching even, with breadth running negative all session. It was like somebody was shoving the proverbial carrot into the juicer. Just pressuring stocks all day. Look how calm the VIX.X was!

I probably share many of Linda's observations today, and at the bottom of today's 01:00 PM EST update, I mentioned that if it weren't for the current Triple Witch, where things don't always make sense, I would be concerned that the above internals had the look that the MARKET was trying to put in a top.

While a day trade short that I had profiled yesterday in the SMH, with the thought that current SMH option open interest, might have an options market maker "pushing" the SMH lower toward its December "Max Pain" theory value of $32.50 didn't work out as planned (the trade was stopped out at $33.40 today), by the close, things went pretty much as I thought they might yesterday afternoon.

Here's my comments from yesterday afternoon.

Market Monitor Post - 12/15/04 at 04:04:23 PM (yesterday)

Option expiration is tricky, and I attempted the difficult task of trading it with the SMH. What I was trying to do, was put myself, and other traders in the shoes of the options market maker, and try to figure out what he/she might try and to, to profit from his/her current position, which is depicted by open interest. "Max Pain" theory comes from the basic thought that a stock or index might mysteriously move (up or down) to its mathematically derived "Max Pain" level. With many indices well above their December "Max Pain" theory levels, the SMH, which was still pretty close, was a candidate security that might be a good test/observation/trade to see if Triple Witch expiration didn't play some type of role in today's, and perhaps tomorrow's trade.

Here is the SMH Option Chain as it looked last night, when the SMH closed at $33.33.

Semiconductor HOLDRs (SMH) - 12/15/04 Option Chain

With just two days until expiration, and the SMH trading $33.33, my main strikes of interest were $35.00 and $32.50. When trying to "figure out" what a security might do (based on market maker activity to inflict max pain) you want to look at what options are in the money. With the thought being that most options traders (like you and I) tend to largely be BUYERS of options, then this would mean the market maker of those options is net short those options that are in the money. By simply looking at the open interest of the $32.50 calls and $35.00 puts, we could observe that the market maker, in very simplistic calculation, was holding a "Loss" of ($0.90 * 65,915 contracts, or roughly $5.93 million. The market maker was also holding a "Loss" of (1.60 * 26,448) $4.22 million in the Dec. $35 puts.

What had a "bear jittery" (an SMH short) was that unusual looking volume in the Jan. $37.50 calls for an average of $0.17 per contract. Why would anyone care about January $37.50 calls priced at a measly $0.17? If a BEAR thought for certain the SMH was headed lower, then sell the January $35's. Only a speculator, or a very sure bull might buy the January $37.50. Remember this trade. Take notes, cause we might need to check them twice next week.

Now I have to think about today's trade in the SMH. We started out fractionally lower to $33.16. "No big deal, I'm short $33.20, and there's a lot of work to be done," is what I was thinking. Well, at 11:00 AM EST, the SMH is triggering my bearish stop at $33.40.

Good Gravy! "Here comes the short squeeze!" I'm thinking. Remember that suspicious Jan. $37.50 call action?

Think about this move higher in the SMH, as it trades up to its intra-day high of $33.56. If you or I were LONG the Dec. $35 puts and we see the SMH at $33.50, what might a trader do? Sell them? Close them out?

But back lower the SMH goes, a lower to the close. A little triple witch volatility?

Now look at today's closing option chain of the SMH. Look where the open interest still is, where the volume was, and who got some "Max Pain."

Semiconductor HOLDRs (SMH) - 12/16/04 Option Chain

Open interest figures would be accurate as of Wednesday's close in the above chain, and there wasn't all that much of a change. But look at the volume in the $32.50 calls. Last trade was $0.40, and depending on tonight's closing interest, the market maker may have gained $0.50 per contract on up to 65,961 contracts! Sure, he may have also lost $0.55 on the $35 puts, but only up to the open interest of 21,677 contracts. I added the Dec. $30 calls to the above option chain, as those got some action today. By the close, that's an additional $0.50 gain for the market maker on 20,165 contract.

Now note again the Jan. $37.50 calls and relatively no volume of 14 contracts. I'm showing the BID at $0.15. Did anyone make, or lose a lot of money based on yesterday's trade? Not really, and there's a month left until that expiration.

Even though my bearish day trader short did not profit, the way the SMH traded as to the way I thought it would, at least has me thinking that today's trade and unexplainable VIX.X, a/d lines hint very much of options expiration.

Grinning.... I've said before, that when you can't explain something, then blame it on valuations, or an option expiration. A Triple Witch, when you've got futures also in play, then all the better.


To get indices to move where you want them to, it takes a LARGE amount of capital (look at today's NYSE and NASDAQ volumes), and the most decisive way to move a security's option, or futures contract, where you want it to go in order to profit, is to either buy (up) or sell (down) the underlying security.

If I were to interpret today TRIN (rather bullish) then this would have me thinking buyers were strong, but the a/d line certainly suggests there was overriding selling pressure to perhaps "force" a lower trade.

What to look for:

Linda Piazza is VERY wise to note today's trade as "not making sense." IF today's trade, and perhaps tomorrow's trade was artificially "forced" in order to try and push some stocks, or indices to a more profitable close, then perhaps there are some "short-term" shorts in the market (market makers) that are pushing things around.

If today's trade is artificial and not a "true market" trade (often happens when nothing makes sense) then we might well expect today's artificial pressure to be released in the opposite direction, once the Triple Witch expiration has passed.

Nobody really cares if Exxon/Mobil (NYSE:XOM) $50.10 trades heavy yesterday, and gravitates toward its "Max Pain" theory of $50. Nobody really cares if 3M (NYSE:MMM) $79.90 +1.02% catches life the past two sessions toward its December "Max Pain" of $80.00.

But the reason I have made comment on these two stocks, is that they are BIG stocks in an index like the OEX, which is well above its December "Max Pain," where I might not be able to make a case that option expiration is largely in play.

The test: My biggest test for bullishness at this point is going to have to be the NH/NL ratios. I've been having a discussion via e-mail with fellow analyst Marc Eckelberry, and he has been alerting me to some BEARISH DIVERGENCE in the RSI indicators he follows, which begins to look SIMILAR to that found last year at this time, when he is looking at MONTHLY interval charts.

My point of professional discussion with Marc at this point is that while the QQQQ is trading higher in PRICE than it was in January, the still RISING RSI may not necessarily be confirming BEARISH DIVERGENCE.

But I also see Marcs point, when we reviewed both the NYSE and NASDAQ NH/NL ratios in the Tuesday evening wrap.

Today's action, as well as the past four days, now has the 5-day NH/NL ratios at both the NYSE and NASDAQ reversing UP three boxes (5 "f" on the NYSE, 3 "f" on the NASDAQ). But when we review the 10-day NH/NL ratios, which are still representing daily trade reading from 9 days ago, they're still inching lower. BULLS want to see more progress in the 5-day NH/NL ratios, to keep the 10- day's firm, if not moving higher also!

And here is another "goofy" observation.

You answer this. If option expiration is involved, where might a trader look to further prove option, or futures-related securities are being manipulated?

How about stocks that don't have options traded on them?

It may be a coincidence, it may not be. But shares of Amerco (NASDAQ:UHAL) $44.07 +2.2% jumped to an all-time high by their close. In this weekend's Ask the Analyst column, I mentioned this very thinly traded stock (you know them by their Uhaul trailers) and this stock does NOT trade with options. Perhaps it is one stock that wasn't "option manipulated" today.

U.S. Market Watch - 12/16/04 Close

I said last night that the QQQQ was probably the toughest trade around right now. It wasn't until I became somewhat convinced that Triple Witch had a lot to do with today's trade, than I remembered those "suspicious" large block traders I had made note of in the QQQQ from several sessions ago (see 12/09 Index Wrap). Pretty good gyration in the QQQQ today with an average open/high/low/close of $40.14.

I didn't get an opportunity to discuss Goldman Sachs' (NYSE:GS) $105.40 -3.52% "blowout" quarterly numbers today, and the stock traded weak. The one point I seemed to pick up on as a criticism, and possible reason for Goldman's decline, was that some of its revenues and earnings are perhaps "too heavily dependent" on the firms OWN trading accounts.

I do think there is good criticism here for longer-term investors to think about though. Is Goldman Sachs in the business of running a mini hedge fund? Or is the company supposed to be focusing its business (revenues and earnings) on financial services to the investment community?

Hey. It's great that Goldman saw quarterly earnings boosted by its own bond trading prowess. But some investors questioned the "quality of earnings." In the company's conference call, Goldman's CFO David Viniar reportedly warned investors that " we will not always be so successful, and we may not always have so favorable a trading environment."

I can't be certain, but Mr. Viniar's "we will not always be so successful..." may have been in regards to the firms recent success and profits from its own equity/bond/commodity trading account profits.

Pivot Matrix -

The most "solid" correlation of support would be found at OEX Daily S1 and MONTHLY R1, as well as BIX.X MONTHLY Pivot and DAILY S2. That's headed the wrong way in my opinion if I'm bullish.

For some SOX.X perspective with the Semiconductor HOLDRs (SMH), the SMH's WEEKLY pivot levels, which will change next week, have Weekly S2-R2 as, $30.10, $31.25, $33.04, $34.19, $35.96.

Just like the SOX.X, the SMH has traded an equidistant range either side of its WEEKLY Pivot.

Note today's low trade in the VIX.X was another all-time low.

Jeff Bailey

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