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Market Wrap

Post Option Expiration Positioning

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Some post January option expiration positioning and a late session reversal in into today's February NYMEX Crude Oil futures (cl07g) expiration found the major stock indices finishing in the red to start the week, with decliners outnumbering advancers roughly 2-to-1 at both the NYSE and NASDAQ.

Just as the NASDAQ-100 Trust (NASDAQ:QQQQ) $43.69 -1.08% found some volatility into its January options contract on what I believe was some NAKED call squeeze action, crude oil has witnessed some gyrations in recent sessions and today's February contract expiration was no exception.

Stocks darted lower at the open as the February Crude Oil futures (cl07g) contract jumped more than $1.00 from Friday's settlement to $53.44 just after 10:25 AM EST. The move in oil raised some trader's eyebrows into today's final February contract trade, as many were looking for a lower settlement in the downward trend. Eventually, sellers did overcome buyers with the February contract settling down $0.86, or -1.65% at $51.13. Perhaps today's final trade for the February contract was "calm" considering last Tuesday's 3% decline, Wednesday's 2% rise, Thursday's 3.3% decline and Friday's 3% rise.

Gold prices mirrored today's trade in oil with the StreetTracks Gold Trust (NYSE:GLD) $62.72 -0.44% (approx $627.72 spot) rising to $63.48 despite a higher U.S. Dollar Index (CEC:DXY) trade in the early morning. As oil prices softened, so did the yellow metal.

The U.S. Dollar index (CEC:DXY) finished Friday's trade at 84.91 and from that benchmark, the DXY was flat-to-higher at today's 03:00 PM EST mark of 85.02.

U.S. Market Watch - 01/22/07 Close

Today's economic calendar was light, with no major releases on the docket. The Chicago Fed National Activity Index showed above-trend economic growth for December, the first above-trend reading in four months. The National Activity Index was reported at +0.04, compared with -0.30 the month before.

Fed commentary had San Francisco Fed President Yellen saying current monetary policy may be "well positioned" to cool inflationary pressures.

Buyers nibbled at the major maturities with the 10-year yield ($TNX.X) falling 1.4 basis points to 4.759%, inverting from the shorter-dated 5-year yield ($FVX.X), which fell 1.1 basis point to 4.766%.

Tuesday's U.S. economic calendar is equally light with December's Leading Indicator Index (month-to-month) forecasted to show a 0.2% increase after a 0.1% gain in November.

Calendar fourth-quarter earnings for 2006 continue to roll in and grab the focus of traders and investors alike. In last week's OptionInvestor.com Market Monitor I mentioned that Standard & Poors had noted that while just 11% of the S&P 500 constituents had reported calendar Q4 earnings (Sep-Dec 2006), the early tally was 8.3% higher than analysts' expectations.

Shares of drug giant Pfizer (NYSE:PFE) $26.95 -0.99% finished down $0.27 per share after the company reported adjusted EPS of $0.43/share, which was a penny better than the consensus estimate. GAAP earnings came in at $9.45 billion, or $1.32 a share, boosted by the sale of its consumer division. The company said it plans to cut 10,000 jobs in a restructuring aimed at saving up to $2 billion a year.

American Express (NYSE:AXP) $58.06 -0.05% traded relatively flat. The financial-services firm's net income rose to $922 million, or $0.75/share, which was a penny shy of Wall Street's expectations. Revenue rose 13% to $7.21 billion, helped by record holiday cardmember spending. Analysts were expecting revenues of $7.33 billion.

General Motors (NYSE:GM) $32.35 +2.53%, which was last year's best performing Dow component was a standout again today, hitting a 2-month high. Bulls placed bets that the world's largest auto giant could be poised to announce better-than-expected earnings on January 30th. Current consensus is for the company to earn $1.14/share in the latest quarter on revenue of $42.52 billion.

Shares of Texas Instruments (NYSE:TXN) $28.59 +0.70% rose $0.20 during today's regular session, then jumped to $29.40 in tonight's extended session after the semiconductor maker posted Q4 net income of $668 million, or $0.45/share, which easily surpasses Wall Street's consensus estimate of $0.38/share. The company said Q4 revenue was $3.46 billion, which was slightly above the $3.43 billion consensus.

Tug and Pull Continues; QQQQ whipped at Op-EX

It has been more than a week since my last market wrap, and for the most part, the tug and pull continues.

However, I must now conclude that the action we've witnessed in the NASDAQ-100 (NDX and QQQQ) has largely been due to some NAKED call writers having gotten "squeezed" prior to Friday's expiration, and the recent weakness also looks very much like some of that "squeeze" has subsided, and equilibrium is being found.

I can only say this as I began following the NASDAQ-100 Trust (NASDAQ:QQQQ) $43.69 -1.08% January options montage closely, when on January 10th, the QQQQ lurched sharply above $44.30, a level I had stated "the QQQQ won't see the light of day above" several sessions prior.

In summary, what I started to alert short-term traders to on January 10th, AFTER I had profiled QQQQ Feb. $43 Puts (QQQ-NQ) for $0.50/contract, when the QQQQ was trading $44.26, was that there may well have been a NAKED Call "squeeze" developing, as the QQQQ broke above a key level of near-term resistance at $44.40.

Traders and investors that have followed my commentary and analysis over the years know that when "something goes wrong," I tend to look for answers as to WHY!

I will not show all of the QQQQ option montages that I showed traders since 01/10/07 at 01:38:07, but want to recap some things here. Yes, it may seem "too late" for some, but I think it is important to understand what I (Jeff Bailey) think took place, so you and I can try to grasp why the volatility in the NDX/QQQQ took place (relative to other major equity indices).

Here's the CALL option side of the QQQQ January option montage. At the time of this screen capture, I began to "worry," or alert traders that a NAKED Call squeeze could be in the making should the QQQQ move much above that day's then high of $44.43.

For those not familiar with what a NAKED call is, that is when an option trader/investor has SOLD something, that is un-hedged in the underlying security.

QQQQ Call Options - 01/10/07 01:38 PM EST

I had noted that Open Interest in the QQQQ $44 Calls (QQQ-AR) was the LARGEST open interest for the QQQQ Calls for January expiration (which ended on Friday 01/19/07). I point to the notable 2,112 DnTickVol (Down Tick Volume, which depicts SELLING of that call) even at the time of that screen capture. In essence, there still appeared to be SELLERS of those calls, even as the QQQQ traded ABOVE the $44 strike at $44.36. The Open Interest of 359,168 equates to, or represents 35.9 million shares of QQQQ at $44.00.

I had a bit of a "lump" in my throat, as I had just profiled some QQQQ Feb. $43 Puts, without having looked at the above options montage.

We had witnessed NAKED Call squeezes into option expirations in recent months July, August, September, October and November in some of the major indices. It appeared that one was in the making for the QQQQ!

NASDAQ-100 Trust (QQQQ) - Daily Intervals

Based on the TECHNICALS, and some rather detailed following/monitoring of the QQQQ option montage, as well as the recent action in the QQQQ, I think the recent volatility in this index (NDX.X too) has been largely due to January's option expiration, and some NAKED $44 Call writers having gotten squeezed.

I showed a similar chart of the QQQQ in the 12/27/06 Market Wrap. However, at that time, my PINK 100% retracement level, which I had been dragging up to a relative high Friday close was at $44.65 (a 11/24/06 high Friday close).

While following an Option Montage can be as much of an art, as it is a science, I also have benchmarked the November and December QQQQ option expiration closes ($44.30 and $44.43) with horizontal green.

We can perhaps see how "easy" it had/has been to just SELL NAKED Calls at the $44.00 strike for November and December expiration, keep the BULK of those premiums, then just do it again for January.

Well.... when Open Interest built to notably higher levels than other CALL option strikes and the QQQQ began moving ABOVE $44.00, say $44.50, suddenly a NAKED Call short-squeeze took place.

All is fair in love and war, as it is in trading.

On Friday, 1/12/07, I did "drag up" my PINK retracement from a prior Friday high close from 11/24/06 (see the 12/27/06 Market Wrap) and while today's low didn't quite test the $43.47 level, I get the distinct feeling that that PRICE level, using this simple fibonacci retracement technique, is being TRADED as support by market participants, just as the $42.94 PINK retracement (see the 12/27/06 Market Wrap) was on 12/26/06).

In essence, UNTIL a QQQQ Close below $43.47 (say $43.45) is found, then that PINK level is deemed support. If BROKEN to the downside, then $42.84 becomes the next DOWNSIDE risk level.

For now, the still RISING "bullish resistance" trend is an UPSIDE trend that bears will assess RISK to, and bulls will assess REWARD to.

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

At tonight's close, I also want to take a moment and update my "neutral" call as it would relate to the broader market, as I believe the S&P 500 (SPX.X) depicts.

At the close of trading on 12/22/06, I thought traders and investors should take on a more "neutral" from "bullish" stance, as some of the internals I follow, which I think hold HIGHER RISK FOR BULLS, and where other internals such as the advance decline ratios at the NYSE and NASDAQ, continue to suggest a more cautious stance among BUYERS of equities.

The advance/decline measure for the NASDAQ that I've been noting, and following here in the Market Wraps and the OptionInvestor.com Market Monitor continue to show some "downside pull." At tonight closing reading, the NASDAQ Summation Index ($NYSI) from StockCharts.com has fallen further to a -84.61 reading.

The advance/decline measure for the NYSE that I've been noting, and following here in the Market Wraps and the OptionInvestor.com Market Monitor continues to show softening, or weakening as it FOLLOWS the NASDAQ a/d weakness. At tonight close, the NYSE Summation Index ($NYSI) from StockCharts.com now reads +679.61.

I continue to follow the major market bullish %, but at the time of this writing, I have not witnessed any MAJOR warning signs that SUPPLY (O) is outstripping DEMAND (X).
 

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