Multi-Year Resistance
The stock market rallied recently on anticipation of a pause in the monetary tightening cycle, when the FOMC meets Sep 20th, because of hurricane Katrina. However, the market is near major resistance, and it's uncertain if the FOMC will pause or tighten. Moreover, the market rallied on a fall in oil prices, from over $70 a barrel about two weeks ago to just over $64 on the close Friday.
Next week is options expiration week, which is typically a volatile week. Some current September Max Pain expirations are: SPX 1,220 with the value of calls over twice the value of puts (which is bearish, since the put/call is a contrarian indicator).
SPX closed at 1,241 1/2. OEX 570 with the value of puts three times greater than the value of calls (which is bullish). OEX closed at over 574.
QQQQ 39 with the value of puts 40% more than the value of calls. QQQQ closed at over 39 1/2.
The first two charts below are same period daily charts of SPX (S&P 500) and OIH (an oil ETF). Both SPX and OIH rallied recently (although, oil prices fell), because institutions hedged oil and non-oil stocks, in case the FOMC does or doesn't tighten. SPX is currently just over its upper Bollinger Band, which is resistance.
Support is at 1,230, i.e. late last week's low. There's further support in the low 1,220s, i.e. the 10, 20, and 50 day MAs. OIH resistance is at its upper Bollinger Band.
The 10 day MA is current support. If OIH fails to hold the 10 day MA, then the 20 and 50 day MAs, and lower Bollinger Band are support levels.
The third chart is an SPX monthly chart that shows further resistance at 1,246 (the recent and four-year high), 1,252 (monthly upper Bollinger Band), and 1,253 (multi-year Fibonacci level). Consequently, it seems, SPX is near a short-term top. So, if SPX rises early next week, that may be an excellent opportunity to buy September or October puts.
Also, I may add, intrinsic value becomes more important closer to expiration. So, September in-the-money options are much safer than September out-of-the money options next week. Also, SPX September options will have huge leverage, because of time value decay and high strike prices.
Next week economic reports are: Monday: None, Tuesday:
PPI, Trade Balance, and Treasury Budget, Wednesday: Retail Sales, Industrial Production, and Capacity Utilization, Thursday: CPI, Unemployment Claims, Business Inventories, Empire State Index, and Philadelphia Fed, and Friday:
Current Account, and Michigan Consumer Sentiment. Also, the weekly oil inventory report is each Wednesday.
The unwinding of options, anticipations and announcements of economic reports, and oil prices should generate a great deal of volatility next week. If the market remains high before the FOMC announcement a week from Tuesday, then the news may be discounted, and the market may fall (whether the FOMC tightens or not). Moreover, earnings warning season in late September, end-of-the-quarter window dressing, and third quarter earnings in October should contribute to volatility over the next few weeks.
See PeakTrader.com Forum Index Market Overview section for free charts.
Arthur Albert Eckart is the founder and owner of PeakTrader. Arthur has worked for commercial banks, e.g. Wells Fargo, Banc One, and First Commerce Technologies, during the 1980s and 1990s.
He has also worked for Janus Funds from 1999-00. Arthur Eckart has a BA & MA in Economics from the University of Colorado. He has worked on options portfolio optimization since 1998.
Mr Eckart has developed a comprehensive trading methodology using economics, portfolio optimization, and technical analysis to maximize return and minimize risk at the same time and over time. This methodology has resulted in excellent returns with low risk over the past four years.
Arthur Eckart
