Friday, July 8, 2011

Friday Market Summary

Today the markets had their first significant down move in eight days. The drop came in the form of a gap down in the morning after an absolutely abysmal Nonfarm Payrolls report was released pre-market. Expectations were for an increase of 100,000 jobs while the data came in at a pathetic 18,000.

When the data was released, the futures dropped sharply and once the market opened the SPY gapped down by $1.53. The SPY then briefly flirted with the 200MA on the 10 min chart and ultimately floated back up upwards for the rest of the day closing at 134.40. This float up is not unexpected on a Friday and in a market with light volume.

SPY 10 Min gaps down then floats up

Technically speaking today was significant as this massive rally finally took a hit. But while the market is down, it isn't out--yet. I'd like to see the SPY trade lower for at least one more day before I consider this anything more than a retrace with choppy consolidation of an up-move. With this said, yesterday's doji candle followed by today's sharply lower prices does suggest a top is in place for the time being.

SPY daily pops on a bull flag then gaps back down

Next week is a wildcard. It's the start of options expiration week and a slew of earnings reports are set to be released. There's also the ever-looming potential of bad news coming out of Europe regarding one or more of the debt issues that region is facing. The combination of all these factors means that there's a real possibility for volatile trading if anything catches the markets by surprise. And at such lofty levels on the charts, any volatility will likely equate to a move down.

Options expiration typically involves the market moving away from the most popular put and call strike prices. For example, if traders are weighted heavily in calls of a particular stock, it's not uncommon for the stock to move in the opposite direction so that those calls expire as cheaply as possible. This minimizes the amount that financial institutions would have to pay out in losses and makes it undesirable for the average trader to hold calls or puts long-term.

With this in mind, it's normally easy to gauge how bullish or bearish the market is and then assume that stocks will make a counter-move while options expire. However, this week things are different. The market is horrendously extended, but I wouldn't call it bullish. Many traders, including myself, have been calling for a down move since last week. I wouldn't be surprised if there are still a lot of puts out there and if that's the case the market may float higher for at least the beginning of next week. But if most of these puts have already been sold or exercised, a move down is likely in order.

I'm still holding half positions short from last week and will continue to do so unless we close above Thursday's highs next week. I plan to scan the charts this weekend for both short and long setups depending on which direction the market takes.

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