Option Play in S&Ps
Expect heavy option expiration play in the first hour-and-a-half in S&Ps. The market typically dies down after that and trades in a very tight range for the remainder of the day. But the key here is “typically.”
This morning, S&Ps were 200 points higher at 1505.60. We had a four-week high settlement in the S&Ps yesterday. However, volume remained pretty light, even though we did see some spurts of institutional activity with some option expiration-related strategies.
We see a critical area between 1503 and 1505.50. If we get above this zone, we’re looking for 1510. As we’ve laid out, we have resistance between 1510 and 1520, essentially. There is a gap between 1518 and 1520. If S&Ps can’t hold the 1503 to 1505.50 zone, look for 1498 to be tested. If that cannot hold, expect a run back down to support at 1492.50 and 1490. If that were to break, we have good support between 1486.50 and 1484.50, and then Wednesday’s low of 1482.50. The 50- and the 100-day moving averages are between 1484 and 1480.
The NASDAQ was up 15 at 3863 on comments on the semi-conductor sector from the Merrill Lynch analyst. The index is up more than 15% on the week, which has certainly driven the NASDAQ up over the key 3843 area (outlined all week). We are looking for a run to 4000, however, we do not expect this to be fast. We think it will maintain a slow, steady upward climb. Two key numbers on the way are 3982, a key retracement area, and the ultimate objective 4043 which is an 88% retracement.
For today, here is what we are looking at: We have key support – if there is any selling this morning — between 3815 and 3800. If this were to fail, we think the selling would intensify quickly and lead us back down to 3720. Along the way down, 3772 to 3756 is crucial, and then it should go through 3728-3720 area. If this were to fail, we would look for the market to test the critical 3710 to 3690 zone. And if that can’t hold this market, it will be a very ugly day.
We have resistance at 3870 to 3885. Above that, 3903 to 3910. If we get above 3910, we have a pretty good chance for a run to 3950, with a key area along the way between 3925 and 3932. Anything above 3950 should target 3982. We’d be very surprised if today were to bring us the 4000 level. However, if it does, do not fight it.
Interesting day in the Dow yesterday as the financials seemed to forget all about the heavy selling the day before and had a very strong performance across the board. That provided the Dow cash market with its fifth consecutive close above 11,000. We think we are now on the verge of resuming the uptrend after essentially five back and forth days, and we are targeting a run towards 11,425 in the cash. That area will be critical; however, it is about 350 points away, so it will take a little time to get there.
Also note: we are having much broader participation on the listed side. Good breadth and good volume on the NYSE. The advance/decline index has reached its best level since last December. However, one of the reasons we’ve been back and forth is because the NASDAQ in general is not confirming this. To get a good strong rally, we’ll need all the indices working together.