Technical Analysis: Expiry Games

Once the QQQ, the Nasdaq 100 tracking stock, went above 35 today, hedging kicked in to send the market higher. Always a good idea to be cautious around expiry. When hedging kicks in, the following week often has a downward bias as hedges are unwound, at least for the early part of the week. A time of month when unusual forces are at work, both in the days before and the days after expiry. The Dow (first two charts below) is chewing through some very tough resistance despite being extremely overbought on multiple indicators and timeframes. 10,250, 10,300, 10,350 and 10,400 are all major levels. 10,150, 10130 and 10,075 are support. One note of caution: -DI, or selling pressure, has now dipped below 10 for the first time since the March 2002 peak. However, with the market near one of its seasonally strongest periods, it’s possible that the market won’t face a strong correction until the February-March timeframe. Sentiment, as measured by the equity put-call ratio, has been consistently on the complacent side – but has yet to slip below the .45 danger zone. In short, some signs of excess, but nothing warning of a major top just yet, and with momentum definitely pointed higher, we suspect it will take some time for the market to reverse course when it eventually tops. On the Nasdaq (third chart), 1967 looks like strong resistance, followed by 1980 and 1990, and 1940 and 1934 are support. The S&P (fourth and fifth charts) faces resistance at 1093 and 1100-1106, and support is 1083, 1075, and 1068-1071.