Technical Analysis: Nasdaq, S&P Break Support

Max-Pain, the theory that stocks and indexes gravitate to the level where most options expire worthless, worked like a charm this week despite the volatile path it took to get there. A week ago, we wrote that Max-Pain for today’s options expiry was 34.50 on the QQQ; the Nasdaq 100 tracking stock closed just 11 cents above that level today. Today’s downdraft might continue into next week as hedges are unwound, but another day or two down would also bring the indexes into oversold territory. The big technical picture continues to be clouded by potential broadening tops forming on the major indexes (see charts below), which merit some caution here. The Nasdaq (first chart) took out 1920-1923 support today, which is now first resistance. The next support levels are 1900, 1890 and 1860. The S&P (second chart) also broke support today, and now faces resistance at 1040-1043, 1054 and 1070, and support is 1035, 1030, 1025 and 1015-1022. The Dow (third chart) faces resistance at 9825-9850, and support is 9675-9686, 9611 and 9500. Today’s equity put-call ratio was very low, but on an expiry day that may not mean much. Still, it would be good to see a spike in fear next week if the downdraft continues. And finally, a wish for Red Sox and Cubs fans on this options expiry Friday: may they someday see an October where they don’t experience their own version of Max-Pain.