Options Expiration Puts More Volatility In the Market

7:45 am MT: Pre-market futures were up, just as I speculated in VC last night (for those of you that attended). RIMM and ORCL gave Tech a little boost. Meanwhile the auto bailout chatter picked up again this morning for a formal announcement about $17.4bTARP water being thrown on that fire.....

The net result was a modest boost in futures and a wiggle out of the gate just as I warned last night. I also said to expect GE selling to keep pressure on things, which is also what just happened right after the wiggle. It didn't help that Standard & Poors lowered credit ratings and outlooks for four more financial institutions: GS, WFC, JPM, and BAC.

Right now, the market is settling out a bit after the initial wiggle. Watch to see if we get a Reverse Head and shoulders on the 5m charts. The Dow needs to clear 8,725 in order to confirm the reversal. Remember, the Dow is the lagging index because of GE, so you will want to keep an eye on it today, but use the SPX most of the time since it will probably lead the Dow.

I speculated yesterday that the market would be back and forth quite a bit today because of the huge crosscurrent effect from GE, financial sector credit downgrades, and Energy and Commodity selling (bearish), and low oil prices, low mortgage rates, bad economic, earnings, and employment news priced in already (bullish).

In addition, today is Options Expiration, which typically leaves the market with a lot of volatility and swings intra-day as traders exercise, uwind, or roll out positions. Look for the increase in volatility to peak early in the day and in the last 20m before the close. And remember, volatility doesn't always mean sharp moves to the downside, it also means tossing sharply back and forth, or even sharp moves to the upside. The key to expected increases in whippy behavior is to dial it down a time frame or two. Therefore, keep your focus on the lower time frames for swings (5m - 15m charts) today. It may be that a longer swing presents itself, but take partial profits a little earlier on a potentially moody day like today.

8:05 am MT: It looks like the market wanted to go right into that neckline I described earlier (8,720 on the Dow and 897 on the SPX). If you took the counterswing on the 5m charts off the first bounce carry-through, you would offload half your profits right now and see if the Bulls can push through the neckline.

8:09 am MT: If the SPX can push through 897, then you would take the rest of your profits on calls right in the 899 - 900 area if the SPX pushes that far. This is a loose Reverse Head and Shoulders, so it may not stick the whole day, in other words, it's not a signal that the whole day will go bullish.

8:11 am MT: The SPX broke through 897 and ran right to the 899 - 900 area immediately, just as I wrote above. Here is where you would lock and walk on any short swing calls on the 5m charts. It might overshoot to 901 - 902, but I would be happy with the move. I'm giving more detail this morning because I want you to get in the rhythm of the short, intra-day swings on the 5m - 15m charts to stay profitable and stay out of trouble on a day like today.

8:16 am MT: If the SPX can cross 905, then it sets up an Ascending Triangle on the 2hr charts and probably changes the posture on the day. It basically erases the narrow-based GE selling that caved in the market yesterday and puts us back where we would have been if GE had never happened. We'll see if the market can make that adjustment.....

A cross of 905 and I am looking for the next test back of 900 to pick up a second call position and swing it up into the 910 - 914 area. I would keep that stop tight (897 area at the lowest) just in case the market decides to go whippy again.

8:22 - 8:28 am MT: it looks like things will peak out here in the 903 area, which means a probable test back to that 897 neckline break I wrote about earlier. Use the 5m charts to guide you on the loose Reverse Head and Shoulders reversal and potential neckline test. If the market holds high and tight in a Bull Flag off this move, switch over to the 10m charts and look for the next upswing on that time frame (possibly starting around 897 - 898 and finishing around 907 - 908). Remember, on a short swing, if the scenario happens, take half your trade off at the 903 area and bring your stop to breakeven so you can't lose money on the trade.

8:29 am MT: One last thing: Keep your eyes open, this is a day for all kinds of potential gyrations. Traders kept the market right here so the 60m candle would close (at 8:30 am) near its highs and give the appearance of a bullish reversal on the 60m charts (One Soldier pattern or Ascending Triangle - like on the 2hr charts). In other words, the bulls got just what they wanted. I'm always a little leery when things happen too perfectly on a day like today.....

That doesn't mean I don't want to take calls on the next pullback on the 5m or 10m charts. It just means that I'm more willing than ever to take partial profits early, and then see if this day is really going to tip to the Bulls with a run up to yesterday's highs. I want to make money on calls if that scenario happens, so I want to be in the game, but I want to manage that game very carefully.

The mid point of that Long Body 60m candle that just formed is 895. So a drop below 895 and this was probably just an options expiration pump and dump. I will stay connected to the 5m - 15m time frames today (despite the formations on the 60m and 2hr charts), but puts just got a lot harder because of what just happened on the 60m bar (which is just what the Bulls wanted after yesterday's GE selling cave-in). This was forming up to be a no-brainer for the the Bears early in the day, and the Bulls just blew that up for them.....which is why I imagine the Bulls are grinning like Cheshire Cat's across the aisle at the Bears right now.....

8:45 am MT: The SPX just crossed 905, so this got even tougher for the Bears. You can get a feel for the steep Reverse Head and Shoulders on the 5m charts or the V-Bottom on the 10m or 15m charts. It's not the norm, it means that the GE bogey is probably getting corrected back out of the price action. I don't know if it's real or not, but I would be willing to take a shot at it (calls) on the next 10m or 15m chart pullback, just as I wrote above.

I am going to go away now for awhile. I wanted to get everyone in synch with things early in the day, so stay on top of things now if you're trading this. I will check in later and give a market update.

One last thing, if the pullback (if we get a pullback) on the 10m or 15m charts comes all the way to 895 instead of holding 897 - 898, then DON'T look for a higher high, or even an equal high. If you take calls on a pullback that deep (which is ok but not ideal) then offload half the trade at 900 and get your stop to break-even. If it gets back to 902.50 - 903, offload most of the rest and only save a small amount for a potential higher high. Ideally, the pullback holds 897 or above in order to make a higher high and take a shot at 907 - 908.

Here is a 9:00 am MT chart of the SPX on the 10m charts so you have an idea of what I'm yapping about:
(click on image to enlarge)

9:01 - 9:04 am MT: So far so good on the 10m chart pullback. Again, this was a V-Bottom on the 10m - 15m charts, so it's a little tricky, but that 60m bar should hold for at least one more swing (on the 10m bars), even if it's a partial and not a full swing. The SPX is at 899 right now, so this area is where I want things to be fairly orderly (897 - 899) in order for the market to have a shot at a higher high, otherwise the swing back may not go as far. We shall see.....

Ok, now I'm going, all the best until later in the trading day.

1:45 - 2:00 pm MT: Late Day Update: Back and forth and back and forth we went. This was not that unusual for Options Expiration. After the failure at holding the 895 - 897 area early in the day, trading signals got progressively harder throughout the day. There were several decent signals today, but all of them ended up being on the 5m charts. Today's activity was something I prepared myself for mentally yesterday, so the lack of signals on higher time frames, and the back and forth price action was not a surprise for me.

Some days feel like a lot of spinning without getting anywhere. Options Expiration has a tendency to be one of those days that you have to put an asterisk by when you look at the charts. A lot of gyrating, and then at the end of the day, the market finishes fairly flat.....

Here is the end-of-day chart on the SPX:
(click on image to enlarge)

The net result on the charts is the market is continuing to tighten down as traders decide if they are going to try push for another stage in the Santa Claus Drift (I decided I would go with the German spelling this time). It's pretty much a toss of the coin whether or not we go to the North Pole or South Pole next week. A move above 905 on the SPX and we're probably headed to the North Pole to see Santa. A move below 880 on the SPX and we're probably headed to the South Pole to play with the penguins. Until then, have a great weekend.

One Final Reminder: I won't be doing VC this evening.