By Paul Cherney
This is the week of August options expiration. Tuesday's session made bearish bets profitable.
Opening weakness on Wednesday might afford short-term options traders the opportunity to close-out bearish leveraged bets. If bearish leveraged bets (options) are closed in Wednesday's session (seems likely to me), then the unwinding of hedges associated with those options can create a buying interest in the market that can lift prices from the lows (sometimes even reverse to positive ground).
I used to call the Wednesday before options expiration a.m./p.m. reversal day because what happens near the open and in the morning (the "a.m.") can reverse (or at least lift from the lows) by the afternoon (the "p.m."). That's the potential "one trade day" story. The bigger reality is that the markets have clearly established a series of lower lows and lower highs, and that is the definition of a down trend.
Tuesday's close under 2144 for the NASDAQ has opened the downside for a test of the 2106-2076 area. Volume measures for the NASDAQ have registered levels that force me to doubt that any rebound in prices will be able to attract significant follow-through, and unless other technical conditions emerge, I expect a test of 2106 and lower.
This does not have to happen in a one or two trade day window, it is my assumption for a destination for prices unless there are new technical conditions that arise. Everyday the markets produce data that either confirm or contradict assumptions in place, if the markets deliver data that contradicts the assumptions I have in place, I adapt and react by recognizing I was wrong.
Regardless of how Wednesday unfolds, I am still of the opinion that it would be wiser to wait for thoroughly oversold readings in the end of day measures before expecting a bounce of significance.
The S&P 500 has had a close under the 1219.80 level. This (in my view of the charts) has opened the downside risk for a test of the 1206-1183 level.
• NASDAQ immediate intraday resistance is a shelf 2146.89-2157.98. Then 2165-2185.91, resistance gets thick 2177.85 and higher. Anytime immediate resistances are exceeded, they convert to supports until proven otherwise.
• S&P 500 intraday resistance is a shelf 1223.34-1231.90 with a focus 1225.10-1227.61. Resistance is stacked and formidable at 1229-1239.76. A combination of several intraday plateaus creates a focus of resistance at 1238-1242.62, but resistance runs all the way 1245.81. The next focus of resistance above 1245 is 1249.23-1267.
• NASDAQ immediate intraday support is 2135.69-2122.86. If there is opening weakness and it does not print more than 4 minutes below 2122.86, then the seeds for an intraday rebound from the lows are in place. The next well-defined layer of support is 2106-2076 (very strong and should hold if tested).
• The S&P 500 has immediate intraday support in the form a thin shelf 1219-1215, the 4 minute rule applies (as described in the NASDAQ support comment). The next meaningful support for the S&P 500 is 1206-1183 (very strong).
The close below S&P 500 1219.80 has increased the chances (in my view of the charts) for a sideways market that drifts down to to test 1206-1183. The S&P 500 has a special situation, it has been able to weather selling without dropping dramatically due to the strength in oil related shares. The weakness on Tuesday was partially compounded by weakness in energy related shares, those shares might be considered oversold by some people and they could have a rebound on Wednesday which would limit the downside for the S&P 500.
Cherney is president of Cherney Market Analysis