It's Options Week Again
Submitted by Nic Lenoir of ICAP
Nothing like a bond holiday and low volumes to retest the highs of the year! So now what? Short term we have a support joining recent lows at 1,063.75. Upon breaking there we would expect to see a re-test of 1,042, which should be a decent support, and only a break of 1,026 and the major support line (seen on the dailyor 180-minute charts) would imply more downside is on the way. However, as discussed last week, it really seems there is hardly any steam on the downside here, and if anything the past couple days look like some theta-burn ahead of options expiry at the end of the week, before resuming the march higher. We are set to confim the close above the 88-week moving average if we end the week at these levels. I would wait a 3-hour or daily close above 1,077 in the future to confim we are back in rally mode towards 1,100. In the meantime we can expect to burn more option premium in that narrow 1,063/1,077 range. The daily chart shows that medium-term we are in an expanding triangle currently ranging between 1,026 and 1,100. Assuming nothing else changes from a policy standpoint, the US government (along with most foreign governments) is going to keep the presses running and the subsidies coming, and we will climb in that triangle up to 1,136, the 61.8% retracement of the entire sell-off since the highs of 2007. The only reason why we might retest 1,042, and possibly 1,026, is that most bears out there (myself included) cannot help but hope seeing the basis for a double top. It will have a lot to do with how the USD trades. So far the geen back is finding it difficult to find a floor but indicators show quite a bit of divergence, and if the index could push through 76.75 it would open up the way for a decent retracement, possibly up to 78.50. I am not sure what could trigger it at this point since Washington is making every decision that can possibly further weaken the dollar, and China has been reported for the past few days to be buying EURUSD ever since we dropped temporarily below 1.45.
Interestingly the Dax indicates that there is room for more upside medium term, but short term indicators were exhausted and the 30-minute MACD rolled over this morning and even turned negative. That could add fuel to a possible retest of 1,042 in the US.
But the most interesting chart out there is the Nikkei. The Nikkei has drawn a H&S on the highs, and we came back last night to retest the neckline around 10,130. Should the market open down (or even better GAP down) tonight, we have a perfect set-up to go retest the support line joining the lows around 9,700. A break there would be quite bearish. Anybody looking at selling equities here should absolutely look at the Nikkei as it offers by far the best risk/reward and the best set-up technically. If the market bridges the gap at 10,228 on the upside then give-up the trade.