SPX (S&P 500) Trading Range
Posted: Saturday, July 09, 2005
by Arthur Eckart
PeakTrader.com
European stock markets fell sharply Thu after several bombs exploded in London causing the U.S. stock market to open low. However, the U.S. market finished with a gain at the end of day. It's uncertain why the U.S. market held up so well. Perhaps, a terrorist attack was priced-in, investors were unwilling to sell much before the start of earnings season, or London, which was the financial center of the world for two centuries, is less important than New York, in a U.S. centric world.
SPX rallied about 30 points from Thu morning to Fri afternoon, which was a relatively steep rise. I suspect many short-sellers (who make bets the market will fall) were surprised the market didn't fall further Thu, and rushed to cover their short positions (i.e. buy back short shares, causing the market to rise).
The chart below is a SPX daily year-to-date chart. SPX consolidated recently at 1,190 to 1,210 before making a move higher and then lower. The close above 1,210 Fri may indicate the trading range will be 1,200 to 1,220 next week. A more volatile range is 1,190 (bottom of consolidation area) to 1,229 (the Mar high, which is a four-year high).
However, the intermediate-term technical indicators (e.g. NYSE Oscillator MAs and NYSE Summation Index) are bearish. The short-term technical indicators (e.g. TICK and VIX) are on the verge of becoming bearish (perhaps after options expiration week) or indicate much greater volatility.
Max Pain expirations work over half the time at some point during week of expiration. Some major Jul Max Pain expirations are: SPX 1,200 with the value of calls roughly equal to the value of puts. SPX closed at about 1,212. OEX 560 with the value of puts roughly 65% greater than the value of calls (which is bullish, since the put/call is a contrarian indicator). OEX closed at about 566 1/2. QQQQ 37 with the value of puts roughly 20% greater than the value of calls. QQQQ closed at over 37 3/4. Jul Max Pain expirations indicate the market will be significantly lower at some point next week.
Economic reports next week are: Mon & Tue: None, Wed: Trade Balance, and Export & Import Prices, Thu: CPI, Retail Sales, and Unemployment Claims, Fri: PPI, Industrial Production, Capacity Utilization, Business Inventories, Empire State Index, and Michigan Consumer Sentiment. Inflation has been rising, although from low levels, over the past year, and real output has maintained above trend growth for two years. If expansionary monetary and fiscal policies continue, inflation will accelerate, while real output growth will slow (i.e. stagflation), ceritus paribus (all else equal).
Some notable earnings reports next week include: Mon (after the close): DNA, Tue: PEP AMTD, Wed: AAPL AMD ABT HDI, Thu: GENZ UNH RMBS LUV, and Fri: GE. There may be an opportunity to make big gains on earnings with Jul options (including in-the-money spreads).
SPX has open gaps at 1,174, 1,143, and 1,138, which it may close this summer. There are no open upper gaps. I believe, SPX will hit a short-term top next week, and then fall into a downtrend for at least several weeks. SPX Aug puts are much safer than Jul puts, although there may be excellent opportunities to make big gains quickly with Jul puts. Also, I may add, intrinsic value becomes more important closer to expiration.
Charts courtesy of StockCharts.com
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