Market Might Bounce Next Week – Options Expiration Pattern

February 18, 2022

Posted 9:30 AM ET – The market remains focused on Fed tightening and the threat if a Russian invasion of Ukraine. The S&P 500 has been above and below the 200-day MA and that level seems to be a magnet. The S&P 500 is flat overnight and the skirmishes on the Ukrainian border are intensifying. There are a few interesting points I want to make in today’s comments.

Swing traders should be sidelined. We are going to wait for the FOMC in a few weeks and we will watch this chop from the sidelines. With the big overnight gaps even short term swing trading does not make sense. I did a little research and in the last year (mind you much of it was very bullish) we had 9 weeks where the market closed lower than the prior week during monthly options expiration. We had two weeks where the market was moving higher and one week where it was flat (although we were just coming out of a deep drop). Institutions have figured out that they can put the hurt on put sellers during monthly options expiration. This is further supported by the fact that 10 times in the last year the week after monthly options expiration the market closed higher. I will be watching for a possible market bounce next week, but I will wait for confirmation. This pattern tell us that if we are selling out of the money bullish put spreads we should enter them on these drops during monthly options expiration and close them the week before monthly options expiration.

Day traders need to be careful. There was an overnight bounce, but I would not trust it. I don’t believe we will see a sustained market bounce until the downside is tested. Buyers want to know that there is support and we have not seen that yet. The upward sloping D1 trend line is in danger and the SPY closed below the 200-day MA. Those are both technically bearish. In bearish markets, stocks open on their highs and close on their lows. That is why we see red candles on the chart. Don’t be fooled by early bounces. We have a major technical breakdown and it needs to be respected. We have seen heavy selling and the drops are deeper and more sustained than they have been in years. Am I bearish? No, I am neutral. I just want to discourage bottom picking when we have a D1 technical breakdown and a tendency to decline into monthly options expiration. The D1 uptrend I have drawn comes into play at $438 and we need to preserve that today.

Support is at SPY $442 and Resistance is at the 200-day MA.

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