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Option Expiration Week Magnet Pulls Prices Higher at Trader’s Narrative

Wayne, an experienced options trader sends along this note:

“The S&P 500 is up 7.0% so far this week. Over the last 30 years, if the S&P 500 is up over 4% for the 4 days going into an expiration, the market is 8-2 on that Friday.

SPX options expiration week HS pattern July 2009

Here are the 10 individual cases, when they occurred, the 4 day gain as well as the final Friday performance:

Start Date 4 Day Gain Friday’s Gain

  • 1982/08/20 — 5.11 — 3.54
  • 1989/10/20 — 4.04 — 0.01
  • 1991/01/18 — 4.04 — 1.30
  • 1998/10/16 — 6.42 — 0.85
  • 2000/03/17 — 4.54 — 0.41
  • 2001/04/20 — 5.93 — (0.85)
  • 2002/05/17 — 4.10 — 0.76
  • 2002/10/18 — 5.25 — 0.59
  • 2003/03/21 — 5.11 — 2.29
  • 2008/10/17 — 5.25 — (0.62)

Markets tend to go where there is the most business to be executed. Tomorrow that is the 950 strike price where option sellers will either have to buy or sell depending on the settlement. Also June’s 953 highs will act as magnet as well. I have been trading option expirations for 20 years and history has taught me many times, that if you are on the wrong side, don’t expect the market to do you any favors.”

While the statistical case isn’t really iron clad from the above, I agree with Wayne’s assessment. The S&P 500’s 950 level corresponds to not only the magnetic pull of the recent options expiration but also the top of the range trading we’ve seen for the past while. We’ve clearly seen a failure in the head and shoulder formation but I doubt that we have enough to juice it above the previous resistance levels.

I know that 10 instances over 30 years is a trifling sample but just for kicks, I took Wayne’s starting dates and then calculated ahead by 2 months (60 trading days). The best two month walk forward was for the 1982 date with a return of 23.46% and the worst was for May 17th 2002 for a -18.33% return. The average performance of the S&P 500 over that time for all 10 cases was only 4% - nothing to write home about.

In the even that we do see a decisive break above 950, we could be looking at a rally that demands respect. Not only will it have broken through the resistance that has pushed back prices since late last year, but it will have done so after a an incredibly strong push higher with extremely positive breadth, not to mention, with the wind at its back provided by the 200 day moving average (trading below price), the Golden Cross, as well as the upturned Coppock Guide.

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