Options Expiration Week Kicks Off With Two Solid Down Days

As noted in today’s second intraday update, new 20-day lows failed to expand despite the S&P trading over 0.5% below yesterday’s low. That type of divergence has usually led to a one-day bounce, but we should keep in mind that’s a recent phenomenon only. It never happened a single time in 2005 or 2006, and only twice in late 2007. That’s in comparison to 14 occurrences in 2008 and 8 occurrences so far this year. Overall, the sample size isn’t large enough to be considered statistically significant, but it hints at the potential for a bounce.

It’s also noteworthy that S&P futures ended down in excess of 1% Tuesday on the heels of Monday’s downside gap. As I discussed in this intraday update, an unfilled downside gap that’s immediately followed by another solid down day usually sees downside follow-through over the next 1-3 days. While a bounce looks possible on Wednesday, this tells us that such a rebound will most likely be followed by a resumption of the downtrend.

Selloffs that get underway during options expiration week tend to see short-term follow-through. If the 20-day new low divergence fails to lead to a bounce on Wednesday and the Dow finishes lower, a short-term sell signal will be triggered.  Historically, when the Dow has posted three straight lower closes during options expiration week, there’s a notable tendency for the downtrend to continue over the next 1-3 days. The last thirty times that the Dow closed lower three days in a row (all during options expiration week) are listed in the table below. Note that in 27 out of 30 cases, or 90% of the time, there was a subsequently lower Dow close within the next three sessions, significantly better than the 67% at-any-time odds for a lower Dow close within three days. The implication is that when the market gets into a trending mode during expiration week, there’s a better than average chance of that trend continuing over the near-term.

Dow Down Three in a Row During Expiration Week
01/14/09… Lower Dow close three sessions later
12/19/08… Lower Dow close one session later
06/18/08… Lower Dow close two sessions later
01/17/08… Lower Dow close one session later
10/17/07… Lower Dow close one session later
08/15/07… Lower Dow close one session later
01/19/07… Lower Dow close one session later
05/18/06… Lower Dow close two sessions later
04/15/05… Lower Dow close one session later
03/17/05… Lower Dow close two sessions later
01/21/05… Lower Dow close one session later
10/14/04… No lower close within three sessions
07/16/04… Lower Dow close one session later
02/20/04… Lower Dow close one session later
10/17/03… Lower Dow close three sessions later
07/17/03… No lower close within three sessions
01/17/03… Lower Dow close one session later
12/19/02… No lower close within three sessions
09/19/02… Lower Dow close two sessions later
06/21/02… Lower Dow close two sessions later
09/19/01… Lower Dow close one session later
08/15/01… Lower Dow close two sessions later
06/15/01… Lower Dow close two sessions later
09/15/00… Lower Dow close one session later
07/19/00… Lower Dow close three sessions later
02/18/00… Lower Dow close three sessions later
01/20/00… Lower Dow close one session later
10/13/99… Lower Dow close two sessions later
09/16/99… Lower Dow close three sessions later
01/13/99… Lower Dow close one session later

Categories : Archived EOD Commentary, End-of-Day Commentary

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