Potential Short-term Setups on Expiration Friday

Dow currently off 0.2% with a little less than an hour to go in Friday’s session. A down close would have short-term negative implications. 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
06/17/09… Lower Dow close three sessions later
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

I’d also note the NDX is in the process of underperforming the SPX for a third consecutive session, another generally negative sign for the short-term. If the NDX closes lower again today and underperforms the SPX on a percentage basis, odds would favor the Nasdaq trading flat-to-down during the first part of next week. The last 30 times the NDX closed lower three consecutive sessions and underperformed the SPX on a percentage basis each day are listed in the table below…

NDX Down Three Days, Underperforms SPX Each Day
10/03/08… NDX -9.5% three sessions later
09/03/08… NDX -3.8% three sessions later
06/24/08… NDX -2.5% three sessions later
06/10/08… NDX -0.3% three sessions later
04/09/08… NDX -1.9% three sessions later
02/19/08… NDX +0.5% three sessions later
01/08/08… NDX +0.1% three sessions later
11/12/07… NDX +2.1%  three sessions later (*)
01/18/07… NDX -1.1% three sessions later
12/20/06… NDX -1.4% three sessions later
08/08/06… NDX +0.1% three sessions later
07/14/06… NDX +1.9%  three sessions later (*)
07/07/06… NDX -2.1% three sessions later
06/06/06… NDX -1.6% three sessions later
05/11/06… NDX -2.0% three sessions later
03/07/06… NDX -0.8% three sessions later
02/06/06… NDX -0.2% three sessions later
01/18/06… NDX -2.4% three sessions later
12/30/05… NDX +3.7%  three sessions later (*)
10/27/05… NDX +2.2% three sessions later
06/24/05… NDX +0.3% three sessions later
04/15/05… NDX -0.1% three sessions later
02/18/05… NDX +0.2% three sessions later
01/21/05… NDX +0.4% three sessions later
01/03/05… NDX -2.9% three sessions later
07/14/04… NDX -1.4% three sessions later
07/06/04… NDX -0.4% three sessions later
04/28/04… NDX -2.6% three sessions later
11/17/03… NDX -2.2% three sessions later
10/31/03… NDX +0.9%  three sessions later (*)

Note that in 19 out of 30 cases, or 63% of the time, the NDX closed lower three days later. That’s well above the 46% at-any-time odds for a lower NDX sessions later, although the edge isn’t quite strong enough to qualify as an outright sell. More noteworthy is the Nasdaq’s limited upside potential even when it does manage to rally. Consider that on any given day in the 2003-2009 time frame, the NDX has rallied more than 0.5% over the next three sessions 42% of the time. But when the Nasdaq has closed lower and underperformed the S&P during each of the last three sessions, the NDX gained more than 0.5% three days later only 13% of the time, significantly below random. We do have  a bullish seasonal setup going into effect at next Tuesday’s close, so the most likely time frame for weakness would by the Monday-Tuesday period.

Categories : Archived Intraday Commentary, Intraday Commentary

 Print This Post