Short-Term, High-Probability Mean Reversion Indicator: Weakness After Options Expiration?

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Includes: DIA, EEM, EFA, EWY, EWZ, FXI, GDX, GLD, IBB, IWM, IYR, OIH, QLD, QQQ, RTH, SDS, SMH, SPY, SSO, TBT, TNA, TZA, USO, VXX, XLB, XLE, XLF, XLI, XLU, XLV, XLY
by: Andrew Crowder

Options expiration started out with a sharp decline at Friday's open which I thought might just close the gap on SPY at $118.71. The ETF fell as low as $119.25 before rallying to close the end of the week at $120.29.

Historically, the week after options expiration, particularly the trading day immediately following options expiration, is quite bearish. While there is no true edge currently, at least according to my High-Probability, Mean-Reversion Indicator, I do think that history will once again repeat itself on Monday. I expect to see a close of the gap early next week and possibly a return to the declines that began on 11/08.

The one thing that could keep this market afloat over the next week or so is the bullishness that surrounds the Thanksgiving holiday. As I have stated numerous times over the years, Turkey Day is bullish the day before and after the holiday and quite bearish the next two days. This could postpone the gap fill a few days ago or it could postpone the decline that began on 11/08, but I think we will see a decent decline fairly soon.

I would like to see a continued advance so that we see an overbought extreme hit a few of the ETFs I follow in the High-Probability, Mean-Reversion Strategy. One thing is certain, I will sit patiently on the sidelines until a signal is triggered.

Currently, the Semiconductors (NYSEARCA:SMH) and the Retail sector are the closest to being in an overbought state and the RSI (2) has pushed above 90 in both ETFs. A day or two of higher prices would certainly push both into an overbought state and possibly into the extreme state that would trigger a signal. Stay tuned.

Short-Term High-Probability, Mean-Reversion Indicator – as of close 11/19/10

Benchmark ETFs

* S&P 500 (NYSEARCA:SPY) – 55.1 (neutral)
* Dow Jones (NYSEARCA:DIA) –49.9 (neutral)
* Russell 2000 (NYSEARCA:IWM) – 58.1 (neutral)
* NASDAQ 100 (QQQQ) – 51.1 (neutral)

Sector ETFs

* Biotech (NASDAQ:IBB) – 62.1 (neutral)
* Consumer Discretionary (NYSEARCA:XLY) – 62.0 (neutral)
* Health Care (NYSEARCA:XLV) – 52.6 (neutral)
* Financial (NYSEARCA:XLF) – 45.3 (neutral)
* Energy (NYSEARCA:XLE) – 69.2 (neutral)
* Gold Miners (NYSEARCA:GDX) – 52.0 (neutral)
* Industrial (NYSEARCA:XLI) – 59.8 (neutral)
* Materials (NYSEARCA:XLB) – 54.9 (neutral)
* Real Estate (NYSEARCA:IYR) – 39.8 (neutral)
* Retail (NYSEARCA:RTH) – 65.8 (neutral)
* Semiconductor (SMH) – 69.1 (neutral)
* United States Oil Fund (NYSEARCA:USO) – 34.9 (neutral)
* Utilities (NYSEARCA:XLU) – 32.8 (neutral)

International ETFs

* Brazil (NYSEARCA:EWZ) – 51.6 (neutral)
* China 25 (NYSEARCA:FXI) – 35.8 (neutral)
* EAFE (NYSEARCA:EFA) – 56.6 (neutral)
* South Korea (NYSEARCA:EWY) – 60.3 (neutral)

Commodity ETFs

* Gold (NYSEARCA:GLD) – 43.8 (neutral)

Ultra Extremes

* Small Cap Bear 3x (NYSEARCA:TZA) – 39.7 (neutral)
* Small-Cap Bull 3x (NYSEARCA:TNA) – 56.9 (neutral)
* UltraLong QQQQ (NYSEARCA:QLD) – 50.9 (neutral)
* Ultra Long S&P 500 (NYSEARCA:SSO) – 54.4 (neutral)
* Ultra Short S&P 500 (NYSEARCA:SDS) – 43.4 (neutral)
* UltraShort 20+ Treasury (NYSEARCA:TBT) – 46.8 (neutral)

Disclosure: Short SPY