Looking For Short Opportunities in an Already Favorable Technical Set-up

Over the last ten days the S&P (SPY) has established a trading range that seems to show strong resistance at $151.50 and decent support around the $150 area. My guess is that we will see similar price action as we move closer to options expiration on Friday. I would be surprised to see SPY break the defined range mentioned above this week, but next week could be a different story.

Historically, pre-options expiration has an average return that is slightly above random. Over the last ten years the random return was 0.04% with a 57% chance of finishing the week in positive territory. During the week of options expiration the statistics are more favorable for the bulls as the return is 0.06% with a 65% chance of ending the week with gains. Post-expiration is a completely different story though. The average return is 0.03% with only a 53% chance of ending the week higher.

You might be asking yourself, how can this help me? Well, if the market is oversold coming into expiration week the probability of a trade to the long-side could be favorable, whereas if the market is overbought as the market moves into post options expiration the week there could be a decent short opportunity to be found.

As I mentioned yesterday I will be looking for this type of opportunity next week if the market happens to move into an overbought state. Currently, the Dow (DIA) has my attention and if it is able to stay afloat or better yet, move further into a “very overbought” state I will be looking at a possible set-up.

As I always say, patience is key and opportunities are made up more easier than losses”, so I will certainly not rush into a position just because seasonal factors are on my side. However, if the seasonal winds are blowing at the back of an already favorable technical set-up, well, as a trader, you just can’t ask for more.

Overbought/Oversold levels for May 15, 2007

SPY - 55.4 (neutral)

DIA - 76.2 (overbought)

IWM - 32.6 (neutral)

QQQQ - 38.1 (neutral)

GLD - 41.1 (neutral)

OIH - 66.0 (neutral)