Active sonar creates a pulse of sound, often called a "ping", and then listens for reflections (echo) of the pulse. By measuring the relative amplitude of the reflective wave, objects, their shape and form, their distance from the sonar source can be detected.
In multiple algorithms, we are using this knowledge to define key support and resistance levels, by pinging in advance where the amplitude of alternating prices has reflection points.
SPY Chart with Critical Wave Reflection Points
For today, December 20, 2013, we ran a ping to detect the depth of the stock market. We have, what is called triple a witching day, where three important stock market contracts are expiring:
- Stock market index futures;
- Stock market index options;
- Stock options.
There are two major forces, with different interest and they are actually the ones producing the key reflection points to detected:
- Market Makers, which have to fulfill the contracts.
- All other institutional investors, which want to close out the benefits of their investment.
Our preferred indicator asset to determine potential price reflection points for the stock market is SPY, an ETF of the S&P 500. We choose SPY as the key asset by the consequences for the option buyer and seller when settling the contracts for the physical assets by transferring stock.
After pining the depth of SPY, please mark the following critical price levels for today:
Level-1 Low: $181 - To reach this price level, the market has to drop about 5-SPX points. Closing SPY below $181 will save the Market Makers from transferring stock in a substantial amount of money and thus, when the price comes close to $181, you will see a lot of fighting and you can use this price levels for day trading to and from this critical price point.
Level-2 Low: $180 - In case the market shows weakness, closing SPY below $180 would be the market makers dream, sparing them the need to fulfill 3-times more contracts than they have to fill on the $181-level. However, the market has to move by 15-SPX points to reach this price level and only news like today's GDP data could be the triggering such a price move.
Level-1 High: $182 - The upper target for today is 5-SPX points above yesterday's closing and again, positive economic news can easily get us there, while the market maker will surely try to intervene, keeping the SPY price below to spare them the fulfillment of further contracts that they rather want to expire worthless.