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Schizophrenic Market

May 16, 2011 3:44 PM ET
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 If you are an intra-day stock trader you will have noticed that the major stock market indexes have traded all over the map. The Dow Jones Industrial Average has traded over 300 points from its intra-day peaks and troughs. The driving force behind every stock market move is the U.S. Dollar Index(DXY). When the DXY declines the major stock indexes rally and trade higher. The opposite is true when the DXY trades higher the major stock indexes deflate and trade lower. This inverse relationship between the stock market and the U.S. Dollar Index is as tightly correlated as I have ever seen.

Options expiration is on May 20, 2011, therefore, that means that the entire trading week should be very volatile. Often during this week, many of the leading and popular stocks will trade rather erratic. The reason for this type of activity is due to the institutional games that will played by the major financial firms. You see the institutions have enough capital on hand to push the market anyway they see fit. The object by the institutions is to try and shake out the small retail options traders out of their positions. For example, if enough retail options traders bought call options on a stock like Netflix Inc.(NASDAQ:NFLX), or Apple Inc.(NASDAQ:AAPL), the stocks will generally sell off during the week so that the retail options trader closes his call position for a loss on the premiums paid.

These games take place every month during the week into options expiration. Therefore, until the institutions take care of business it would be prudent to expect more volatility throughout the trading week.

Nicholas Santiago

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