Watch behavior after quad-witching this week

Recently I noticed that the price of SPY has frequently diverged from the SPX index, so wanted to chart it and see if I can find any patterns or trends.

What I’ve found is that the divergence seems to intensify as we near quad-witching option expiration days (QWOE). What’s also apparent is that there seems to be surge of buying in the days leading up to every QWOE, which could explain last week’s extremely bullish surge.

Where things start to differ is how the indices reacted after QWOE in 2017 vs. 2018. In 2017 the index accumulated relentlessly in the face of bearish RSI divergence, disregarding negative technical indicators. But in 2018 the index dumped after every QWOE and pulled back a minimum of 10pts (if you don’t count xmas eve, which also lost 5pts) regardless of divergence. The most significant of course being Sep 22, where there was bearish RSI divergence at a higher high from QWOE buying, not dissimilar to where we are now.

There are currently a multitude of potentially negative catalysts in play for next week:

1) post-QWOE pullback (?)
2) Bearish RSI divergence
3) Buyback blackout period begins for companies reporting in mid-late April (most mega-cap tech)
4) News that trade deal could be pushed back to June (https://www.scmp.com/news/china/diplomac…)
5) Fed meeting (risk is to downside, market has priced in extreme dovishness)

My thesis is that if the index somehow manages to stay in the 280s despite these factors, you gotta think that we’re in 2017 melt-up mode and that 286.70 (.886 retrace) and ultimately the ATH at 293 is a foregone conclusion.

On the other hand, if we break below 280, a retest of the 200DMA and probably 272 will be imminent. If the stories about the trade deal being pushed back several months are true, I think this becomes the more likely scenario as investors start to lose their patience.

Regardless, I expect the index to test 280 this week as the algos go hunting for stops. Whether we bounce from there should tell us if 2019 will look more like 2017 or 2018.

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