The week of option expiration is finally upon us and our SPX Short Iron Condor strategy (after a rough few months) finally looks to reap the max profit for the month. As I reported on 5/11, the seasonal edge for the strategy is here and hopefully we can take advantage of the typical range-bound period from May-October.
Price action during the week of option expiration tends to be fairly lackluster and I would expect to see much of the same this week as the S&P struggles with the 1500 area. Since 5/2 the S&P has been trading in a fairly tight range and I do not expect to see that change, at least over the short-term. However, if the market can somehow manage to push higher I would expect to see weakness towards the early past of next week. Typically, the trading day following option expiration is weak so I will be watching how things develop as the week progresses.
However, the historical precedent (bearish the trading day following expiration) has been turned upside down as of late. Furthermore, since 1950, the day following May expiration has been higher 71.4% in the Dow and 61.9% in the S&P. As I said before, I will be watching how the week progresses to see if any highly probable set-ups are in the cards.
The higher-beta Nasdaq 100 (QQQQ) and Russell 2000 (IWM) are once again nearing oversold territory. This is in the face of the continued march higher in the Dow. The higher-beta sectors are often an early indicator of things to come so I will be interested to see if that theory comes to fruition. Certainly if the QQQQ or IWM reaches an oversold state I will be looking for potential short-term (1-5 days) trades. Stay tuned. This week has the potential to be very interesting.
Overbought/Oversold levels for May 14, 2007
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SPY - 54.8 (neutral)
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DIA - 71.8 (overbought)
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IWM - 42.1 (neutral)
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QQQQ - 49.0 (neutral)
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GLD - 33.5 (neutral)
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OIH - 64.6 (neutral)
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Have a great night!
Andrew Crowder, Chief Investment Strategist,
www.crowderinvestments.com