Thursday, March 14, 2013

Where the rubber meets the road

As the market inches higher day after day, hitting new highs, there is now evidence that the Johnny come lately investors are diving into the markets feet first. First of all, this week is options expiration. March expiration week has had a tendency to close higher over the past 2 decades. However, this particular opex is quadruple witching. These particular opex's are traditionally more volatile than others. Having said all of that, so far this week, volatility is trading lower and is slightly below the support I outlined on Monday. When you add all of this with the fact that the S&P 500 and Dow are both trading around 4% above 75+ year old resistance, you get a recipe for a nasty pullback. The market charts displayed below clearly show both markets piercing the broken channel resistance that has held since the tops in 2010, 2011 and 2012. With volatility at 6 yr lows and proven, formidable resistance pushing against the markets, I see only one likely outcome. I believe the markets will probably close relatively flat tomorrow. Probably no upside but no real downside either. Volatility should tick up and close the week above support. However, next week the beginning of a 4-6% move lower is HIGHLY probable. March 31 marks the end of the quarter. The lifetime charts display price in quarterly candles. That means the move has approx. 2 weeks to complete. In conclusion, look for the SPX and Dow to close the month of March around 1500 and 13,900, respectively. It will be interesting to see how it all shakes out.

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