Monday, January 09, 2006


Marketz : Today's trading action

The markets trended higher on decent volume. Everybody's excited about Dow 11000. But what is important IMHO is that the QQQQ is close to the 43 level. Before today's market action, the 43 strike housed close to 500, 000 calls. This is not a small number. 500,000 calls control 50 million shares which is more than half of the daily volume. Here's another way to look at it. For the QQQQ ETF, the total assets under management are about 20-25 billion dollars. That translates into roughly 500 million shares. So, the 50 million shares controlled by the calls at the 43 strike control 10 % of the asset base of the QQQQs ! Thats substantial.

Today about 100,000 of these calls were liquidated as open interest dropped to ~400,000. So you would think there's less resistance right ? Not so fast. Nasdaq implied volatility (VXN) increased 4.75 % today. Now VXN is calculated from a bunch of options but the greatest weightage is given to at the money (ATM) options of the month at hand. At some level, implied volatility is a measure of buying pressure vs selling pressure on options (both calls and puts).[ In fact, a lot of people think excessive option writing is responsible for the slow and steady decline in implied volatility, which is at historic lows across all indices] So my best guess is that buying pressure was higher than seeling pressure. Thats normal 'cause people maybe buying puts to lock in their recent gains. But back to the 100,000 calls that were liquidated-I think that was people who wrote those options were buying them as to not to miss out on further upside. If I'm right, thats excessively bullish sentiment.

Till as late as 3:45 pm, the total volume of shares traded on the QQQQs was hovering aroung 66 million shares (if my memory serves me right). There was a volume surge at the close of more than 10 million shares. Considering that the QQQQs dipped after the close, that might be a little late in the day distribution right there ?

What about technicals ? Monthly and Trimonthly RSIs are just hitting 70-not yet in nosebleed territory. But Bollinger bands getting constricted again in the Biweekly and Monthly charts and of late, Bollinger Bands where the actions been. That said, market action on Monday defines the weekly trend (usually, but not always). If the QQQQ breaks 43 and stays there, that will be mighty impressive.

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