we typically don’t like to make too much of the price action during an option expiration week, especially after witnessing a sizable downdraft and spike in implied volatility. The market is not in the business of paying out lottery tickets and we always are expecting a rally to burn put option premium. It seems this week is no exception.
However we must be on guard because of the technical make-up of this rally and the Fibonacci/Elliott Wave implications. The initial rally off the the 1357 low was a clear 3 wave move. By the rules this is a corrective wave and we will label it A of some degree yet to be determined. If you take that to be the case then the subsequent fall from the 1389 area would be labeled B and the current rally today could be a C which would complete an ABC corrective move up. What makes this important is that we are approaching the .618 retracement at 1398 which also lines up with a kiss-back of the parallel breakdown from the initial leg off the top. If we fail up there that has very dangerous implications for the market. It would imply an ABC correction which would be either a B wave or a II of some degree. If that’s the case the dreaded C or III would follow and it would be a violent sell-off that would slice through support.. The 1340 level that everyone is seeing as big support would be warm butter and target a test of 1300/1290.
We have seen some bears in the street start to turn bullish on this rally as they get squeezed and see the potential for a breakout. This sentiment shift as we see a 3 wave move into the 618 sets up for a great risk/reward short opportunity once we get the April expiration out of the way. As always risk management is crucial so don’t get married to a position. If this is a B wave up it could last much longer than we expect so stay nimble and use tight stops.