This s an interesting question, so I went back to the May Op-eX which was similar in that the market was showing weakness before Op-ex and after, it also wasn't a major 1/4 window dressing event or Quadruple Witching like we saw in June so I figure it's a more appropriate example.
We have a market that is showing significant signs of weakness, but as I said earlier, the game still must be played so lets take a look.
Starting with the DIA, in June the hourly 3C alerted us to the likelihood that not only would the viscous downtrend that was taking place would soon end, but that we were building a significant base and we'd likely see a rally. We were weeks ahead of the market regarding the rally/short squeeze and the white box is the area that was under accumulation. Since we saw the short squeeze and then some, then the 60 min went negative and we saw a reversal in July. The 60 min chart is still extremely negative so big picture, 'm bearish on the market, but there's still the volatility game and perhaps some very good reasons for it.
Here's the DIA 15 min chart, a good timeframe for swing reversals on divergences. We saw confirmation of the short squeeze rally at the green arrow as 3C made higher highs with price, whenever you see a green arrow with 3C, it denotes confirmation of the price trend. Then a negative divergence at the red arrow and square on an island candle. Right now we have a 15 min positive divergence, it does not trump the 60 min chart's negativity, but can warn of a counter trend reversal. Note how price this week has been range bound, likely having to do with options expiration and pinning the market at a specific level causing the most number of contracts to expire worthless.
The 10-min chart also has a recent positive divergence.
And so does the 5 min hart, but I attribute this one more to potential upside today to bring the market in to what I expect to be the closing range of $132.50 or n the mid $132 area to pin options.
Now we look at the IWM and May options expiration on the 20th . Note again the range bound market going in to op-ex Friday in the red square. Actual closing op-ex is at the white arrow. However, note that after op-ex, we had a dip in the market and then a swing up, which resolved to the downside. Why would this occur? Because the market had to remain within a range to pin options, but the locals on Wall Street want to short in to strength and that brief move up allowed them to do so, as op-ex and the range bound market was no longer a concern.
Looking at an hourly 3C chart of the IWM during the period, we saw weakness by way of a negative divergence in late April, then options expiration in May. There was no positive divergence on the hourly chart around op-ex time because it takes a lot of accumulation to move that chart, but we did see pries advance after op-ex and we did see heavy distribution marked by the hourly negative divergence at the end of the swing move up, then the market resolved to the downside. In June we see the accumulation I spoke of hinting at the short squeeze to come, followed by distribution and a reversal in July. Note the hourly chart remains negative right now.
Here the 15 min chart shows current accumulation, suggesting we may indeed see a move higher after op-ex, unless it resolves negatively today by the close.
The 5 min chart is positive too, but I think this s more related to intraday trade.
Here are the QQQ's at May option expiration in yellow, note the 15 min positive divergence building during the op-ex trading range, similar to harts above now. The large white box was our accumulation for the rally and you can see the red arrow negative divergence turning the market lower and a current positive divergence.
The Q's hourly hart remains negative in leading status, so the big picture s still bearish.
QQQ 30 mn postve divergence now suggests some upside after op-ex.
The 15 min chart tells us nothing.
The 10 min hart however has turned very bullish today.
And the 5 min 3C chart
Here's the SPY at May op-ex, note the 15 min positive divergence then that led to the brief bounce up, then a negative divergence and a resolution to the downside. Currently the 15 min chart tells us nothing about the present.
Here' the hourly chart I've spoken of that tipped us off to the short covering rally. Note this hart remains negative for the bigger picture.
The 15 min chart isn't telling us much presently, but called the recent top and in the white box, strong accumulation. Two days before I sad, "The market needs to pullback and accumulate before heading higher", it did so in the white box.
Here's a positive divergence currently on the 10 min chart.
Overall, my take away from this is that the market must be pinned and therefore Wall Street can't sell short into higher prices until after op-ex. The nature of the positive divergences are mid-term on the 10-15 min harts, suggesting enough accumulation to swing the market higher next week (remember the day after May op-ex-the next Monday, the market fell, and was accumulated for the swing move higher).
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