Zeev's Ideas

[Koikaze]

ZEEV, TECHNICALS - up to ZEEV:322062, 11/14/04

11/07: (319540) (*COMMENT*)

(Part 1)
DOW(90.8), SPX(93.1), Naz(90.8), NDX(87.5), QQQ(87.7) rsi 5d all very overbought. Means jack according to some.

(Part 2)
I am not sure what you means by "jack", but to me it means a sharp, though rapid retrenchment starting maybe even tomorrow or Tuesday. The futes are down a little but I think that by opening they may very well be back up, giving us a false breakout above the July highs on the Naz (and the March highs on the SPX). However, a retreat here should be bought, since I still think that my target of about 2275 on the Naz (see my August 6 targets for instance #msg-3751323) in January is quite achievable as a blow out top. My plan, reduce exposure a little over the next two days and step aside to see how far (if) a retreat develops.

(Part 3)
I think we're very overbought and in need of a breather.I was pointing out that last week two posters told me overbought means absolutely nothing,zilch,nada(one said "overbought means jack,the other "overbought means shit)".
(*END*)

Now I got you, yes, overbought eventually get corrected, one way to put it is if the 5 day RSI is at 90%, how much higher can it go?


11/14: (322049) (*COMMENT*)
my opinion on max pain is that it follows the index rather than being a predictor of future action as most believe. about the only time i look at it is times like this, where there is a significant difference between the underlying and max pain. im playing for a retrace of last weeks action to close the gap some.

i do not have a good understanding of delta hedging and would appreciate it if you or someone else could post a link to a description or if you could give me a quick overview. from what i do understand, this is a prime setup for that to occur. sure hope it doesnt as i have a big net short position
(*END*)

Steve, I don't know any place where it is described, I have tried few times to explain "my take" on it (I am not big on options nor a great believer in Max pain either). In short, when Max pain is well under the market, as it is now, it means the houses are stuck with a lot of naked calls that are "in the money", and if the do not manage to narrow the gap early in the week, near expiry they are forced to rush into the market buying the underlying security (that is the "delta hedging") causing additional upward pressure on prices (often undone rapidly in the two to three days after expiry). The inverse is the case when max pain is well above the market, a lot of naked puts are outstanding and the houses sell short the underlying equities to cover their naked puts putting further downward pressure on the market. Can you "bank on it", I don't know, but you are gutsy being heavily short here trying to guess how far this thing goes, while it is in "breakout" (QQQ above the July highs, SPY a three years high, I believe) mode. Probably a little "nail biting" time (g).



Added by editing after posting:

11/14: (322085) (*COMMENT*)
The window I use for Max Pain started last Thursday. In a situation where delta hedging occurs, I've noticed in the past the MM's will often move price equal to or slightly more away from Max Pain going into expiration as the distance it was on that Thursday.

For example, let's say Max Pain was roughly 36.50 on Thursday on the QQQ and price began at 37.79 from Wednesday's close. That's 1.29 points above Pain. Ideally, the QQQ should move to a minimum 39.28 (or NDX 1579) to cover the Max Pain spread. Often times it moves above the minimum as the MM's give themselves a profit cushion. The alternative would be to reach the minimum a day or two prior to expiration and then drop into expiration.

Looking at the situation, I think we could see a white candle this week with a bit of a shadow below and above on the COMP/NDX/QQQ, and then a 58 NDX point drop from the top the following week. We'll see.

During bullish moves, it seems we often have fast dumps in November, but recoveries around Thanksgiving.
*END*

I think you may be right, I have a "next" turn date around thanksgiving (Jim also), thus we may top on expiry and the normal post expiry swoon (when expiry is up) turn into a beginning of a short term decline allowing for the typical post Thanks giving EOY run.