Daily Trend Watch:
November 11, 2002
Open Interest
Stocks are lower Monday morning, with the Dow down 94.87 points and the Nasdaq lower by 18.07 points. May Department Stores (MAY) posted lower quarterly profits today. They cited a slow-down in consumer spending as the reason for earnings coming in 11 cents less than the same quarter last year. J.C.Penney's is not feeling the slow-down, as they reported that November sales were slightly ahead of plan.
Key Open Interest Levels This Week
It's option expiration week again. Long-time readers know we like to anticipate where the market will likely finish at the Friday's expiration close, based on the number of options contracts that are open at the key strike prices. The theory is based on the principle that the market will tend to not fulfill the expectations of the majority of players. Some call this the 'maximum pain' theory. We focus on key strike prices with the largest open interest to determine where the market should settle on Friday's close.
Here's the current configuration of the open interest in the Nasdaq 100 Trust (QQQ - 25.07):
You can see the call open interest on the left on the put open interest on the far right. The largest November call open interest on the QQQ's is at 25, with over 146,000 calls open. We also see three other November call strike prices with 100,000 or more contracts open, but the 25 strike is the biggest open interest and thus is the short-term focal point for the market currently. On the put side, the November 25, 24 and 23 puts all have roughly 110,000 contracts open respectively, while above 25 the put open interest drops off. This implies that the market is expecting more downside than upside in the short term, which in turn implies that the market should not fall too much and then could bounce higher to thwart these expectations. Based on the theory of maximum pain, the current configuration suggests to me that we could see some oscillation between the 24 and 26 levels but that we should finish the week near the 25 strike to see the most combined damage done to both the bull and bear sides. This is prone to change, so stay tuned to future Daily TrendWatch updates as we alert you to any significant changes in open interest patterns during this expiration week.
Support & Resistance Levels:
SUPPORT RESISTANCE
Nasdaq Composite 1345 1375
S&P 500 880 910
Dow Industrials 8440 8630
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