It’s no secret that the markets are manipulated, but during options expiration week, we often see prices move beyond key support and resistance levels during periods of light volume, which shakes traders out of their positions.
We tend to see increased volatility and false breakouts during low-volume sessions, pre- or post-holidays for swing traders, or between 11:30 a.m. and 3 p.m. EST for day traders.
This happens because the market markets for individual stocks are able to slowly walk the prices up and down beyond short-term support and resistance levels simply because there is a lack of participation in the market.
That being said, look at the chart below of the SPDR S&P 500 ETF (NYSE: SPY) on Thursday (the day before Friday options expiry).
SPY 4-Hour Candlestick Chart
The put/call ratio was showing extreme bullishness. I also mentioned that we should expect a pop of 0.5% -2% in the next 24 hours as big guys will try to shake everyone out of their short positions (put options).
The put/call ratio indicator at the bottom of this chart is a contrarian indicator. When it shows that everyone has jumped to the bullish side, the big money knows it’s about time to change the direction so they can cash in at premium price levels.
S&P 500 60-Minute OptionsX Chart
If you look at the volume at the bottom of the chart you will see there are times where there is virtually zero volume trades. The yellow highlighted section shows the overnight price surge, which is very easy for the big guys to push higher as everyone sleeps.
Here is what they are doing: The light volume makes it easy to manipulate so they push it higher until key resistance is broken, then everyone who was short and had a protective stop in place will have their order executed. As the price rises, more and more stops get triggered. Also, with the rising number of traders becoming bullish from the previous session, they have buy orders to go long if key resistance is broken. This causes a virtually automated rally to unfold, but once the orders/buying dries up, the big guys start selling their positions at premium prices, pushing the price all the way back down to where the market closed the previous day.
In short, the big guys shook the majority of traders out of their positions Thursday night and pocketed a ridiculous amount of money. The crazy part is that 99% of the public don’t even know this type of thing is happening while they sleep.
S&P 500 OptionsX Intraday Price Action
I thought I would show this chart as it shows the selling pressure in the market. What I find interesting about this chart is the fact that there was more selling volume during options expiry week, but the prices continued to move higher.
From watching the market internals I saw the majority of traders go from bearish to bullish by the end of the week, and this really gave the big guys a huge advantage in my opinion. Each session selling volume took control with the big guys unloading, but the low-volume afternoons naturally brought prices up again as more and more traders became bullish each session. This happened all week, and Thursday night it looks as though they let the price rise allowing the key resistance level to be broken, which caused a surge of buying that they could sell into.
So what’s next?
In short, the market looks toppy, and if all goes well, last week’s overnight shakeout just may have been a top. This week will start off slow and most likely with light volume until Wednesday. During light volume times, keep trading positions smaller than normal and remember there is a neutral/upward bias associated with light volume.
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