When it comes to market structure, there's certainly no shortage of theories; Elliott Wave Theory (EWT), Auction Marketplace Theory, and Random Walk Theory, to name a few. Years ago, I fell in love with EWT and went on to practice it for years, almost religiously, and to the exclusion of just about everything else. Later on, I turned my attention to chart and candlestick patterns, and I fell in love with them too. My tool set was growing larger, and as a result my technical analysis was becoming more precise. And then I had one of those KAPOW! moments; I recalled a mantra we used to cite back during my Information Technology days, known as the "law of the instrument": if you have a hammer, everything looks like a nail. (Ref. https://en.wikipedia.org/wiki/Law_of_the_instrument).
Since then, my tool set has grown even larger as a result of my embracing several disciplines. Add to that the seasonality effect, and more importantly, the impact of the options marketplace. The latter, in my opinion, controls the stock market's tempo week in, week out. (Note: weekly options were introduced just over a decade ago).
On Monday morning, I posted a chart grouping, noting the disparity between the $ES (S&P December contract) and the $SOX (Philly Semiconductor Index), among other things. And on Tuesday, I followed up with chart 2, in which I exposed the phoniness of Monday's rally .
Chart 1. A triangular consolidation in the $ES came to an end on Monday on the back of a rally that the $SOX was in disagreement with.
Chart 2. The $ES showed its hand on Tuesday with a downward resolution to the triangle.
As of Wednesday, the $SPY's weekly Auction Marketplace, per chart 3 below, was hinting towards the developing vPOC of $213.80 as the critical level to watch, i.e., the "boiling point". Unsurprisingly, the session closed just below it at $213.71 as we had been on the lookout for a lackluster reaction to the Fed minutes, and thus a weak close.
Chart 3. The $SPY's weekly Auction Marketplace chart hinted towards 213.80 as the "boiling point".
Moreover, it's worth noting that our initial bearish stance on Tuesday was further bolstered on Wednesday upon the identification of several confluent chart patterns, all sharing the same downside objective. Consequently, chart 3 morphed into chart 4 where in addition to the yellow triangle (classic chart pattern), we identified the blue bullish Bat (harmonic pattern), the purple 5-wave (EWT), and the red bullish Crab (harmonic pattern).
Chart 4. Additional charts were identified on Wednesday. Altogether, the yellow triangle, the blue Bat, the purple 5-wave, and the red Crab.
Needless to say, the downside objective of all these confluent targets was reached on Thursday morning, leading us to exit our short positions ($SPY October 14 215/216 credit call spreads) and establish bullish positions by means of $SPY $210/$209 credit put spreads expiring on October 21st. In short, we're looking for a mean reversion move on the heels of the 5-wave EWT structure that has already fulfilled its objective. Target? The ~$213.80 area ($SPY) and the underside of the yellow triangle ($ES). In other words, expect a full retracement of the red Crab.
Now let's throw the options marketplace into the mix. Chart 5 below depicts the $SPY's weekly Open Interest. We're looking for the majority of options to expire worthless. So, what better place is there, other than ~214, to inflict maximum pain?
Chart 5. The $SPY's weekly open interest. $214 looks like a likely weekly closing price.
Peter Ghostine (@peterghostine)
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