So What Now?

The fat lady finally sang last Friday when $BABA was unleashed onto NYSE. Shares rose as high as 33%, pushing up the S&P500 to an all-time high near 2020 and the Nasdaq to a post-2001 high of 4580. Some big players took this opportunity to take some handsome profits:

Current levels of support for $SPX. First support to watch: 2007.5

So what now?

Let's take a look at some option skews:

The skew for $SPY shows two possible scenarios for this week. Some traders are betting on upside action in the S&P500 up to the 201 level, which translates to 2013.00 in the $SPX. This level is also the 50% retracement of last Friday morning's highs.

Most traders are seeing sell-offs up to 199.5 in the $SPY, which would translate to 1990.00 in the $SPX. Puts in the index outsold calls 2:1.

On the volatility front, the $VIX got slammed to just slightly north of 12.00 last week after spending considerable time above its 50 and 200 day moving averages. The dip in volatility coincided with the September monthly expiration in the VIX which I talked about last week. We wouldn't want those calls to expire in-the-money would we?

Let's take a closer look at market volatility:

Traders took the opportunity last Friday to buy calls in the VIX with calls outselling puts 15:1. The 30-day forward looking volatility (red curve) retraced its August lows, presenting a good opportunity for volatility speculators to buy contracts in the index for a relatively low premium. Interestingly, the 10-day historical volatility finally surpassed the 30-day forward looking volatility, while the 30-day historical volatility converged with the 30-day forward volatility.

According to the Stock Trader's Almanac, the week following Sept. expiration is historically the worst performing in the S&P, Nasdaq, Russell 2000, and Dow Jones.

Since 1988, weekly declines average from –0.88% for NASDAQ to –1.43% for Russell 2000. S&P 500 has only posted full-week gains five times in the last 26 years.

They speculate that this is due to managers re-adjusting positions ahead of quarterlies. As always, please remember that indexes do not go straight up or straight down. Hedge accordingly.