Stocks:
The market sold off Thursday as expected. We checked the Maximum Pain Theory values for the OEX and QQQ options and found that, as of Thursday, the maximum pain for OEX options is 460 and for the QQQ options, it is 27. The downmove on Thursday took the OEX to near 465 and the QQQ to near 28. If the option writers are going to maximize their gains — and they do so fairly often — they will move the market down a little bit more to force call option buyers to sell out, then they will move the market back up to wipe out the put option buyers as well. Overall, from a purely Maximum Pain Theory perspective, the market is likely to be trapped in a narrow trading range until next Friday as the option writers maneuver the market between the two poles of call and put buyers.There was strong Money Flow into the blue chips on the dip Thursday, so it does appear that buyers are eager to buy the dip. That was evidently stronger in the S&P 500 Index rather than the NASDAQ-100, however, which mutes the bullishness of the indicator.
The broad market held up well, with the Value Line trading well within its uptrend channel on the intraday chart. The blue chip S&P 500 Index did slightly breach its uptrend channel support line, suggesting it is likely to be weaker until it finds lower support. The NASDAQ-100 also broke its intraday uptrend support line and looks likely to find support on the violet-colored support line just above 1100.
Our ES-NQ spread moved up slightly, but not robustly. This behavior leads us to think this correction has limited downside potential. But, of course, we will need to see the NASDAQ-100 Index start to "circle the wagons" on Friday. One of the most bearish of factors here is the plight of the US Dollar, which has considerable downside momentum going for it. Traditionally, a rising US stock market in the face of a falling US Dollar has been the perfect setup for a stock crash. All it takes is one careless match in the forest to set off a forest fire of selling.
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