I'm not buying this rally - not yet anyway. This past Sunday night, I calculated max pain for the ETFs that track our major indices. After staring at the numbers, I wondered "can they do it again"? By "they", I meant the market makers. You see, a month ago while I was in Seattle at StockCharts' ChartCon conference, an astute member of ours pointed out mid-week (August 10th) that max pain was WAY above current prices. In options lingo, this simply meant there was a TON of net in-the-money put premium on the table just as EXTREME pessimism was kicking in. Take a look at the chart below:
The green arrows highlight the EXTREME levels of pessimism. Notice how each of these extremes marks a bottom on the S&P 500? I've been noticing it for years, which is why sentiment analysis should be a big part of every trader's arsenal. Now take a look at the blue circle highlighting the S&P 500 bottom the second week of August. In addition to extreme pessimism, max pain suggested a SIGNIFICANT upward move was likely based on the imbalance of equity calls and equity puts. Extreme pessimism hit the -20% threshold on August 8th. The S&P 500 bottomed on August 9th. More importantly, the S&P 500 rallied over 100 points from the August 9th low to the August 17th high. I think that qualifies as a SIGNIFICANT upward move. Chalk up more TARP for the financials (market makers)"
Tom Bowley's full article is here:
It appears quite simple and may be it isn't. Last Friday was the option expiration. The manipulators/market makers has the interest to move the market up to cancel out the money they otherwise would have to pay out to those expiring option holders. So, they are the one and only one buying in the last up move. There are simply no other buyers in the market. I have a problem with what happened last month. Noted that the market tanked on 8/17, 2 days before the option expiration day of 8/19. You would think those manipulators would have enough fire power to hold the tide up at least past the expiration date of 8/19. How did the equation changed when those market maker actually joined the party and became sellers themselves ?