This may be an opex week when "max pain" can really hurt, so don't presume on equilibrium too much

The equilibrium or "max pain" concept that price will settle going into options expiration (opex) at the point that balances between calls and puts (also frustrating the most investors, producing "maximum pain"), can be a useful guide. But it's only one guidepost among many. I can tell you from personal experience, since I've been paying attention to it most of the time over the past 15 months, that price does not always go to this equilibrium level into opex. I've seen descriptions that a trending market can push price above or below the maximum pain point. Well, I cannot speak to all the reasons why price may go to a different level - I'm just trying to warn readers not to rely on this alone. I noticed that Tyler Durden, whose blog posts I tend to enjoy reading, has written in a post, The Option Expiration Equilibirum Price Attractors (Zero Hedge, 4/15/09), that the SPY exchange-traded fund (ETF) for the S&P 500 market index can be calculated at $80 for equilibrium. Natch - that matches with what we pull up using that "Max Pain" website included in the "other sites of interest" in the list at the right side of the page here. You can see their graphics of this, below (I also added one for Citigroup just because it was already showing there when I pulled up the site - interesting; and a huge amount of money ($44+ million) riding on such a low-priced stock!). Fortunately - we have other guideposts, including the ChartsEdge weekly cycle forecast and daily map, as well as trend, turning point, Elliott Wave, and other cycles sources reviewed in posts here, that have clued us in to expect the very thing that other traders are not expecting this week. Namely, that this overbought, tired rally is likely to extend some more - just as it did today.

We do know that the market doesn't necessarily go exactly to the "maximum pain" level. But we also know that the other methods including the cycles do not necessarily guarantee the market will continue to notch up into Friday afternoon, either. So we won't become complacent, and we advise readers not to become complacent either. Of course, we can point out that when you look at the graphics for SPY, you'll see that the shape of the curve is such that there will still be plenty of pain if it gets up toward $94. Not that I can really believe it will move that much - but with all the factors going into this key April 17 cycle time window, traders should remain cautious for upside surprises.

Don't get me wrong - I'm very cognizant of the possibilities for what lies around the corner of this cycle time window. In fact I was re-reading Armstrong's March newsletter including his thoughts about the prospects for going to a new low by June or July if we see a high in this April time window. It can be a really fun ride, if it happens and if we're positioned correctly.

Let's just pace ourselves. Much as a trader might want the market to place SPY at $80 by Friday, we just cannot count on that happening.




**Update - I'm adding the Bullish Percent - S&P 500 chart (included in my Charts Roundup post at my UBTNB3 blogspot this evening) - looking at the indicators on this bullish percent chart (below), looks like we may be approaching a significant high level when those indicators cross over and begin to roll over. Just hasn't happened ... yet.