Some pain in equities in both directions this week may set up for "max pain" lower on Friday

Sometimes when you're winning, it's the best time to proceed cautiously. Today the market started to reward those of us who have tilted bearish on the prospects for the rally to continue. But there remain reasons for bears to remain on their toes right now. For one, many markets and indices dropped neatly to their 20-day moving average (see the little S&P 500 chart at left). While we may think that there's still a little drop needed that may appear tomorrow morning, there's a good possibility that the markets re-test and attempt to move above the 20-day moving average again, perhaps in a small second wave pullback upward over the next couple of days. On the VIX chart (below), I've marked with a solid blue line so you can see that the VIX moved neatly up to a trendline that can provide some resistance or at least turbulence. That would also be consistent with market bulls putting up a fight the next couple of days - which we also saw indicated in the ChartsEdge weekly forecast (posted this weekend) as a distinct possibility.

Then there's opex and triple witching coming on Friday, so it's a better time to look more closely at the "max pain" objectives (since this is a more reliable guide closer to opex). The Option Pain CBOE (Max-Pain) Calculator from OptionPain.com is handy to use, so I used it to obtain the projections for the QQQQ's to $34 as you can see below. Since I know a lot of people have been using FAS and FAZ, and even though people should be wise by now to consider them daytrading vehicles rather than swing trades, I thought it would be interesting to check out "max pain" for them. So those are below as well - FAS at $9, and FAZ at $5.

Strongly trending markets won't necessarily "obey" the "max pain" projections, but I think it's become evident that the equity markets are not strongly trending upward right now. A little QQQQ chart is at left - you can see it tested its 20-day moving average too. Getting to $34, or at least well under $35 again (that prior resistance on the P&F chart that was broken in what looks like the last fifth wave of the rally), for opex Friday would place it at its 50-day moving average. That isn't enough to "decide" whether it's only part of a mere pullback versus a re-test to much lower levels for that "primary C" wave down idea. But it will be a pretty good move for nimble players this week, especially if it takes place after a "rally effort" the next couple of days. After that, depending on the pattern, it can set up for another leg lower next week.

(click on any image to see it larger)