There are only four triple witching Fridays in a year. Last Friday was one of the them and the market didn’t fail to prove triple witching Friday’s abnormal trading reputation. On a triple witching Friday, there is the simultaneous expiration (or rollover) of various futures and options contracts. Many U.S. stock index futures, stock index options, and stock options expire on these days.
Futures and options contracts, unlike a stock, have an expiration date. Large bets have been placed in the futures markets, and triple witching is when those traders will have to decide if they will roll their futures contracts over and maintain a position in a non-expired contract, or close their futures position, which could be buying or selling, depending on the direction of their original trade.
Options traders also find out if their options expire in or out of the money. On such days, traders with large positions in these contracts may be financially incentivized to try to temporarily push the underlying market in a certain direction to affect the value of their contracts. The expiration forces traders to act by a certain day, causing trading volume in affected markets to rise.
Triple witching is often said to cause volatility in the underlying markets, and in the expiring contracts themselves, both during the week preceding, and on the expiration day. In some cases, this may be true, but triple witching can also be a rather calm event, with lower volatility and a statistical bias to the upside (at lease for S&P 500 futures) during the week of and on triple witching.
All indices gap opened lower than previous day’s low on Friday, but all refused to carry on the downside momentum shortly after open. The NASDAQ led the small cap and hyper growth stocks to hold the plunge on the downside. The failed follow thru on the downside caused short covering in ARKK ETF, which gave ARKK a big day with 5.8% increase.
The rally in ARKK on Friday is by no means sending a signal that the market correction is over. It is only a relief rally that was caused by short covering.
On the NASDAQ daily chart below, you can see that:
- The NASDAQ suspiciously stopped at taking out 12/03/2021 low. If the 12/03/2021 low was taken out last Friday, it would cause the NASDAQ to drop like a stone with significant downside momentum. The triple witching trading stopped it from happening.
- The price is clearly contained below a 3-point downtrend line, the momentum is on the downside.
- It has been 10 trading days since the daily cycle low that occurred on 12/03/2021. Statistically, there is only a 10% chance for the NASDAQ to make a bottom here.
- The end goal for the NASDAQ is to take out the weekly cycle low that occurred on 10/04/2021, that’s about 1000 points below.
- Next week is a short trading week with Christmas holiday. The market could be trading sideways with large swings.
- The real action could be delayed into the first week of January.
The DOW and S&P 500 are all geared to move down. The little upside momentum in NASDAQ and ARKK last Friday is not trustworthy.
Danger ahead as we said in our private email.
This time the correction could be slower than previous corrections for the reasons below:
- The Fed tightening is a slow action. The QE will stop by mid March, so between now and March, the Fed will still pump new money into the system, albeit at a smaller amount.
- The Fed might be forced to raise interest rates in March as soon as the tapering is done, which could cause the market to panic . Right now the market is expecting the Fed to raise interest rates in June.
- So the market is still living under the emergency easy monetary policy at the moment, the impact of a tighter monetary policy is not felt at the moment.
- There are a lot of cash on the sideline, some people will buy in January to start the new year. Those type of buying actions could hold the market before a real correction.
We believe the 4-year mid cycle top has been made in November 2021, it could take a few months to finish the mid cycle transition. The market could be in some kind of sideways for a little while, then a fast plunge to finish it off. We see the market to trade sideways to down from here. The risk is on the downside.
It’s not a good idea to start a new position while the general market is waiting to reset.