The algos are attempting a ramp into 3:00 because they know that the institutional investors are coming back into the market to close out the trading day. This will reveal how they have been positioned for options expiration, since the word on the street is that nearly all the major dealer banks have been net short the market for the past two weeks.

If so, there may be increased selling into the close. It will be the smaller dealers and retail traders who are trapped, as trading on today’s maturities has been closed since noon. If the SPX takes a nosedive into the close, you will see intensified selling due to what is called “gamma hedging.” Simply put, options only transfer risk. The put option sellers will have to sell shares short to cover increasing liabilities. They won’t be able to buy shares back until Tuesday, due to a three-day weekend. Imagine what will happen to the overseas market on Sunday and Monday if SPX closes at a new low today!

This has all the ingredients for a crash. To top it off, some commentators are beginning to disbelieve the “Fed Put.”

VIX had a credible rally today, but what’s more important is that it has not been able to fill the gap and it appears to be closing above its Head & Shoulders neckline at 26.00.

The Hi-Lo Index appears set to close at or near the daily low after making a substantial new low in the sell zone. This is reassuring us that the market is still broken for now.

Have a good Weekend and I’ll be in touch over the weekend with the Weekend Update.

Regards,

Tony

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As a State Registered Investment Advisor, The Practical Investor (TPI) manages private client investment portfolios using a proprietary investment strategy created by Chief Investment Officer Tony Cherniawski. Throughout 2000-01, when many investors felt the pain of double digit market losses, TPI successfully navigated the choppy investment waters, creating a profit for our private investment clients. With a focus on preserving assets and capitalizing on opportunities, TPI clients benefited greatly from the TPI strategies, allowing them to stay on track with their life goals

Disclaimer: The content in this article is written for educational and informational purposes only. There is no offer or recommendation to buy or sell any security and no information contained here should be interpreted or construed as investment advice. Do you own due diligence as the information in this article is the opinion of Anthony M. Cherniawski and subject to change without notice.

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