Squawk Morning Briefing: Expiration Effects Take Control

We are now in the home stretch of quarterly expiration week. These significant expiration events often lead to the sort of sideways action that we’ve seen the past few days and it suggests that we’re likely to continue to experience through Friday. If you walk through the logic of how significant open interest at major expiration events causes prices to pin then it makes perfect sense and it explains the sideways action. However, it doesn’t explain why it happens sometimes and not others.

One can often dismiss this by observing that sometimes there are major events that overwhelm the forces of pinning and can move the market despite the impact of unwinding positions in the various derivative markets. However, it is useful to observe that we have been counting a fourth wave on our charts and that these often tend to be long, drawn-out affairs such as what we’re observing now. In small degree wave structures we often find fourth waves in the early afternoon when markets can’t find much movement.

This is not to suggest that “the waves are in control” and that they are forcing us to pin. Rather, we think it likely that the mass psychology which affects markets as something which observes cycles. These cycles affect the patterns of buying underlying securities and their derivatives and that the attitude toward them can be observed through the wave structure. That, in turn, gives us some insight into what is happening in the markets.

We delve more into the wave structure in today’s videos, but however they count out we seem to be consolidating near these levels. We know that consolidation leads to continuation more often than not and that has us considering the most likely path to be another high before everything is said and done.

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