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inthemoneystock (< 20)

This Is Why It Is Called Whipsaw Wednesday



July 13, 2011 – Comments (1) | RELATED TICKERS: DIA , WFC , JPM

Just when you thought it was safe to trade the markets, it reverses lower. This morning, many traders and investors in the financial media were right back into the risk on mode. The popular peoples index, called the Dow Jones Industrial Average, traded higher by 150.00 points at 11:20 am EST. The so called market mavens were celebrating the return of the Federal Reserve Chairman Ben Bernanke in front of the Financial Services Committee. Everything looked so rosy for the markets to have a huge reversal day to the upside.

Then all of the sudden the major stock indexes began to slowly decline. The leading bank stocks such as J.P. Morgan Chase & Co.(NYSE:JPM) and Wells Fargo & Co.(NYSE:WFC) started to give back a bulk of the morning gains. When the financial stocks rollover it is often a good sign that the major stock indexes will pullback as well. Today, is also the Wednesday before options expiration. This is usually the most volatile trading day of the entire trading week. Traders should always stay nimble during options expiration.

This is a time when the large financial institutions will play a lot of games. Often the small retail options trader will get faked right out of their shoes during options expiration week. Just think about how many retail traders bought puts before the close yesterday when the major stock indexes dropped sharply in the afternoon, only to see the Dow Jones higher by 150.00 points this morning. Many of these same retail options traders closed out those put positions at a lose this morning, only to see the major stock indexes reverse lower this afternoon. Options expiration is a volatile and turbulent trading week. Now you know why we call this session, “whipsaw Wednesday.”

Nicholas Santiago

1 Comments – Post Your Own

#1) On July 13, 2011 at 4:43 PM, davejh23 (< 20) wrote:

"Often the small retail options trader will get faked right out of their shoes during options expiration week."

I think this is exactly what happened...besides options traders, I'm sure many shorts covered and went long just to lose 1%+ on the short position and to be down 1% on the longs by the end of the day.  Bernanke didn't even say anything definitive, but the large financials, aided by the media, used his words as the justification for the move.  Even with a weakening employment picture, I think there is a 0% chance of QE3 happening as long as stocks hold up and oil stays close to $100.  I would expect hints/rumors of QE3 to lead to weakness in equities as this suggests that the Fed sees economic weakness that is far worse than most economists/analysts are currently projecting for H2 and 2012.  After a significant decline, an actual QE3 announcement might lead to another rally.

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