This coming Friday is options expiration for the month of May. As many of you know, options expiration is a week that is filled with lots of game playing by the large institutions. This is a week where you will hear a lot of rumors, mostly untrue. You will also hear a lot of ridiculous upgrades and downgrades by analysts. Usually, stocks and markets that are sharply higher are susceptible to pullbacks. On the flip side, stocks that have been sold off sharply and in down-trends can often get bounces this week. I call it a week of game playing, especially if the overall volume is light.
Recently, the major stocks indexes have been very strong on the charts. All of the the major stock indexes have been surging higher since the March 23, 2020 lows. Many of the leading stock indexes have traded into major retrace levels which is natural resistance . Yesterday, the selling began as a lot of negative news hit the wires. Today, hedge fund managers Stan Druckenmiller and David Tepper have come out with very negative comments about the markets. Earlier this morning, Federal Reserve Chairman Powell was also very negative and cautious.
In my opinion, this pullback/selloff is a positive for markets. The markets were moving up very quickly and when you move up too fast it will usually lead to problems. Remember, parabolic charts never end well. Traders will now have to follow the charts very closely and see the pattern that forms over the next week or so. This should be no surprise to see stocks retreat as we approach the May options expiration date on Friday. As a rule, you must always be on guard whenever you approach a monthly options expiration.