In the Money: Big Pullback Won't Happen Until Next Week

With so many people looking for a retest of the recent lows, the contrary market put on a powerhouse rally Wednesday. The S&P 500 closed just under the important 1081 level, which was last week's high and also the March low. This looks like a natural spot from which to pull back and, after some follow-through buying Thursday morning, the market will probably soften.

However, I think there are too many October holders and naked October call positions (as well as short stock positions) to allow any meaningful decline before the October option expirations next week. So a dip into Friday is probably all the downside we'll get for now.

At the Wednesday close the NYSE TRIN, or Arms index, was low and overbought at 0.53, and the Nasdaq TRIN came in quite overbought at 0.33. The session also produced a high plus tick reading of 1083 on the NYSE and a plus 767 tick for the Nasdaq, high for that market, too. Both figures corroborate the overbought TRIN numbers and suggest a pullback is close.

One other options indicator is worth mentioning. It is the comparison of out-of-the-money OEX calls to out-of-the-money OEX puts. At market bottoms, the puts are priced much higher than the calls -- sometimes at a 10:1 ratio (the ratio can be even more skewed in real panics).

On Monday, with the OEX at 546, the October 480 put was bid at 1.75 and its "mirror image" call -- the October 610 -- was only 0.10. That's a 17:1 ratio and a firmly bullish comparison.

The rally came, but by late Wednesday afternoon the OEX was at 552, the October 515 put was bid at 1.95 and the October 590 call was bid at 0.50. The put was now less than four times the call price. That's still positive, but only mildly so. This quick move away from extreme bearish sentiment would also allow for a pullback now -- though, as I mention above, not a dramatic one.