This column was originally published on RealMoney on Oct. 20 at 7:04 a.m. EDT. It's being republished as a bonus for TheStreet.com readers.

On Wednesday, the market started down on the heels of a poor report from Intel ( INTC). In the process, our 1176 pivot on the S&P 500 was substantially undercut as the index skidded to 1170. We will show why that level is/was important further on in this commentary.

The morning decline was blamed on Intel. So did the subsequent reversal have Intel inside? What were the factors that caused Wednesday's reversal day? Although some may lay Wednesday's rally at the doorstep of the Fed's beige book report or other data points, I am not buying any of it. There is always a data point and there is always a reason to act or not to act.

You've got to have technical tools that will define your parameters on multiple time-frame analysis. That is the bottom line. For example, a daily low was tested. Now the weekly high is being tested. Some may think that Wednesday's rally was generated from natural buyers -- bulls waiting in the wings. That remains to be seen. I have other thoughts that I will explain as you read on.

So what were the keys to Wednesday's reversal? The chart below is an hourly chart of the S&P for the month of October shown yesterday. As you can see, a Live Angle drawn in red shows that last-ditch support for a rally attempt is indicated on a test of just above 1170 S&P. On Wednesday morning, the S&P made a first-hour low at 1170.85:

  • Following the Principle of Tests, that Live Angle was successfully tested on Wednesday.
  • In addition, Wednesday's decline also represented a test of our Lizard Buy Setup from last Thursday.
  • Yesterday, we stated that the failure by the S&P to test its overhead resistance at 1200 suggested serious weakness and selling pressure. But I also went on to say that the S&P failed to reach this 1200 level on its first attempt. In other words, the market does not like to accommodate. The possibility that 1200 may yet be tagged remains. But the market is infamous in its aversion to doing what is expected when it is most expected. The market seldom goes where it is going in a straight line.
  • Finally, as you know, it is options expiration week, and as we stated yesterday, anything can happen. Anything happened on Wednesday. Why? I believe that a key factor in Wednesday's rally was that the big arbs unleashed buy programs to keep naked puts from exploding in their faces.
  • Moreover, the big Boyz love to play Pin the Tail on the options donkey going into expiration. With puts on the S&P ballooning this month and with calls on the 1200 strike on the index shrinking to a fraction for Friday's expiration, the S&P kissed the 1170 strike and was jammed toward the 1200 strike within a few hours going into the bell. The S&P settled at 1195.75. What a swing.

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