Stock Market Danger AheadStock-Markets / Stock Markets 2016 Feb 19, 2016 - 06:11 PM GMT
You may ask, “Why the rally back to the zero line?”
The first answer is, “Because it can.” That’s what support and resistance lines are meant to portray. They represent pockets of buying power or selling pressure, depending on which side you are coming from.
There is another reason. Computer algorithms can be trained to “sense” these areas and use them to the owner’s advantage. In this case, it may be to the owner’s advantage to maintain the market at this level so that certain options will pay off.
However, it may also be used for devious reasons, such as a raid on those very options to produce a sell-off. Trading on today’s options is halted at noon. Should the market start to decline, the sellers of puts may have to sell (short) shares to match the liabilities of their options.
You see, options are not insurance. The options buyer simply transfers risk to the options seller. Should the put options sellers feel threatened with a burgeoning liability, they will begin to sell and as each subsequent layer of options is threatened, the selling may start a cascade.
I cannot predict that this will happen. I am simply explaining the potential cliff we may be facing should selling resume this afternoon.
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