Options Outlook: Manage Open Risk Ahead Of Fed Meeting

Last week's scoreboard showed a flattish result, but getting there was far from boring thanks to unprecedented jawboning by global central banks. Friday ended super green – up almost 2 percent – completely erasing the Thursday drubbing.

The Friday open should have been weak as a result of the strong jobs report, but was surprisingly strong. Janet Yellen now has no reason left to hold back the hike. Apple Inc. AAPL led higher and was responsible for half of the QQQ open greens. The only red was in oil stocks on the headline that OPEC increased oil 2016 production (markets were expecting a cut). Oil will likely be cheap for longer.

The rally was fading a little, and then Mario Draghi dropped a bombshell with the promise of +680 billion euros by 2019. He held this bit of information from the official announcement and caused a lot of damage in the global currency markets. Markets rallied to new day highs: +2 percent in the Nasdaq, +1.5 percent in the SPY and the small-caps lagged +0.7 percent.

Related Link: Where Wall Street Is Looking For Earnings Growth This Week

Range

Equity markets have been stuck in a range, but with the potential of a breakout to new highs, especially in the Nasdaq. Based on the open interest, expect support below, making for a good base for the bulls, and some resistance above, but not insurmountable. Bears should be careful shorting too closely to current levels.

Unless actively trading, it might be best to sit the next few days out or simply manage open risk. The outcome of the next 10 days is likely to be binary, with the imminent December Fed rate decision. Yellen is expected to raise rates, and markets will react to either outcomes. Markets have fretted the rate hike for over a year, so it may be unlikely for traders to cheer its arrival. But there are bulls who believe the rate hike will feed a market rally.

Small Caps

The real battle is in the small caps, as they still lag the broader indices with respect to relative proximity to the all-time highs.

The broader indices are gnawing at those levels, while the small caps are far below them. IWM 119/120 has been the battle to watch for the last few weeks.

The Nasdaq is heavily influenced by five mega caps (Alphabet Inc GOOG GOOGL, Apple, Facebook Inc FB, Microsoft Corporation MSFT and Amazon.com, Inc. AMZN.

On any day, one or two of those stocks can move the index by a percent. Case in point: Last Friday, Apple and Microsoft accounted for half of the +2 percent Nasdaq move.

Fear Gauge

VIX price range is tightening, indicating a possible big move as the squeeze gets tighter. A break may occur soon. If the break is upward, then equity markets will sharply correct or else the VIX reverts to its 12-month lows and the bull market powers forward into year-end. The upward breakout in the VIX is not immediately imminent, but soon could come.

On the other hand, the downside breakdown could occur as early as Monday or Tuesday, causing markets to rally.

Eurozone

Draghi seemed to have deliberately made his Friday statement to undo the damage he did with his failure to impress on Thursday. There are experts who don't believe the eurozone has enough qualified assets that they can purchase if they want to put this new plan into action. So, having a plan to increase QE may not be executable without policy changes in the EU.

Bonds

Bonds bounced hard – exactly where they technically needed to do so. TLT Avoided a technical invitation to more selling. This was surprising given the strong jobs report. Rates dropped, which continues to be counter-intuitive to an imminent rate hike.

Oil

Technically, it can break down to new lows, but since the price completely depends on words from Saudi Arabia, no one can forecast its trajectory. However, if it spikes higher, it could help levitate equity markets in the short term.