We had a feeling the shorts would be feeling the pain this week as the market squeezed them into the September expiration; trade didn't disappoint. Except perhaps for those on the wrong side of things (possibly UBS rogue trader Kweka Adobili?). Just when it looked like the world was coming to an end, the December S&P rallied approximately 80 handles from the Monday morning lows to the Thursday night highs.

As good as the markets look, we have to approach tomorrow with caution simply because we are headed into what could be an eventful weekend in Europe. Also, markets are sadistic and have a tendency to behave in a manner that will inflict the most pain to the most traders and selling off after expiration would do just that.

As mentioned in yesterday's newsletter, quarterly futures expiration (early tomorrow morning) has a tendency to mark the short-term highs of a move. All of those traders holding short September e-mini S&P futures until the last minute could end up offsetting near the highs (hopefully, they have enough margin to roll into December). Similarly, short call traders that have suffered on the way up have simply run out of time. Watching the market pull back tomorrow or Monday would be torture, but that is exactly what has happened historically in similar situations.

Although we are neutral to bearish in the coming sessions, we still think the intermediate-term trend will continue to be up. If you are "long" the market with futures or options, we like the idea of lightening up, or taking profits completely, with the intention of trying to get in at better prices if seen.

In yesterday's newsletter we stated "...bears might look to enter trades near 1190 and then again near 1204 (more reliable)." The original resistance triggered a moderate pullback that should have worked well for aggressive day traders and the second resistance area was near the high of the day and occurred on the close. We still feel like it will act as valid resistance going into tomorrow's trade...look for a pullback (possibly) overnight, or more likely early tomorrow morning as the September contract drops off the board. Intraday support lies at 1188 and then again near 1174 in the December S&P future.

In a longer-term view, we feel like this move will eventually see 1224ish in the S&P, and possibly 1244. This would put the NASDAQ above 2300 and the Russell near 740.

Click on image to enlarge!

Click on image to enlarge!

Click on image to enlarge!

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