This won’t be a long post. As is obvious, this 3900 level has become the next nexus of price discovery for this market. I would first note that I think we ultimately break 3900 but bear with me through these two scenarios.
Scenario A: We bounce today and close at the highs. A breach of resistance at 3960 would make this scenario more probable. This would suck. This would open up the possibility of yet again crossing above 4000, and even retesting 4080 by the end of September. I’m not panicking at this scenario as I believe it is the least probable. But it is important to acknowledge the possibility exists.
Scenario B: We bounce today throughout the day, but get a mid to late day rug pull back to lows. I can see this is a large possibility specifically for the Quad Witching OPEX tomorrow. Since a lot of eyes are already on 3900, I can see the institutional players/market makers pushing the market up to get rid of the shorts and put buyers, suckering in an intraday suckers rally then getting short themselves to finish the day. My levels to watch for this is still 3960 to hold as resistance. This would make for a frustrating Friday, but not as bad as scenario A.
Scenario C: We drop below 3880 today to start, catching a lot of longs from today off guard, liquidating their longs at the open. New shorts would also enter trades there. After a 15 to 30 minute drop, lots of short covering (after Michigan Sentiment), rally back to chop around 3900 for the rest of the day, lots of volatility in both directions, but close there near 3900. I think it would be no big surprise that Michigan Sentiment drops below the forecast of 60 (prior is 58.2). I am thinking that unless it drops below 50, it will cause a “sell the rumor, buy the news” type of action. Then a rollover next week will start Monday. I see this as being the most likely course of trading tomorrow. Similar to Scenario B, this would still allow the institutions to control the expiration of the 3900 puts while still not losing their own shirts.
Scenario D: We gap below 3880 and simply keep dropping. Closing between 3785 and 3810 or so (May low). I think this scenario’s likelihood is tied with C, partly because I am watching post market action and we are testing the September lows as I am typing.