Last Thursday marked the unofficial start of triple witching options expiration, with the rollover of June futures contracts into the September forward month at many brokers. The period from the rollover through this Friday's expiration have a well-earned reputation for whipsaws and reversals, raising the potential for high volatility. The CBOE S&P 500 Volatility Index (VIX) is sounding this message loud and clear, with the "fear gauge" lifting to a two-month high above $40.

Broad benchmarks have turned sharply lower at the same time, trapping late-to-the-party bulls in a major downdraft. However, the SPDR S&P 500 ETF Trust (SPY) is getting close to the 50-day exponential moving average (EMA), which it remounted in April. It's unlikely that bulls will give up without a fight at this support level, but the timing is uncertain because the Invesco QQQ Trust (QQQ) needs another 10 points of downside to reach a similar support level.

It also isn't wise to assume that bears can follow through with additional downside, given high levels of optimism generated by pandemic reopenings around the globe. However, traders and investors need to watch rising infection rates in many states, even if local governments deny that health facilities can't handle the surge. As we all know, the same politicians got caught flat-footed in February, denying the impact of the virus until hospital beds filled up.

Chart showing the share price performance of the SPDR S&P 500 ETF Trust (SPY)
TradingView.com

The SPDR S&P 500 ETF Trust (SPY) topped out above $280 in January 2018 after President Trump fired the first shot in the trade war and sold off into the $250s. It returned to the prior peak in August and broke out, but the rally failed in October, generating a steep decline that undercut first and second quarter lows. A second breakout attempt in May 2019 also failed, carving the second higher low since the fourth quarter of 2018.

The fund completed the breakout in October, entering a strong uptrend that posted an all-time high at $339 in February. It then plunged with other benchmarks, failing the 2019 breakout before coming to rest at a two-year low near $220. The subsequent uptick shows element of a V-shaped recovery pattern, but so far at least, it has failed to complete a round trip into the first quarter high. In addition, recent price action has posted a bearish island reversal through the .786 Fibonacci retracement level, raising the odds that the recovery wave has come to an end.

The reversal is nearing the confluence of the 50- and 200-day EMAs as well as round number support at $300 and the .618 Fibonacci retracement level, raising the odds for a string bounce. However, the on-balance volume (OBV) accumulation-distribution indicator failed to keep up with bullish price action during the three-month bounce, stalling at the .618 retracement. This bearish divergence may signal that buying interest has dried up, raising the odds for additional downside.

Chart showing the share price performance of the Invesco QQQ Trust (QQQ)
TradingView.com

The Invesco QQQ Trust (QQQ) has carved a more bullish price pattern than its rival, posting a series of new highs into October 2018. It sold off through the fourth quarter, coming to rest at a 15-month low in the $140s, and bounced back to the high in April 2019. Price action then eased into a triangular pattern at resistance, finally yielding an October breakout that booked impressive gains into the February 2020 high at $237.

The decline into March undercut the breakout level before an April recovery wave remounted support. The fund completed a volume-supported V-shaped recovery pattern in June, returning to the prior high and adding another 12 points into June 10's all-time high at $248. The fund has given up about 16 points and failed the breakout in the past three sessions, reinforcing resistance in the upper $230s. A test at that level during the next uptick could be instructive, with a buying spike reinstating the breakout, while a reversal would drive another nail into the rally coffin.

The Bottom Line

Look for volatile, two-sided price action during this week's triple witching options expiration, with the potential for major benchmarks to complete bearish reversal patterns.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.