Next week is options expiration week.  One thing I’ve noticed regarding expiration weeks is they tend to go the direction of the overall trend, but are more volatile.  Given the near-term technicals are obviously weak here, this is definitely concerning for some more weakness next week.

Getting right to it, last November the market was weak heading into expiration and as a result the SPX sold off 3.81%.    Then let’s not forget ’08, the market was obviously crashing late that year, but check out the massive 8% drop that week. Over the past decade, November expiration checks in at about minus 1% on average.  Still, check out the average returns when its a down week of minus 3%.  Summary is when it drops, it really drops.

Here are all the expiration week returns over the past year.  Again, what strikes me is once ’12 started we had a nice uptrend and some really solid returns during expiration weeks of Jan-April.  But then the SPX peaked in late April and started to roll over into expiration week during May.  Sure enough, like clockwork, May expiration was a blood bath as the SPX dropped 4.30%.

No indicator is perfect and if we get some good news out of Europe or fiscal cliff, sure a huge rally could take place.  Plus, let’s not forget fear is really starting to ramp up, which can always spark a big rally on any good news – especially when you consider how near-term oversold we are, a bounce could happen out of the blue.  Still, it pays to listen to history and my money says be open to anything next week – including a big drop even though we are near-term oversold.

Good luck trading and have a great week.