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This Top is Obvious, and Investors Are Already Overhedged

Have a look at this 30 minute chart of the QQQ (Nasdaq 100):

qqq-top

After a hard rally in August, the Nasdaq has been in a time-based correction.

And it looks like a top, right? Feels like a top?

Ready to rollover?

Here's the problem with that thesis. This is a 30 minute chart of the VXN, which is the VIX for the Nasdaq:

vxn-30

THe normal relationship with markets and options is that options will become in high demand when markets are selling off as investors are fearful that the current selloff will continue.

What we have here is a unique situation where there are many investors buying protection in anticipation of a selloff that hasn't occurred.

If the VXN were near 3 month lows I would be convinced that further downside is coming in the markets.

But because eveyone and their mother has already positioned for that pullback, this turns it into a bullish case.

My guess is that we will break under the "obvious" support level, suck in some more shorts and put buyers, then reverse higher and retest the range highs.

by Steven Place

Steven Place is the founder and head trader at investingwithoptions.com/