TWO Weeks of CHAOTIC MARKETS:

Wall Street professionals and average traders and investors will be excused for appearing shell-shocked coming into this week. During the past two weeks they have witnessed markets that wiped out all of the year’s gains. It matters not that the exact cause of the brief, but horrific 1,000-point plunge in the Dow Jones Industrial Average on May 6 remained uncertain.

Last Monday: DOW: Plus 404 points, a 3.9% gain.

Last Tuesday: The DOW slipped 0.3% for the day.

Last Wednesday. The Dow ended the day with a sprightly 1.4% gain.

Last Thursday, the Dow surrendered more than 100 points, or 1.1%.

This past Friday, the Dow had bounced back from its session lows, but still retreated nearly 163 points.

Despite logging back-to-back triple-digit losses, the Dow held on to Monday’s gains. For the week, the DJIA added 2.3%, marking its first weekly gain since mid-April. Elsewhere, the SPX rose 2.2% for the week, and the Nasdaq led the pack with a weekly gain of 3.6%.

The S&P 500 Index (SPX) rallied powerfully from its 200-day moving average early last week. The rally pushed the SPX back above its 160-day moving average, situated at 1,120, and the January highs in the 1,150 area. But after an unsuccessful attempt to overtake its 50-day moving average in the 1,175 area, the SPX retreated 3.1% on Thursday and Friday. The SPX closed the week at 1,135 – below its January highs, but above the 160-day moving average, in a slight technical improvement relative to last week.

There is great importance placed on the SPX 1,100 level, which is not only the SPX’s 200-day moving average, but also represents about a 10% correction from the recent highs. It is also worth keeping a close eye on the 1,167 level, as this is the site of the 160-month moving average, a trendline that acted as support at the bear-market bottom in 2002-2003. Moreover, when this moving average was breached in October 2008, it was a major sell signal. A month-end close above this level would support the notion that the SPX is in bull mode.

Also worthy of close scrutiny this week is the expiration of May options. There is massive out-of-the-money put open interest on various indexes and exchange-traded funds that is getting set to expire. Should the market find any type of stability, the unwinding of short positions related to the expiration of the out-of-the-money puts could create a tailwind for the stock market.