A momentous occasion…NDX just crossed beneath its Ending Diagonal trendline, implying a complete retracement of its rally since March 23, 2020. For those of you who question my ‘Point 6″ of the Orthodox Broadening Top, the low at that time was 6771.91. That was the low of “Point 4” which must be exceeded by “point 6”.. That target now has another in its vicinity.
ZeroHedge reports, “Stock futures ticked lower on Monday, hurt by weakening sentiment in Asia and Europe amid growing worries about economic stagflation, the global energy crisis and renewed fears about property developer China Evergrande whose stock was halted overnight in Hong Kong, while Tesla shares rose after reporting a record number of electric vehicle deliveries. At 715 a.m. ET, Dow e-minis were down 114 points, or 0.33%, S&P 500 e-minis were down 16.25 points, or 0.37%, and Nasdaq 100 e-minis were down 73.75 points, or 0.5%.
“The global chip and energy shortage is getting worse, the inflation is rising, the recovery may be slowing, and that puts central banks between a rock and a hard place,” Ipek Ozkardeskaya, a senior analyst at Swissquote, wrote in a note. “The best they could do is to do nothing, or to tighten their monetary policy to avoid losing control on the economy.”
SPX futures are down this morning. No one sees the Cup with Handle formation just above 4300.00 that can set off a firestorm.
On Friday SPX dipped its toe beneath 4300.00 and found the water too cold. Dip buyers came in and the result was a near 50% correction (at 4377.00) of the week’s decline. What most investors don’t see is a huge options collar taken off at the end of the quarter and a new one installed for the end of December. The expected sell-off due to this transaction appears to have been muted.
You see, Wall Street’s biggest customer is not the retail investors nor is it the hedge funds. It’s the insurance companies who market equity indexed life and annuity products. They offer a floor of protection when the market goes down, but participate in market increases. This is done through the options market. The aforementioned collar is the tool used to provide that floor in a down market. However, it costs money to do that, even in a bull market.
Why not make it free? Just sell another out-of-the money put at a lower level to offset the cost of the collar. There is no consideration that the market may decline more than 10% and go against the bank. In the meantime, the bank(s) has put itself in the unenviable positon of having to sell more shares of SPX as the market goes up and buy more shares as the market goes down to maintain the hedge. That is why the SPX has been “flat” since July. They are walking a tightrope.
ZeroHedge explains, “$500,000,000.
Half a billion dollars.
Currently, this is how much of $SPX index needs to be bought or sold for every 1% down or up move, respectively.
These flows are a result of a substantial options trade that remains unknown to most market participants.
On Friday, we highlighted some of the impact of this ‘hidden’ crash hedge.
VIX futures are consolidating within last week’s trading range. There appears to be a considerable effort to kee the VIX from rising above 25.00, even though it has broken above its Ending Diagonal formation. The Ending Diagonal target is a complete retracement to the March 23, 2020 high.
TNX futures testedd 15.00 this morning as it rises to complete its Master Cycle. In fact, the Cycles Model suggests growing strength in the uptrend both this week and next. The implied target is between 16.00 and th Cycle Top at 17.95.