SPX futures touched a new high of 4727.20 overnight, but are sinking away from the gamma-laden options strike at 4700.00 this morning. The morning low was 4688.40 thus far. Today is day 260 in the old Master Cycle with the intra-day high on November 5, day 246 at 4718.50. By all reckoning, thus far in the cash market November 16 may be called a failed MC high at 4714.95. However, the closing high on November 16 was 4700.90, higher than the 4697.53 on November 5. Needless to say, this top has been chaotic.
Open interest at the 4675.00 level is light, while open interest in SPX puts at 4650.00 is 21,506 vs. 13,464 calls. The big hurdle is this fternoon’s SPY options with open interest of 90,587 calls at the 470.00 strike vs. open interest of 40,048 put contracts. The Max Pain zone for SPY is 467.50. Should SPY fall beneath that level, put gamma may dominate the market. Wall Street appears to have an “excuse” for its behavior.
ZeroHedge reports, ” Having briefly touched new all time highs of 4,723.5 overnight, S&P futures tumbled shortly after Europe opened as a fourth wave of the pandemic in Europe resulted in a new lockdown in Austria and the prospect of similar action in Germany wiped out earlier gains and forced stock markets down close to 1% as it overshadowed optimism about corporate earnings and the economic recovery. Friday is also a major options-expiry day, which could trigger volatility in equities. Two progressive Democratic senators said they oppose the renomination of Federal Reserve Chair Jerome Powell to a second term, because he “refuses to recognize climate change” joining Elizabeth Warren in urging President Joe Biden to choose someone else.
S&P and Dow futures fell tracking losses in banks, airlines, and other economically sensitive sectors. Uncertainty over rising inflation and the Federal Reserve’s tightening also kept demand for value stocks low. At 745am Dow e-minis were down 218 points, or 0.609%. S&P 500 e-minis were down 12.25 points, or 0.26% and Nasdaq 100 e-minis were up 68 points, or 0.41%.”
The NYSE Hi-Lo closed at 10 yesteday, on the verge of a sell signal. An open beneath 0.00 may confirm the sell signal. The Hi-Lo Index reveals a quiet withdrawal out of equities that has not been clear in the price action to date. Today may be the turning point, as may be indicated in the Hi-Lo.
VIX futures rose to 19.01 this morning, giving us a buy (SPX sell) signal. That, along with a potential confirmation from the Hi-Lo may give us the confidence to sell/short equities.
ZeroHedge remarks, “Today’s “elephant in the room” for traders is the fact that 41% of SPX gamma expiring today. As SpotGamma notes, that is a very large number, and may invoke some unexpected volatility today. As we chronicled extensively the past week, we certainly think it will spur volatility next week.
The chart below shows the current distribution of gamma across strikes in SPX, and its rather remarkable.
We cannot recall seeing such a concentration at a single strike before – and this is the result of 18k calls and 23k puts to the 4700 strike.”
TNX declined this morning, approaching the 50-day Moving Average at 15.11, with a secondary target being mid-Cycle support at 14.92. This move may be more of an “automatic” migration from stocks to bonds than a reversal in trend. The move thus far is a 51.5% retracement with a 61,8 Fib retacement at 15.03.
USD futures consolidated in place during the overnight session. There is room to retest the Cycle Top support at 95.10 before moving higher. The Cycles Model suggests a continued rally trhrough mid-January.
Crude oil declined to an overnight low of 75.88, well below the 50-day at 78.10. It is on a sell signal with the current Master Cycle having two more weeks to go. The Cycles Model suggests a decline to the Cycle bottom may be in order.