The final high was in the last hour of the day. Will there be an Island Reversal or even a Limit Down day tomorrow?
SPX rallied toward the Cycle Top at 4213.94 and above long gamma at 4150.00. This is a hell of a pickle for dealers counting on closing at Max Pain at 4115.00. Will they be able to ease the SPX down out of long gamma? The Broadening Wedge appears complete.
ZeroHedge remarks, “A colder than expected CPI print – driven by slowing energy price gains offsetting continued gains in shelter costs – prompted an immediate knee jerk reaction sending rate-hike odds tumbling.
September went from pricing in an 80% chance of a 75bps hike to around 30% chance instantly…
This prompted wild euphoria in stocks because surely this means The Fed pivot is back on…
SPX futures made an morning high of 4138.20 this morning, after managing to close above the 100-day Moving Average at 4114.18. This morning’s bounce may have been the result of dealers selling their short positions to cover the in-the-money puts in yesterday’s op-ex. The Cycle Model suggests an increased downside momentum by the end of the week, with a full-blown decline by Monday.
In today’s op-ex Max Pain is at 4115.00. Calls dominate above 4125.00 while long gamma begins at 4150.00. Puts rule beneath 4110.00 while short gamma lies beneath 4100.00. This is a very tightly wound options market where a false step may have a dramatic outcome.
ZeroHedge reports, “US equity futures reversed earlier losses and traded modestly in the green in cautious, muted overnight action before US inflation data which is expected to show headline US CPI cooled but stayed elevated in July, and which will shape investor expectations for further Fed rate hikes. S&P 500 contracts climbed 0.2% as of 715am ET, following a fourth day of declines in the underlying index Tuesday after Micron Technology followed Nvidia, and become the latest chipmaker to warn of slowing demand. Nasdaq 100 futures also rose 0.3% as Tesla hilariously gained in pre-market after CEO Elon Musk vowed an unexpected $6.9 billion sale of Tesla stock – his biggest on record – would be his last (which would be at least somewhat credible if he didn’t say that after every previous stock sale). Europe’s Stoxx 600 Index erased an initial drop, while the dollar slumped, and 10Y Treasury yields traded flat around 2.79%, while the 2s10s curve remained inverted by a massive 50bps. Crude oil dropped below $90 a barrel as a major pipeline from Russia to central Europe was set to resume flows in the coming days, and industry estimates showed an increase in US inventories. Gold and Bitcoin edged lower.”
VIX futures bounced to 22.34 this morning and remains near the top of its trading range. It is on an aggressive buy signal after having made the Master Cycle Pivot on Friday. Confirmation of the buy signal lies at the mid-Cycle support/resistance line at 25.02, where the buy signal may be universally recognized.
VIX futures are dropping to a new low, at 20.60. The Master Cycle has been stretched to day 280. How rogue will it go?
Today’s op-ex shows Max Pain at 20.00. Puts dominate beneath 23.00 with no gamma in sight. Calls dominate above 23.00 with long gamma beginning at 25.00.
ZeroHedge remarks, “What if the bear makes a come back?
Over the past few days we have presented a series about the bounce in five different thematic emails (premium subs only), Where are we in this squeeze…are we “there yet”?. Trading violent bounces like the one we have witnessed is hard and many get caught wrong, both ways. We expected an overshoot above the 4200 level and a “real” volatility puke. We never saw this play out, but trading is not perfect. Maybe we are not there yet, but we are definitely much closer. Time to put on the first bear trade.
Sentiment in a bear market: what do you expect?
Yes, sentiment & positioning data continues to look depressed and has kept us from going short over the past few weeks. However, if this truly still is a bear market one should not expect these indicators to swing from full risk-off to full risk-on. It is worth noting that some indicators actually are somewhat (and even markedly in some cases) off their extremes. This one below is at least 10%-points off the 1-month reading and even better than the 3-month reading. This actually means something. Do NOT expect to get the perfect sell signal from sentiment & positioning charts. You need to go early.
TNX dropped significantly at the benign CPI report. This may alter the short-term outlook for both stocks and bonds. The current Master Cycle is due to pivot on or shortly after the August op-ex. Could a new low be ahead?