October 5, 2022

1:50 pm

ZeroHedge observes, “What goes up must come down. With financial conditions going from super tight to rather easy…

… in literally 48 hours as markets soared after pricing in a Fed pivot (again), in the process making a Fed pivot unlikely, even as “Buy-to-Cover” flows have been “absolutely staggering” (in the parlance of Nomura’s Charlie McElligott), it appears that ‘ammunition’ for a squeeze has run dry.

As SpotGamma points out, despite the heavily-sold narrative of Fed pivot proximity, we are searching for a reason to think this rally has more legs, but are struggling to find it.

As we noted yesterday, despite equity gains, the market’s expectations for Fed hikes actually shifted hawkishly in the last two days (i.e. narrative fail, confirming this was all options tail wagging the market dog)…”

..as I suspected.

10:30 am

SPX has declined into short gamma territory beneath 3750.00.  This may accelerate the decline as today’s op-ex is heavier than usual.  The entire rally may be wiped out today.  That is one of the reasons for not recommending cash or longs on Monday morning.  The market can turn very quickly, giving only seasoned professionals the ability to anticipate the turns.


8:00 am

Good Morning!

SPX futures have begun their descent, reaching a morning low thus far at 3750.00, testing short gamma.  This may be the beginning af a probable 4.3-day descent to new lows.  Under “normal” circumstances, we may expect a decline to 3430.00, as mentioned last week.  However, The Broadening Wedge formation may come into play with a target below 3000.00.

In today’s op-ex, Maximum Pain for all options investors is at 3760.00.  Long gamma begins at 3775.00 while short gamma starts at 3750.00.

ZeroHedge reports, “After the best 2-day rally since April 2020, the best start to a new quarter since 2009 and the best start of a Q4 since 2002, the powerful rally fizzled and US equity-index futures fell as investors pushed back on bets for less hawkish central banks amid the latest surge in oil, and sought more evidence that inflation is moderating. In other words, unlike yesterday, stock algos finally noticed what oil was doing.

Futures tracking S&P 500 and Nasdaq 100 dropped 0.9% each after the underlying indexes scaled two-week highs on Tuesday. And as the dollar rebounded for the first time in three days, Treasuries slid across the curve as oil swung ahead of the OPEC+ meeting today where the cartel is expected to cut output by as much as 2mmb/d.”



The NYSE Hi-Lo Index nearly went positive yesterday as stocks soared.  However breadth remained negative, especially at the end of the day.  Negative breadth may become more so through the weekend as the Cycles Model suggests a possible new low for 2022 in the coming week.  It remains on a sell signal for the remainder of the week.


VIX futures rose to 29.59 in the overnight session.  The short squeeze in stocks has not affected the VIX as one would suppose.   VIX may now be inversely synchronized with the SPX.  A decline to 3400.00 in the SPX is likely to move the VIX to test the Head & Shoulders neckline, at a minimum.  However, a decline in the SPX beneath 3400.00 is likely to propel VIX to a much higher level.

In today’s op-ex, Maximum Pain is at 29.00.  Short gamma also begins at that level.  Long gamma starts at 30.00 and may extend to 70.00.  Next week’s op-ex is similar and may influence the rise in the VIX up to 70.00, should SPX decline beneath 3400.00.

ZeroHedge remarks, “Remember VVIX?

They took it higher, but the VVIX has given back the entire squeeze move basically. VIX not so…

Source: Refinitiv

VIX term structure – lower for longer

The VIX front end backwardation is soon all gone. People piled into short term VIX hedges just in time for the squeeze. This is now in puke protection mode…The chart showing the curve shifting sharply lower yesterday compared to Monday (which was a huge shift lower itself).”


TNX has bounced to 37.19 in the futures.  It may prolong the zigzag formation, but that appears unlikely, as significant trending strength may have begun and appears to continue through the weekend.

RealInvestmentAdvice  observes, “Market instability” remains the most significant risk to central banks globally. Despite their desire to combat surging inflation, market instability is a greater risk to global economies due to the massive amounts of leverage. We previously discussed the importance of controlling instability. To wit:

Interestingly, the Fed is dependent on both market participants and consumers, believing in this idea. With the entirety of the financial ecosystem now more heavily levered than ever due to the Fed’s profligate measures of suppressing interest rates and flooding the system with excessive levels of liquidity, the “instability of stability” is now the most significant risk.

The ‘stability/instability paradox’ assumes that all players are rational, and such rationality implies avoidance of complete destruction. In other words, all players will act rationally, and no one will push ‘the big red button.’”


USD futures bounced off the intersection of Intermediate-term support and the upper trading channel trendline at 109.98 to an overnight high of 111.06.  Yesterday’s low appears to be the end of the Master Cycle on day 264.  If so, this may be the beginning of a robust three week rally, as trending strength may intensify.


Crude Oil futures rose to a retracement high of 87.67 in the overnight session.  Overhead resistance is at the 50-day Moving Average at 88.67.  From there it may resume its decline toward the lower trendline of the Broadening Wedge formation at 67.00.  The anticipated Master Cycle low may be due at the end of October.

ZeroHedge comments, “OPEC+ could be on the verge of one of the largest production cuts in two years, a move White House officials would undoubtedly have a ‘panic attack’ as they attempt to dissuade the 23 crude-producing countries and its allies, such as Russia, from making the cuts.

OPEC+ is considering cutting 2 million barrels a day, and on the smaller side, a reduction of 1-1.5 million barrels a day, delegates said. Such a move would be a blow to Washington as the Biden administration has scrambled to unleash record amounts of crude from the strategic petroleum reserve to tame soaring crude prices this summer.

“Higher oil prices, if driven by sizeable production cuts, would likely irritate the Biden administration ahead of US midterm elections,” Citi strategists wrote in a note. “

ZeroHedge further remarks, “As was well-telegraphed – and despite The White House’s sabre-rattling – OPEC+ JMMC has recommended the cartel to go ahead with a historic 2 million b/d production cut.

One delegate has confirmed this cut is from baseline levels. This means the production cut is less than 2 million b/d directly since current actual production levels are already below quota. However, it is still a sizable cut.”


Gold futures reversed sharply down to 1711.75 after testing the 50-day Moving Average at 1735.90 yesterday.  The retracement off the Master Cycle low lasted 4.3 days and the reversal may be the start of a 7-week decline.  The Cup with Handle formation becomes activated at the re-crossing of the Lip at 16.75.  In other words, sell the rally.





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