February 2, 2023

2:02 pm

VIX may be on its way to a Key Reversal day. It made a new low, touching the Cycle Bottom support, reversing from that low.  It has since exceeded the prior day’s close at 17.87, fulfilling the requirements of a Key Reversal.  It also gives us an aggressive buy signal that may be confirmed above the 50-day Moving Average at 20.95.

ZeroHedge remarks, “Mean reversion

Volatility is mean reverting over time for “natural” reasons. You don’t buy protection when you must. You to buy it when you can. We outlined our logic on volatility earlier this week (here). VIX around 18, give or take, is close to the lower part of the “mean reversion” range. Sure, maybe we undershoot, but volatility you trade in “batches”, i.e lean into the trade logic. We would be looking to add a “batch” around these levels.”


12:27 pm

SPX overshot our maximum target.  It was based on the weekly mid-Cycle resistance, now at 4170.00 from 4165.00 two days ago.  As mentioned this morning, this market is being propelled higher by gamma influence.  There is a huge volume of gamma-chasing trades using single-day options.  For example, over 39,000 put contracts have been traded thus far today at the 4150.00 strike.  Even more amazing, over 55,000 call contracts have been traded thus far today at the 4200.00 strike.  This is a veritable feeding frenzy.  However, after 1:00 pm the frenzy may flatten out and profits taken as the close looms.  This is an ideal setup for a key reversal.

ZeroHedge advises, “Here is why, should the market rise just a modest 2% higher from here, what has already been a painful, short-squeeze driven meltup, could become a full-blown capitulatory panic as the Dealers cover shorts and go all-in the upward chase (just as Hartnett warned last Friday in “Another 3-5% Will Feel Like Bathing In Lava If You’re A Bear“).

As Goldman derivatives guru Brian Garrett calculates, at current spot, the Goldman model suggests dealers are long between $2.5-$3bn of option gamma (ie, dealers sell ~14.5k ES1 futures if the SPX rallies 100bps).

But, in the up 3-4% node, the GS model suggests this gamma profile flips from long to flat (dealers are no longer a seller in an up tape, and instead start chasing the market, buying more as stocks accelerate to the upside)


8:00 am

Good Morning!

SPX futures stayed positive, reaching an overnight high of 4146.70.  This may be due to dealers chasing long gamma into the close.  Note that today is day 258 of the Master Cycle and 3 days into the new 12.9-month Primary Cycle.  Today is also a day of trending strength which may make a reversal very sharp and strong.  There is no technical support until SPX reaches the descending trendline at 4006.00.  The 50-day and 200-day Moving Averages are very near 3950.00, with a confirmed sell signal beneath.  Most of yesterday’s blazing spike may have been due to same day call options chasing long gamma above 4050.00 and not to short covering per se.  Should the rally persist into the open, maximum resistance lies at 4165.00.

Today’s op-ex shows Maximum Pain for options investors at 4055.00.  Long gamma starts at 4100.00 while short gamma begins at 4050.00.  There appears to be a growing conviction among the shorts.  There are fewer calls at 4150.00 than puts at 4050.00.

ZeroHedge reports, “Global markets rose, with US futures solidly in the green as tech stocks were set to extend their rally on Thursday, lifted by Powell’s comments on inflation and Meta surging 20% in US premarket trading after the social-media giant’s earnings and buyback news. Summarizing yesterday’s market moving FOMC decision and presser, Goldman said that even though the “FOMC Statement was Hawkish: kept ‘ongoing’ and ‘appropriate’, however “more importantly presser was dovish: 1) Powell’s disinflation language (“we can say the disinflation process has started”, something that’s “welcome, encouraging, and gratifying”) and 2) the fact Powell didn’t warn markets RE easing financial conditions in the last few weeks.” In kneejerk reaction bears everywhere were steamrolled as Powell triggered a marketwide short squeeze.

Nasdaq futures were up 1.3% at 7:45 a.m. ET after the tech-heavy index jumped 2% during the previous session and closed at its highest level since September; the Nasdaq 100 is up 13% this year, having posted the best monthly gain since July in January. The recovery follows last year’s 33% slump, which was the worst since the 2008 global financial crisis. S&P futures added another 0.4% to yesterday’s surge, which pushed spoos to 4152, the highest since August as the consensus bearish trade (JPM, MS, GS, BofA are all bearish) gets steamrolled.”


VIX futures extended lower to 17.49 this morning, possibly due to dealers chasing short gamma from yesterday’s op-ex.  Dealers may use the futures market to obtain their liquidity to pay off matured in-the-money puts, thus the futures are pushed lower, then sold to raise liquidity.  The dip may not last beyond the open.   Once those transactions are complete, the VIX may make a substantial bounce.  A buy signal is made above the 50-dqay Moving Average at 21.03.


TNX has tested the 200-day Moving Average at 33.47, but hasn’t bounced yet.  It’s low thus far is 33.54 on day 253 of the Master Cycle.  It may retest the 200-day, but once it rises above the mid-Cycle resistance at 33.83 it may be on an aggressive buy signal.  TNX is due imminently for a double dose of trending strength.  Should that occur after the reversal, the surprise to the markets may be complete.  The new Master Cycle may extend through late March.  Is Yellen trying to prevent a panic?

ZeroHedge reports, “Amid the escalating debt ceiling standoff which is sure to culminate with fireworks some time in September, the Treasury announced on Wednesday morning that it would offer $96 billion of Treasury securities to refund approximately $67.1 billion of privately-held Treasury notes and bonds maturing on February 15, 2023. The amount was inline with expectations and was unchanged from last month. This issuance will raise new cash from private investors of approximately $28.9 billion. Issuance plans for Treasury Inflation-Protected Securities, or TIPS, were also kept unchanged compared with sizes over the prior quarter.  The securities to be issued are:

  • 3-year note in the amount of $40 billion, to be sold on Feb 7 and maturing February 15, 2026;
  • 10-year note in the amount of $35 billion, to be sold on Feb 8 and maturing February 15, 2033
  • 30-year bond in the amount of $21 billion, to be sold on Feb 9 and maturing February 15, 2053.”


USD futures made a new low at 100.68 this morning on day 280 of the current Master Cycle.  USD may be wrapping up a 25.8-month Cycle, due in February.  Since the current Master Cycle is running over, it may be possible that it had ended on January 18.  If USD does not reverse by the weekend, the chart may be modified to reflect that  and a new Master Cycle low may be seen by the end of the month between 93.50 and 98.25.  The Cycles Model shows a strengthening of the trend starting this weekend.


Crude oil (WTIC) made a new morning low at 75.73 after declining beneath the 50-day Moving Average at 77.81 yesterday.  It is now on a confirmed sell signal.  The Cycles Model calls for a decline that may last through the end of February.  Should it cross the Broadening Wedge trendline near 71.00, that formation may be triggered with the knock-on consequences.  The Wave structure may need to be modified to accommodate an extension of the decline.




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