Update: SPX declined to a new low this afternoon, just above the short gamma wall at 4450.00. A bounce has ensued with the intent (?) of closing at Max Pain at 4495.00. However, this probe may be stopped at 4485.00, which is mid-Cycle resistance. So the decline may resume this afternoon with a minimum downside target of 4415.00, using Elliott Wave guidelines. It is back in negative-to-short gamma, so we will see whether the dealers can defend the current low…or not.
BKX, our Liquidity proxy, resumes its decline as it may retest the 50-day Moving Average at 84.60 today. Beneath that level is a confirmed sell signal. The Cyclies Model infers that the decline may last until early September. If you thought the decline to the March 24 low ws bad, this one has the potential to be a disaster. Third Waves cannot be the smallest. In this case, the Head & Shoulders target may meet this test.
ZeroHedge remarks, “Money supply growth fell again in June, remaining deep in negative territory after turning negative in November 2022 for the first time in twenty-eight years. June’s drop continues a steep downward trend from the unprecedented highs experienced during much of the past two years.
Since April 2021, money supply growth has slowed quickly, and since November, we’ve been seeing the money supply repeatedly contract—year-over-year— for six months in a row. The last time the year-over-year (YOY) change in the money supply slipped into negative territory was in November 1994. At that time, negative growth continued for fifteen months, finally turning positive again in January 1996. ”
SPX extended its Cycle for a day as it finally corrected the 9-day decline with a 45% retracement. I had mentioned earlier that Monday’s high at 4519.84 needed to be met. Yesterday’s morning futures only went to 4517.10, falling short of the retracement requirement, but I gave it a pass. Now that the correction has been made, a decline beneath the mid-Cycle support at 4484.58 tells us the decline may be resuming. Recall that puts are dominant beneath Max Pain at 4495.00 with short gamma beneath 4450.00.
ZeroHedge advises, “Earlier in the week, we warned “the clock is ticking on negative market gamma”, noting that the longer the market remains trapped in negative market gamma territory, the more dangerous it gets because there is more opportunity for fragility (from declining liquidity and shock absorbing gamma) to meet a burst of systematic market risk or other kind of momentum event.
Today, we see a potential ‘event’ in the rebound in CPI (albeit as expected) and – as it does – the US equity market has decided that is a buy, with stocks up over 1% out of the gate (after some initial chop)…
But, just as he did last week, Goldman Sachs’ Flows Guru Scott Rubner has issued a note telling clients to “Sell The CPI Green, Again”.
We mourn and pray for those residents and visitors who lost so much in Lahaina. My wife and I have had many fond memories going back 40 years to our first visit. Now, they are only memories.
SPX futures bounced to 4497.40, testing resistance at 4500.00. The most likely explanation for these overnight bounces, especially since August 3, is due to short gamma. As the SPX closes in short gamma, the dealers and hedge funds have to monetize those short option profits. Many people think of the options market as “insurance.” That could not be further from the truth, as dealer-held positions that cover those options must be sold. In other words, dealers must cover shorts or buy long positions to pay off the profitable put options. To make things more difficult, speculators have been piling into 0-DTE puts, aggravating the daily swings. This condition cannot last. Something may break…and soon.
We will be watching closely at the CPI announcement at 8:30 am.
In today’s op-ex, Maximum Pain for options investors is at 4495.00, which also explains the overnight bounce-back. Long gamma starts at 4540.00, while short gamma begins at 4450.00. There is a very large put wall (7135 contracts) at 4400.00.
ZeroHedge reports, “US equity futures and European bourses rebounded from yesterday’s slump and are higher into CPI, which may provide clues on the Federal Reserve’s next steps, with slight outperformance from MegaCap Tech. As of 7:45am ET, both S&P and Nasdaq 100 futures were up 0.5%. The Stoxx 600 was up 0.4%, with travel and luxury companies among the biggest gainers on speculation that companies will benefit an increase in Chinese tourism spending after Beijing lifted travel curbs. The dollar dropped against all majors except the yen; bond yields are flat and oil slipped while metals and ags prices are higher. Today’s focus is on the CPI print at 8.30am; there are two Fed speakers this afternoon.”
VIX futures are consolidating within yesterday’s trading range. The VIX ix on a confirmed buy signal, which means shares/options may be purchased on the pullbacks.
Next Wednesday’s monthly op-ex shows Maximum Pain for options investors at 17.00. There is a massive put wall at 14.00-15.00. Long gamma becomes very strong at 20.00 and has pockets of strength up to 60.00. Should long gamma take hold, we may see a move very much like the one last seen in March 2020.
ZeroHedge reports, “Expectations for this morning’s must-watch CPI print were for a MoM and YoY rise in the headline, and modest slowing of the core YoY. However, The Fed will be watching its new favorite signal – Core Services CPI Ex-Shelter – which reaccelerated in July (+0.2% MoM, and from +3.9% to +4.0% YoY)…”
The TNX correction may have “bottomed out” this morning as yields may rise with higher inflation (see above article). The 10-year yield rose briefly to 40.38 before pulling back. The Cycles Model points to rising trending strength the rest of this week and early next. Should TNX break out, we may see it rise to 45.00 or higher.
ZeroHedge reports, “When the Treasury issued its latest refunding schedule last week and yields blew up on the ominous TBAC forecast of a lot more issuance on deck, few expected this week’s auctions to be outstanding. Yet yesterday’s 3Y auction was nothing short of stellar, and despite fears that we would see some blow up in today’s sale of $38BN in benchmark 10Y paper, not only was today’s just concluded auction strong but it was in fact one of the strongest 10Y auctions this year.”
USD futures slid to 101.60 before a bounce brought it back toward 102.00. For the time being, Intermediate support at 101.56 may be the low. The 50-day Moving Average is at 102.17. A breakout above the 50-day may mean a resumption of the rally.
WTIC stretched its Master Cycle to the last possible day – 275, before an overnight reversal. The Cycles Model implies a sharp decline into the end of August may be on deck. The Wave structure suggests a decline to the mid-60’s may be in order in this decline.
ZeroHedge notes, “Oil prices are higher (again) this morning, with WTI testing $84 – 2023 highs – as fears of global markets tightening continues. European NatGas prices are also pulling oil (and coal) higher and a weaker dollar is helping.
“There is no doubt that there is plenty of momentum here, and traders are really ignoring all the bad news that is embedded in the Chinese data, which many analysts are trying to drum as loud as they can,” Naeem Aslam, chief investment officer at Zaye Capital Markets, said in a note.
“Oil traders are feeling highly comfortable with their approach when it comes to trading oil prices, and the clear trend seems to be skewed to the upside,” he wrote.
After last week’s record-breaking drawdown, all eyes will be on the crude inventory report for a bounce (or follow through).”
Gold futures tumbles through critical supports yesterday, creating a confirmed sell signal. The overnight futures then bounced to 1963.30 before crashing back through the 50-day support at 1958.51 and Intermediate support at 1953.78. Volatility is rising and with it a possible decline lasting through late September. The initial support for this decline may be the Cycle Bottom at 1754.23.