The Practical Investor

1:00 pm

SPX has now fallen into a bear market.  In addition, it is embarking on Wave [iii] of 3 of (3) of c, a lethal combination.  We may expect this Wave alone to reach 3000.00.  Most analysts are reading this formation as a Head & Shoulders with a minimum target of 3400.00.  The Cup with Handle is much more  bearish.   Short gamma is in full force and may intensify over the next couple of weeks and may last as long as mid-June.

ZeroHedge remarks, “Traders will close old positions for an estimated $1.9 trillion of derivatives while rolling out new exposures on Friday. This time round, $460 billion of derivatives across single stocks is scheduled to expire, and $855 billion of S&P 500-linked contracts will expire according to Goldman.

As SpotGamma notes, this expiration is not particularly large for SPX or QQQ with our models showing ~15% of delta & gamma expiring, but sizeable for SPY (37% of gamma, 20% of delta).

The impact of the sizable 3900 strike gamma exposure cannot be understated however…

Most of this position expires today, as does a large percentage of the at-the-money SPX/SPY/QQQ options position (seen in light grey). The expiration of these positions reads as less support for next week.”

8:00 am

Good Morning!

SPX futures reached a morning high of 3952.20, under the 38.2% (cash) Fibonacci level of 3958.38.  SPX is still deep within short gamma territory beneath 3975.00 in the morning options.  Oddly enough, a huge put holding at 4000.00 has been removed, easing the downward pressure.  Both am and pm options are positive above 4000.00, with Index options lighter in the pm.

SPY (close: 389.46) options, which close this afternoon, favor puts at 412 and below, with short gamma starting at 400.00.  Should the SPX open lower, a firestorm of volatility may ensue.

ZeroHedge reports, “Contracts on the S&P 500 advanced 1.1% as of 7:15a.m. in New York suggesting the index may be able to avoid entering a bear market (which would be triggered by spoos sliding below 3,855) at least for now, although today’s $1.9 trillion Option Expiration will likely lead to substantial volatility, potentially to the downside.

Even with a solid jump today, should it not reverse as most ramps in recent days, the index – which is down almost 19% from its January record – is on track for a seventh week of losses, the longest such streak since March 2001. Futures on the Nasdaq 100 and Dow Jones indexes also gained. 10Y TSY yields rebounded from yesterday’s tumble while the dollar was modestly lower. Gold and bitcoin were flat.”

NDX futures rose to 12094.00 in the overnight market and has eased lower   It’s 38.2% retracement value is 12092.69.  This morning puts are favored beneath 12150.00 with short gamma at 12100.00.  An open beneath that level may cause increased volatility.

In tonight’s expiration, QQQ (289.58) is loaded with puts beneath 300.00, with short gamma starting at 290.00.

ZeroHedge remarks, “An interesting way to exercise the brain is to imagine what some of us might consider the unimaginable. That is what I ask you to do now. Many investors continue to believe that even if the stock market drops they will be smart enough to get out after taking only a minor hit. Others simply think no way exists for these markets to fall sighting a lack of investment alternatives and what they see as the Fed put having their back.

After the financial crisis in 2008 when the market took nasty and violent swings many investors came away with the feeling they learned a few things that will enable them to leap to safety before it is too late. That brings us to today.

Almost everyone agrees that after years of moving ever upward this bull market is long in the tooth. Today with  the economy rapidly slowing and debt across the world having exploded it seems any opportunity to panic the bears should not go unexploited. It is against this backdrop that one allows optimist fellas to think, this time is different.”

VIX futures reached a low of 28.41 this morning, but has regained some of its losses.  Most analysts watch the top of the chart and observe that VIX is no higher than it was in January.  However, they fail to observe the rising lows, adding upward pressure on the VIX.  A breakout may be explosive.

TNX is retesting Intermediate-term resistance at 28.47 this morning prior to heading lower.  The Cycles Model is warning that a very large surge of liquidity may be heading into Treasury notes as it leaves equities through the end of the month.  Let me warn that a Wave 4 may descend to the top of Wave 1, should the conditions be met.

USD futures may be bouncing off its Cycle Top support at 102.87 as it consolidates beneath its high.  The Cycles Model has USD declining through mid-June.

3:25 pm

After the institutions sold this morning, there was an expectation that foreign and retail investors would pick up the buying.  That did not happen and now institutions and mutual funds have stepped in to sell again.  Unfortunately the dealers and hedge funds supporting the options market are under-hedged and must sell/short.  This may not end well for them.

1:58 pm

SPX reached the 38.2% (futures) retracement at 3939.00 given this morning.  There may be another attempt at the 38.2% (cash) retracement at 3958.00 before the close.  Should stocks go down from here, there may be a firestorm of selling.  35% pf SPX short gamma comes off tomorrow, but only if SPX can rally back above 4000.00 in the next 24 hours.  Otherwise all of those puts must be hedged by the dealers.  I am not sure I agree with Charlie McElligot, but his comments are always interesting.  It appears that the May 12 low was the Master Cycle low after all, as today would be day 266, 12 days into a whole new Cycle.  That gives us a very short, 4.3-day retracement  and  the beginning of new decline lasting several weeks, should the market fail here.

ZeroHedge observes, “Yesterday was different.

Bond yields tumbled with stocks (they have tended to rise recently as stocks tanked)…

…and VIX spiked as stocks were spanked (it has been decoupling, exuding calmness for a few days until then)…

The change was catalysed by two factors:

1) “Hard-Landing” / “Recession” narrative keeps gaining-steam, so bonds are beginning to “work” as a risk-asset hedge, and

2) Yesterday’s VIX-piry (and tomorrow’s Op-Ex) removed much of the overhang suppressing vol, crushing hopes for some form of ‘stabilization’

So given the ‘change’, what happens next?”

11:15 am

I have had three failed attempts to log in to my brokerage account.  On the third attempt, they messaged me back, asking that I call them (for my protection).  My attempted call was refused by my cellular company, saying they were taking emergency calls only.  I wonder if this is a nationwide phenomenon???  So far, the internet and email are still working.

10:29 am

SPX made a 22% retracement to 3923.90, then gave up the ghost in an epic failure of a retracement.  I have often mentioned that the institutions make their largest play in the first hour of the day, then return in the final hour for the “mop up.”  Having been unable to regain the morning losses, the big players must determine whether to go short or not for the rest of the day.  Will this be a 10% down day?

8:30 am

Good Morning!

NDX futures dove to 11700.90, just above the previous low, which should put us on high alert for a retracement back to 12573.00.  Remember, Friday is a huge options expiration day and all the indices are in serious short gamma.   While yesterday’s decline was clearly impulsive, the powers-that-be may make every effort to redeem their predicament.  The 50% retracement value is 12200.00.  Should the bounce exceed that, the chances of an even higher  retracement may prevail.  I would prefer the bounce to stay beneath the 38.2% retracement at 12100.00.

SPX futures did similarly, pausing at 3858.90, just .03 above the previous low.  Should the SPX break down further, the decline remains intact.  However, should the low hold, the probability of a strong retracement arises.  The 50% retracement is as 3974.00, while the preferred 38.2% retracement lies at 3939.00.  Thus far the futures are lingering near the low, so we wait for a move to clarify the situation.  Should the cash market gap down beneath yesterday’s close, it may be favorable to an extended decline from here.

ZeroHedge reports, “US stock futures slumped again, extending yesterday’s brutal selloff that erased $1.5 trillion in market value on concerns about everything from slowing growth, to Chinese lockdowns, to soaring inflation and tightening monetary policy. Contracts on the S&P 500 were down 1.2% 7:30 a.m. in New York, having earlier dropped to 3,856, one point away sliding 20% from January’s all time highs, and triggering a bear market. The underlying index tumbled 4% on Wednesday, the most since June 2020, as consumer shares cratered after Target slashed its profit forecast due to a surge in costs. Nasdaq 100 futures were down 1.2%. 10Y TSY Yields slumped about 7bps, dropping to 2.833, while the dollar also dropped after yesterday’s surge; bitcoin was flat around $29K.

VIX futures rose to a new high at 33.11, possibly testing Cycle Top resistance, but not yet threatening the neckline near 40.00.

TNX opened beneath Intermediate-term support at 29.28, indicating a continued decline.  The Cycles Model suggests a continued decline through the end of the month.

ZeroHedge observes, “There’s an alarming lack of conviction in the way markets are flip-flopping all over the place, and that’s a tribute to the epoch-making transformations occurring across the global economy.

In case you think that’s an exaggeration, consider what’s been going on in Treasuries, often cited as the world’s deepest market and a potential haven for investors panicked into prizing return of capital over returns on capital.

The past two days saw the benchmark 10-year yield jump 10 basis points and then drop by the same amount, as traders gyrated between inflation and recession fears.

USD futures sank to a new low at 102.95 this morning.  The combination of lower confidence and lower yields are taking their toll on USD.

ZeroHedge remarks, “In a recent ‘Chart of the Day’ from DB’s Jim Reid, the credit strategist makes it very clear not only what comes next to the US economy (that would be stagflation for anyone who happens to be an idiot, or is a central banker, but we repeat ourselves), but also how much the consensus has moved for the US economy over the last year.

And while Reid would still not call real GDP growth at just below 3% this year “stagflation,  he admits that the direction of travel is clearly moving in that direction, especially for 2023, which is when DB’s base case for a recession kicks in (to this day, DB remains the only bank which has recession penciled in as its 2023 base case; we expect every other bank to follow suit in the next 2-3 months).”

12:38 pm

As ZeroHedge mentioned, liquidity coming out of stocks is pushing the 10-year T-Note yield down beneath the Cycle Top support at 29.16.  The 10-year yield may go considerably lower over the next three weeks.

12:28 pm

This decline is beginning to show its legs as the last two days’ lows have been taken out.   The next level of support may be at the 2-hour Cycle bottom at 3870.86.   Should it be exceeded, the May 12 low at 3858.87 is the next candidate.  The bear market in the SPX begins at 3855.00.  Good luck with that.  The possibility of a retest of yesterday’s high remains until support is taken out…

ZeroHedge advises, “Remember the rally yesterday and how great that felt… “is the bottom in?” etc… yadadadada… Well… it’s gone…

US equity futures are tanking after the cash markets open, taking out yesterday’s lows…

As Nomura’s Charlie McElligott notes, it appears this is the potential unwind of the “TINA” phenomenon, as, thanks to the repricing of the risk-free rate – then pushing into yields on spread-product – “there is an alternative” to equities once again.”

8;10 am

Good Morning!

NDX futures hit a morning low of 12407.00 and appears to remain near the bottom.  The current Master Cycle is not due until the end of the month.  Today’s action may determine whether that is a new low or not.  this may be a minor Wave 2 retracement and may be smaller in size and duration.  If so, the correction may be complete and a panic decline may be in the works.

ZeroHedge remarks, “One month after the April Fund Manager Survey was downright “apocalyptic” with the majority seeing a bear market and stagflation – yet nobody rushing to sell – and with optimism plunging to levels right before Lehman, today Bank of America published the latest, May FMS (available to pro subscribers in the usual place) in which the bank’s doom-and-gloomy Chief Investment Strategist Michael Hartnett (who most recently warned that the bear market will end when the S&P hits 3,000 in October) found that his view is shared by a growing number of even more apocalyptic Wall Street professionals, because the survey which polled 331 panelists managing $986 billion in AUM, revealed global growth expectations plunged even more compared to last month, and dropped to fresh all-time lows (net -72%) …

… with profit expectations slumping past the COVID lows to net -66% (from 63%), the weakest since Oct’08, smack in the middle of the Global Financial Crisis. (note lows in global profit expectations consistent with other crisis moments such as LTCM, Dotcom bubble burst, Lehman bankruptcy, and COVID)…”

SPX futures touched 4097.50 after the close, then hit a low of 4053.10 this morning as the reversal appears to be underway.  From a technical point of view, the Lip of the Cup with Handle near 4015.00 was due to be retested.  In addition, from a Cyclical point of view, the Cycle bottom must also be retested before proceeding to much lower levels.  This may be the beginning of a panic Cycle that everyone has been fearing.  today is day 258 of the Master Cycle.  The two choices are (1) the MC was made last Thursday or (2) it may be made in the next 4.3 days.  A panic decline here will undoubtedly move the MC low to next Tuesday.

In today’s expiring options, the Max Pain level is 4090.00.  Calls dominate above 4100.00, but only by a thin margin.  In other words, long gamma is nowhere to be seen.  Short gamma appears at 4000.00, but the lack of calls may cause a slippery slope at a higher level.

ZeroHedge reports, “The brief bear market rally in US stocks was set to end with a whimper following Tuesday’s strong dead cat bounce, after Fed Chair Jerome Powell gave his most hawkish remarks to date. Hope that China lockdowns would soon end turned to skepticism, as the yuan slumped after its biggest gain since October, while dismal guidance from Target – which warned that inflation was crushing margins – confirmed what Walmart said yesterday, namely that the US consumer is running on fumes. An 11% plunge in the latest weekly mortgage applications only reaffirmed that a hard-landing is inevitable and just a matter of time. Nasdaq 100 futures dropped 1%, while S&P 500 futures slipped 0.7% after US stocks surged on Tuesday. Treasury yields hit session highs, rising back to 3.0%, and the dollar snapped a three-day losing streak. Bitcoin got hammered again, sliding back under $30k.”

VIX futures rallied above the 50-day Moving Average, hitting a morning high of 26.97 thus far.  Once the VIX exceeds the Neckline of the Head & Shoulder formation, a reasonable target may be 55.00 for Wave 3 of (3).  Wave 5 usually follows quickly on the heels of Wave 3, so an MC high in the VIX may occur in early June.

TNX futures spiked to 3.015 before pulling back beneath 3.000 this morning.  What follows may be a powerful drawdown, as Wave 4 may decline as far as the top of Wave 1.  the Cycles Model suggests that this may happen between now and the end of the month.  This may be the last month to lock in a favorable mortgage rate as rates go down before the final push higher this summer.

ZeroHedge comments, “Following March’s modest rise in Housing Starts and Permits, analysts expected reality to catch up with the homebuilder market in April (just as we saw in the NAHB sentiment survey slumping to 2 year lows). Housing Starts and Building Permits both dropped in April but the picture was mixed with Starts falling just 0.2% MoM (against -2.1% MoM exp), but that was due to a huge downward revision in March Starts from +0.3% to -2.8% MoM?!

Building Permits tumbled 3.2% MoM (more than the expedcted 3.0% MoM drop) with only minimal revisions to March.”

USD futures consolidates in the overnight market as they approach the Cycle Top support.  That may soon be broken as the USD is due for a decline through the middle of June.

9:25 am

The  GSCI Ag Index broke through the neckline of its Head & Shoulders formation yesterday.  This is a fresh buy signal that cannot be ignored.  While the new Master Cycle may top out on or near May 27, the Cycle following it may quickly recover and continue its rise through mid-August.  While liquidity may have a part to play in this asset class, shortages may be the real culprit.

ZeroHedge reports, “Italian League party leader Matteo Salvini has warned that if the war in Ukraine does not end soon, chronic food shortages will cause an immigration wave that will lead to 20 million African migrants trying to enter Europe.

If Ukrainian grain supplies continue to be impacted, Salvini cautions, “Significant hunger is expected on the African continent, which will be a humanitarian, then a social, and finally an Italian problem.”

“Without peace there will be famine in the autumn and 20 million Africans will be ready to go,” he added.”

ZeroHedge states further, “If you think that the food and diesel shortages are bad now, then you will be absolutely horrified by what the globe is experiencing by the end of the year.  All over the planet, food production is being crippled by an unprecedented confluence of factors.  The war in Ukraine, extremely bizarre weather patterns, nightmarish plagues and a historic fertilizer crisis have combined to create a “perfect storm” that isn’t going away any time soon.  As a result, the food that won’t be grown in 2022 will become an extremely severe global problem by the end of this calendar year.  Global wheat prices have already risen by more than 40 percent since the start of 2022, but this is just the beginning.  Meanwhile, we are facing unthinkable diesel fuel shortages in the United States this summer, and as you will see below there are “no plans” to increase refining capacity in this country for the foreseeable future.”

7:45 am

NDX futures rose to 12540.90 as it seeks to retest either the Cycle Bottom resistance or the Lip of the Cup with Handle formation.  NDX and SPX are on slightly different Cycle patterns, where the SPX appears to be indicating bottoms, while NDX Cycles indicate tops.  In this case, the NDY Cycle suggests a potential Master Cycle high on or near May 25, eight days from now.

ZeroHedge observes, “In addition to the mauling suffered by the OG of all tech investors, Tiger Global, which we profiled earlier and which saw widespread sales and liquidations in its tech-heavy portfolio, a rundown of the latest 13F data reveals that many other hedge funds also cut their exposure to the stock markets worst performing sectors in the first quarter – primarily tech – while significantly increasing their holdings of surging energy shares, according to a Bloomberg analysis of the data. Overall, the moves have been beneficial to the funds with the sectoral trends continuing into the second quarter, and adverse to those funds – like Tiger and its offspring – which retained an overweight exposure to tech.”

SPX futures made an overnight high of 4086.00, then eased down, a bit.  There is a distinct probability that this bounce is a Wave [a], while Wave [b] may reverse down to a deeper low by the end of the week, which may be a closer fit to the Master Cycle (day 258).  Today is day 257.

Today’s options expiration shows Max Pain at 4005.00.  While options are positive above that level, the call population is thin and long gamma doesn’t kick in until it hits 4100.00.  Puts are favored beneath 4000.00, with short gamma at 3900.00.  That gives the dealers wriggle room all the way up to the Lip of the Cup with Handle without suffering serious damage until Friday.  You will notice that there are options expirations every day of the week, now.  The key is Friday’s options expiration, in which calls are virtually nonexistent and  puts are favored beneath 4200.00 with short gamma starting at 4100.00.  Considering the overhead resistance at 4100.00, Friday’s options pose a serious threat to the longs.  Spot Gamma thinks that capitulation risk lies at 4000.00.

ZeroHedge reports, “Another day, another dead cat-bouncing, bear market rally.

After Monday’s flattish session which saw tech names slump on fresh inflation fears, Nasdaq futures rebounded on Tuesday, setting up technology stocks for solid gains after a six-week rout as investors were encouraged by China’s easing covid lockdowns and amid speculation that Beijing regulators may ease a yearlong clampdown on internet companies at an upcoming meeting with tech executives. Nasdaq 100 futures jumped 2% by 7:00 a.m. in New York after the underlying gauge sank on Monday on concerns about a slowdown in economic growth; S&P 500 futures rose 1.6%. Treasury yields rose modestly above 2.90%, and the dollar retreated. Bitcoin managed to rebound back over $30K.”

VIX futures made a low of 26.49, testing the 50-day Moving Average at 26.36 and making a 55% retracement.  The Wave structure reaches parity and the 61.8% retracement value near 24.50.

ZeroHedge reminds us, “Abandoning “free puts” hurts

There has been three puts working in favor of the “longs”: the Fed put, the BTD put and the bond/equity diversification put. All have failed over past months. As BofA writes: “The Fed, in fact, has gone from suppressing vol and supporting risk assets to supporting vol and suppressing risk assets (from long Fed put to short Fed call)”. The investment bank argues for put collars as a favorable hedging strategy. We are slightly higher to when they recommended the strategy of buying the SPX Sep 3875/3375 put spread and selling the 4375 calls. From a vol point of view we like the logic.”

TNX has bounced back above the Cycle top support/resistance area.  This may be indicative of money flowing back into stocks, temporarily.  The Cycles Model suggests the decline in TNX may resume until the end of the month.

USD futures decline to 103.25 in the overnight session, confirming that the correction may end in a decline through the middle of June.  The target may be either the Broadening Wedge trendline at 97.00 or the mod-Cycle support at 96.52.

3:14 pm

Today’s action implies that the Master Cycle low may have been made last Thursday, May 12, on day 252 of the Master Cycle.  There is a strong alternate outlook that there may actually be a lower low in the next 8-9 days that may qualify as the actual MC low.  Thursday’s low occurred on day 44 from the Wave (2) high, making this decline a shorter one than the Wave (1) decline that was 52 days in length.  Should that be the case, a retracement back to the Lip of the Cup with Handle may follow.

8:15 am

Good Morning!

The Shanghai Composite Index has begun its decline into Wave 5 of Wave (3) of Primary Wave [C], a very strong degree.  This may have a great influence on the tech-heavy NDX.The Cycles Model suggests the decline may last through the end of May, which may stretch the decline in U.S. stocks, especially the NDX.

ZeroHedge reports, “Three things we learned last week:

1. China’s credit growth plunged. Friday’s data showed banks lent 645 billion yuan ($94.9 billion) of new loans in April, when Shanghai was locked down. It was less than half of the amount expected, and the lowest since 2017. The credit slump creates a strong case for policy easing, as Bloomberg economist David Qu wrote. Indeed, nine of 14 economists surveyed by Bloomberg expect the benchmark one-year loan prime rate will be cut this week.

Lower rates may help on the margin, but when Covid restrictions disrupt the economy and life, business and households may remain reluctant to borrow to expand production or buy homes. The biggest stimulus would be a turnaround in public-health policies.”

NDX futures are coming down after reaching a high of 12496.00.  Despite the massive rally on Friday, the rate of decline is steepening.  In today’s expiring options, the Max Pain zone is near 12425.00. Puts are favored in the options at 12400.00 and below.

In the NDX options (301.94), Max Pain is at 306.00 and puts are favored at 305.00 and below, with short gamma starting at 300.00.  You can see that the dealers and hedge funds supporting the options market avoid short gamma at all costs, since that is the trip wire for a panic decline.

ZeroHedge reports, “Friday’s bear market rally dead-cat bounce appears to be over, and global stocks have started the new week in the red with US equity futures lower after a “huge miss”, as Bloomberg put it, in Chinese data fueled concerns over the impact of a slowdown in the world’s second-largest economy. As reported last night, China’s industrial output and consumer spending hit the worst levels since the pandemic began, hurt by Covid lockdowns.”

SPX futures rallied to 4045.00 before easing back down to the Max Pain level at 4025.00.  While the call are thin above that level, puts begin in earnest at 4000.00 and short gamma kicks in at 3950.00 to 3975.00.  Note that current market valuations are being compared to 5 and 10-year averages, precisely when the Fed was pumping liquidity.  Things will get much worse…

ZeroHedge remarks, “Wilson now worried about bear market rally

In the short term that is. The real bear has not fully revealed himself yet…Wilson: “The bottom line is that this bear market will not be over until either valuations fall to levels (14-15x) that discount the kind of earnings cuts we envision, or earnings estimates get cut. However, with valuations now more attractive, equity markets so oversold and rates potentially stabilizing below 3%, stocks appear to have begun another material bear market rally. After that, we remain confident that lower prices are still ahead. In S&P 500 terms we think that level is close to 3,400, which is where both valuation and technical support lie” (Morgan Stanley Strategy)

Not expensive

The forward 12-month P/E ratio for SPX of 16.6 is below the 5-year average (18.6) and below the 10-year average (16.9).”

VIX futures have begun a rally from Friday’s low that may trigger the Head & Shoulders neckline.  The Cycles Model suggests a burst of trending strength on Tuesday that may break the range-bound consolidation that has been in place since December.

TNX may be retesting the Cycle Top at 28.82 this morning.  The Cycles Model suggests the decline may continue through the end of May, with the 50-day Moving Average as the prime target.  This falls in line with the idea that the stock market decline may also extend to the end of the month.

USD futures show that it reached a weekend high of 105.15.  This morning it has eased back down.  The Cycles Model shows trending strength today and again at the end of the week.  This may be due for the demand for USD from the liquidation of stocks.

11:00 am

ZeroHedge gives more detail, “The template of 1929 and 1987 is coming into focus in recent trading days.

Let’s start with the 1929 crash. The Dow Jones Industrial Average began the week of October 5 with a slight gain, and then the rest of the week (October 6-9) were all down days as well. This first week down brought stocks to new intermediate lows that had held for several months. The next week, the DJIA opened up down on Monday, October 12 and traded down each day of the week. Then, bang, on October 19, 1929 we experienced a 20% waterfall decline, which carried into Tuesday. The whole 11-day episode erased 28.94% from the DJIA.”

10:06 am

With options expiration looming, the need to get SPX into the Max Pain zone is immense.  However, it may not last.  The Cycles Model suggests the next 4.3 days may be give us a real panic Cycle.  Prepare to embark on the roller coaster.

ZeroHedge remarks, “Futures surged overnight and holding gains after the cash market open this morning, having bounced almost to the tick off the ‘bear market’ trigger levels for the S&P 500.

As SpotGamma warns, outside of the very large 4000 strike, the call positions remain light. We note that in particular the strikes above hold little in the way of call gamma, and so there is little to offer resistance above 4000.

It just seems like the market is “full up” on downside protection, and chasing higher IV’s/short-sale risks remain high (ie. you can get face-ripping rallies here).”

7:35 am

Good Morning!

NDX futures rose to 12178.80 before easing down.  The decline is complex and wide-ranging, giving false signals along the way.  Today the Cycles Model suggests a severe down day despite the morning rally. Should the Model be accurate, the decline may last into Monday with a brief respite on Tuesday.  The final drawdown for Wave 3 of (3) may last through late Monday, May 23 or early Tuesday, May 24.  Options are deep in short gamma territory and may not let up until May 20.

ZeroHedge observes, “Two weeks ago, after Twitter reported disappointing earnings and admitted that it was “overestimating” millions of users since 2019, we asked whether this “merits a purchase price adjustment.”

A few days later, noted short-seller Hindenburg Research picked up on this and in a report warned that Twitter is overpriced and that there is “significant risk” that the deal could get repriced lower.”

The NDX Hi-Lo Index shows approximately 50% of NDX stocks making new 52-week lows.  In the coming week(s) we may see over 80% making new 52-week lows.

SPX futures may be hitting trendline resistance from the short-term trading channel near 3980.00 (not shown).    Today’s pm options expiration show Max Pain at 4025.00.   Expiring options turn positive at 4050.00, while expiring options turn short at 4000.00.  Short gamma begins at 3925.00.  Little wonder it closed at 3930.00 yesterday.  Options still control the flow, but as more investors bail, options expiration is becoming more painful for the dealers.  The Cycles Model suggests today may be a strong down day by the close.

ZeroHedge reports, “After dropping to the edge of a bear market, with Eminis sliding to precisely 3,855 or exactly 20% lower than the all time high, US index futures rebounded sharply from the brink (the same way they did on Dec 24, 2018 when the S&P spent a few minutes in a bear market) as the stabilization of much of the cryptosphere (where no new stablecoins suddenly cratered to 0) and an overnight easing in Treasury yields provided some relief after a two-day slide. Nasdaq 100 futures climbed 1.7% as of 730 a.m. in New York. S&P 500 futures were also higher, rising 1.1%, as high as 3976 after dropping to 2,855 yesterday. Twitter shares plunged as much as 26% in New York premarket trading after Elon Musk tweeted that his deal for the social media company was “temporarily on hold.” Yields on 10-year US Treasury yields fell for a fourth consecutive day on Thursday, reaching 2.85%, before edging higher again on Friday. The dollar index dipped but remains on course for its longest streak of weekly gains since 2018, while bitcoin and ether reversed several days of harrowing losses to rise back over 30,000 and 2,000, respectively.”

VIX futures declined to 30.25 in the overnight session.  The May 18 options expiration shows Max Pain at 29.00 while expirations turn long at 30.00 and long gamma begins at 35.00.  To the extent that VIX has remained range-bound since December makes it difficult to predict where VIX may go next.  That leaves most investors unwilling to hedge at these prices.

ZeroHedge (TME) remarks, “Muted VIX in a pic

VIX is not higher than where it was on previous sell offs this year when the index was much higher. GS writes: “Even though the VIX’s reaction to recent spot downside has been mild, its high starting point leaves vol high overall, and we like strategies with a short volatility bias, including put selling and 1×2 call spread overlays.” We agree on this point.

TNX popped above the Cycle Top resistance at 28.65 but may not stay there long.  The Cycles Model suggests the decline may last through the end of the month.

ZeroHedge reports, “After a stellar 3Y auction and a subpar 10Y sale yesterday (although judging by the plunge in yields those who bought it are quite happy today), moments ago the Treasury concluded the week’s refunding issuance where investors were eyeing to see if today’s sale of $22BN in 30Y paper would translate in the first 3% coupon since March 2019.

It did not, because the auction stopped just below 3.00%, and even though the When Issued was trading at 3.006%, the auction stopped through the When Issued by 0.9bps at 2.997%, which nonetheless was well above last month’s 2.815% and the highest since the 3.014% in March of 2019.”

USD futures consolidated beneath yesterday’s high at 104.96 this morning.  It may go higher as another burst of trending strength may be due this weekend.

Gold futures passed beneath the weekly mid-cycle support at 1828.11 yesterday and continues its decline today, hitting a low of 1799.70.  The uptrend is broken and the decline may extend to mid-June, per the Cycles Model.  The goldbugs are strangely silent, as it flies in the face of “gold as money.”  In fact, the loss of liquidity means that gold is like any other commodity that may crash with the onset of a recession.

ZeroHedge proclaims, “The paper price of the yellow rock sjust tumbled back below $1800 for the first time since early Feb…

This is well below pre-Putin-invasion levels and Gold is now underwater for 2022…

…because nothing says ‘sell paper gold’ like raging global inflation…”

3:38 pm

Some analysts believe that stocks are becoming reasonably priced at 15-16 times forward earnings.  That’s a bunch of B.S.  The attitude of the glass half full is still holding sway.  In reality bear  markets are likely to bottom at 5-7 times earnings.  By contrast, the 2009 low was at 13.7 times earnings.  We haven’t seen a real bear market since 1981,when I entered the business.  In addition, earnings estimates are still too high.  We are in a recession and margins will become much thinner.

12:14 pm

The Ag Index has launched from its 50-day Moving Average at 561.80 to begin a new Master Cycle.  This Cycle may only be about 3 weeks in length, as the prior MC stretched.  The objective is to rise above the neckline at 592.00.  Should it rise with sufficient amplitude, the neckline may then offer support in the next Cycle.  An alternate view is that it remains beneath the neckline for another test of downside support, due to market liquidity issues.  Stay posted on this one.

ZeroHedge reports, “As global food prices remain at record highs and war wages in Europe between two of the world’s largest grain suppliers, troubling videos from China show farmers slashing winter wheat production ahead of harvest times, adding even more uncertainty about food security.

Bloomberg reports China’s agriculture ministry is very concerned about the matter. The ministry is investigating if there’s illegal destruction of wheat crops.

The ministry said this comes three weeks before harvests, adding the crop was subjected to devastating floods late last year. There’s also concern that soggy field conditions in southern China due to abnormal rainfall could affect farmers’ ability to harvest.”

ZeroHedge further explains, “If you think that things are bad now, just wait until we get into the second half of this year.  Global food supplies have already gotten very tight, but it is the food that won’t be produced during this current growing season in the northern hemisphere that will be the real problem.  Worldwide fertilizer prices have doubled or tripled, the war in Ukraine has greatly reduced exports from one of the key breadbaskets of the world, a nightmarish bird flu pandemic is wiping out millions of chickens and turkeys, and bizarre weather patterns are absolutely hammering agricultural production all over the planet.  I have often used the phrase “a perfect storm” to describe what we are facing, but even that phrase really doesn’t seem to do justice to the crisis that we will be dealing with in the months ahead.

10:08 am

The Banking Index, our liquidity proxy, has been making new lows as it approaches its Master Cycle low due next week.  To pinpoint it more precisely, the Cycles Model informs us of a triple strength play around May 20.  That makes the Cup with Handle target possible, as impossible as it may seem.  It appears that liquidity may become scarce in the following week.  Don’t let it surprise you.  Note that the BKX has already fallen nearly 30% since the first of the year.

7:50 am

Good Morning!

The Shanghai Composite Index appears to be completing its last period of strength in the current Master Cycle prior to a larger decline into the end of May.  While it seems excessive, the Cup with Handle target is still in the running for the final resting place.

ZeroHedge comments, “The most recent macroeconomic figures show that the Chinese slowdown is much more severe than expected and not only attributable to the covid-19 lockdowns.

The lockdowns have an enormous impact. Twenty-six of 31 China mainland provinces have rising covid cases and the fear of a Shanghai-style lockdown is enormous. The information coming from Shanghai proves that these drastic lockdowns create an enormous damage to the population. Millions of citizens without food or medicine and rising suicides have shown that the infamous “zero covid” policy often disguises mass population control and repression.

It is easy to use the covid-19 lockdowns as the reason for the weakening of the Chinese economy but that would be a gross simplification. The problem is deeper.”

NDX futures continue the decline on heavy volume after yesterday’s failed bounce.  Tomorrow’s options are deep into short gamma beneath 12100.00.  The heavy population of puts tapers off after May 20.  While the Cycles Model suggests the Master Cycle may on or shortly after May 20, the VIX suggests a probable extended Master Cycle.  The Cup with Handle target may be achieved by then.  Analysts are still predicting a bounce, so we aren’t close, yet.

SPX futures dipped beneath 3900.00 this morning as the decline extends.  SPX is now in free fall territory and whatever happens today may only be a prelude to another very strong down day tomorrow. In tomorrow’s expiring options the Max Pain zone is 4095.00.  Puts dominate the options population beneath 4070.00 and short gamma begins at 4050.00.  While the options taper off on Monday, there is another large crowd of puts on Friday, May 20.

ZeroHedge reports, “The relentless slow-motion crash sparked by the Biden Fed (which is hoping that a market collapse will halt inflation) that has sent stocks lower for the past 6 weeks continued overnight, and Wall Street’s main equity indexes were set for more declines after losing $6.3 trillion in value since their late-March high as stubborn inflation in the world’s biggest economy bolstered the case for more aggressive monetary tightening by the Federal Reserve.

Nasdaq 100 futures were down 0.7% at 730am in New York, a day after the underlying gauge sank to its lowest since November 2020 on concerns that higher-than-expected inflation in April would lead to an even more aggressive pace of policy tightening by the Fed. S&P 500 were last down -1% and dropping below 3,900, the level. And with eminis trading around 3,900 means that stocks are now at bearish Morgan Stanley’s year-end base case price target of 3900, and 100 points away from Michael Hartnett’s Fed put of 3,800.”

While the NYSE Hi-Lo Index decline wasn’t as steep yesterday as previous days, the Cycles Model suggests a very deep day today in the Hi-Lo.

VIX futures made an overnight high at 34.76.  In the May 18 options expiration, the Max Pain zone is 29.00 .  Options turn positive at 30 and long gamma starts at 35.00.  A breakout may change the sentiment of the VIX options market and a rally above 40.00 may be unstoppable.

TNX futures dropped to  an overnight low of 28..16, but opened slightly higher.  Crossing the Cycle Top support at 28.42 creates a sell signal.  The Cycles Model suggests the decline may last through the end of May.

USD futures made yet another high at 104.74 this morning.  Today and the weekend may prove to be the high points of this corrective expansion as the USD may reverse down early next week.  The Cycles Model suggests a decline through mid-June in the current Master Cycle.

West Texas crude challenged the upper trendline of the Broadening Wedge at 106.20 this morning, then changed course to a slight loss.

Investing.com — The Organization of the Petroleum Exporting Countries cut its forecast for world oil demand this year, due to the effect of COVID-19 lockdowns in China and the war in eastern Europe.

In its monthly report for May, OPEC said it now expects global demand to grow by an average of only 3.4 million barrels a day this year, down from a prior estimate of 3.7 million b/d.

That masks a dramatic slowdown in growth between the first and the second quarters of this year. While first-quarter demand was up 5.2 million b/d, demand growth is expected to fall to 2.8 million b/d in the current quarter.

ZeroHedge remarks, “The Biden administration has canceled one of the most high-profile oil and gas lease sales which was pending before the Department of the Interior, at a time when Americans are suffering from record-high prices at the pump.

The DOI’s reasoning? A “lack of industry interest in leasing in the area” of more than 1 million acres in the Cook Inlet in Alaska. What’s more, the department also halted two leases under consideration in the Gulf of Mexico due to “conflicting court rulings that impacted work on these proposed lease sales,” according to CBS News.”

Gold futures declined to 1839.24 this morning, near the weekly mid-Cycle support at 1828.37.  Should it drop through that level, the Wave count will have to be modified.  Since recent laws have made the transport of gold illegal, it has changed it from a potential alternate currency to just another commodity.  As a result, gold may be affected by  the lack of liquidity in the market  (see BKX).  A further decline may search out support at 1675.00.  The next Master Cycle low may occur in mid-June.

8:10 am

Good Morning!

Hope springs eternal as the NDX futures rallied to a new retracement high at 12552.90 this morning.  Yesterday was “relatively” calm as the Cycles Model suggested.  Today, on the other hand, is likely to be a bloodbath, despite the short squeeze lifting stocks higher in the pre-market.  The problem is, most analysts have no idea what’s next.  “What are we reading today, tea leaves, or chicken entrails?”

SPX futures reached an overnight “squeeze high” at 4055.20, within yesterday’s trading range.  The Cycles Model calls for a day of trending strength, so the squeeze may turn into a rout by the end of the day.  In today’s expiring options, Max Pain is at 4045.00 while short gamma starts at 4000.00 where the slippery slope ends and the drop off begins.  It is little wonder the dealers and hedge funds are attempting to keep SPX in the neutral zone.

ZeroHedge reports, “US index futures and European stocks were set to extend their recovery from the longest streak of weekly declines since 2011 ahead of an inflation report that was expected to show prices cooled in April, while falling bond yields supported battered tech stocks; Asian equities also advanced, halting a seven-day slide, as new Covid cases tumbled in Shanghai with the local government saying there was basically no COVID community spread in 8 of 16 districts, and the Chinese covid scare appears set to fade.

S&P 500 futures were trading at session highs, up 1.2%, and Nasdaq 100 futures were up 1.4%, while Europe’s Stoxx 600 climbed for a second day. The dollar fell and Treasury yields slumped, with the 10Y trading a 2.91%, a 30 basis points slide in the past three days, providing further support for high duration tech names. US-listed Chinese stocks rallied in New York premarket trading after the Asian nation reported easing Covid cases. Tech stocks also climbed in Hong Kong and Europe on Wednesday.”

The NYSE Hi-Lo Index had its second worst day in two years.  The calm surface at yesterday’s close is a lie.  Investors are bailing, although this is not capitulation, yet.  The sense of defeat at the bottom may be so great that no one will be looking up.

VIX futures are spiking higher, recently hitting 34.25 and climbing.  As SPX declined beneath 4000.00, the pressure to hedge will grow exponentially.  The ratio of puts to calls is 10 to 1 beneath 4000.00, suggesting VIX may rise to 90.00 or higher this summer.

TNX is on a bounce this morning that may turn into a rout later in the day.  An alternate explanation may allow a continued rally in TNX through the end of May.  Details may be forthcoming.

ZeroHedge reports, “fter March’s surge in consumer prices, analysts’ consensus is that CPI has peaked and April was expected to show a big slowing from +8.5% YoY to +8.1% YoY, however, CPI printed hotter than expected at +8.3% YoY…

Source: Bloomberg

Bear in mind that headline CPI is still at its second highest since 1982.’

USD futures rose to 104.14 this morning, short of Monday’s high.  There is still room to go higher.  A sell-off in stocks may increase the demand for dollars as investors choose cash.  The common wisdom is the dollar should decline with a higher CPI print.

ZeroHedge comments, “Watch out for a non-textbook surprise in the dollar just after U.S. inflation data hits. In the past 12 months, CPI has mostly come in hot — yet the BBDXY has fallen more often than not. That probably runs counter to the belief that the U.S. currency should rise on a high reading as it steers the Fed toward faster rate hikes.

The one time CPI surprised on the downside in January, the dollar fell 0.2% in the first thirty minutes after the data. Here’s a breakdown of the numbers:”

Crude oil bounced this morning, testing the 50-day Moving Average at 104.56.  An alternate retracement target may be the Broadening Wedge trendline near 106.00.  However, the short-term trend may be down with the next low near the June options expiration.

ZeroHedge explains, “Global stocks of refined petroleum products have fallen to critically low levels as refineries prove unable to keep up with surging demand especially for the diesel-like fuels used in manufacturing and freight transportation. The result has been a surge in prices refiners receive for selling fuels compared with prices they pay for buying crude and other feedstocks, boosting their profitability significantly.

In the United States, refiners currently receive roughly an average of more than $150 per barrel from the sale of gasoline and diesel at wholesale prices, while paying only around $100 to purchase crude.

The indicative 3-2-1 margin of $50 per barrel is based on the assumption a refinery produces two barrels of gasoline and one barrel of diesel from refining three barrels of crude.”

9:45 am

The Ag Index may have made its Master Cycle Low yesterday on day 270.  That leave an irregular correction wit a resumption of the rally through the end of May.  The Head & Shoulder formation offers a significant target for the index that may take it through mid-August.  The bumblers in Washington don’t have a handle on it at all.

ZeroHedge remarks, “Samantha Power: ‘Never let a crisis go to waste.’ Do the World Economic Forum and China agree?

“Fertilizer shortages are real now.”

Uttered by USAID’s Samantha Power in a May 1 ABC interview with former Democratic advisor George Stephanopoulos, the words briefly drowned out the din of the news cycle.

They were not unexpected to some.

Power, who served as U.N. ambassador under Obama, mentioned fertilizer shortages after weeks of hints from the Biden administration.

White House Press Secretary Jen Psaki repeatedly alluded to challenges obtaining fertilizer in recent press briefings. So did President Joe Biden himself in a joint statement with EU President Ursula von der Leyen.

“We are deeply concerned by how Putin’s war in Ukraine has caused major disruptions to international food and agriculture supply chains, and the threat it poses to global food security. We recognize that many countries around the world have relied on imported food staples and fertilizer inputs from Ukraine and Russia, with Putin’s aggression disrupting that trade,” the leaders stated.”

8:20 am

Good Morning!

NDX futures declined further to 12104.70 before a bounce to 12415.20.   NDX is deep into short gamma territory with little energy to shake off the bears until options expiration on May 20, when a massive amount of puts fall off the books.  That agrees with the ending of the current Master Cycle in equities.  In other words, there is more downside to come.

ZeroHedge observes, “Good luck reshuffling big books

Nothing new really, but liquidity is horrible. You don’t need much size in order for this market to move. Add short gamma to the mix and pain is huge.

Source: GS

Source: GS

Welcome to “max” destabilizing territory

QQQ and SPY short gamma are basically at “max” levels. Frustrated dealers are absolutely smoked after FOMC. First we had the squeeze higher immediately post Fed where short gamma dealers had to chase deltas desperately higher. The market reversed abruptly and dealers had to sell everything they had bought much lower, plus all the additional deltas they have been desperately selling as short gamma has made them longer and longer deltas the lower we have moved (for the 1 min explanation of gamma see here). Expect the destabilizing effect to continue working. Don’t forget it works both ways as gamma does not care about direction…”

…..

This morning ZeroHedge reveals, “After tumbling as low as 3960 a few hours earlier, the lowest since April 2021, futures have reversed and are spiking higher not just due to the sporadic dip buying attempts discussed earlier but because CNBC’s Jim Cramer reported moments ago that hedge fund legend David Tepper, whose “Balls to the Wall” comment 12 year ago sent stocks soaring higher, has covered his Nasdaq – and more importantly – Treasury (which is just another long duration proxy) shorts.”

SPX futures bottomed at 3967.40 last night, then bounced above 4000.00.  There are few calls below 4000.00, meaning there is no “fuel” for a bounce, much less a significant rally.  On the contrary, at 50-point intervals where calls exist, puts outnumber them by 10X.  You may note that Tuesday options expiration has begun this week, intensifying the battle for directional supremacy.  Frankly, having daily options expiration raises the probability of a blow-up.

ZeroHedge reports, “The relentless rout that erased $3.4 trillion from the Nasdaq 100 in the past month paused on Turnaround Tuesday as battered tech names including marquee “generals” attracted scattered dip buyers, but nothing (yet) like the full-throttled BTFD buyfest observed in months gone by. Futures on the tech-heavy index rose as much 1.4% as bargain hunters returned after the Nasdaq 100 slumped to the lowest since November 2020 on Monday, capping three days of bonebreaking losses. S&P 500 futures were 0.7% higher to 4,016 after rising as much as 1.2% earlier but also after plunging to as low as 3,961.”

VIX futures rose to 34.75 in the overnight session until short covering marred its luster.  It is possible that, once  Wednesday options expiration are done, the ability to rise above the neckline will increase exponentially.  The Cycles Model suggests the next Master Cycle high in early June.

ZeroHedge comments, “Update (1700ET): As SpotGamma warned earlier, S&P’s 4,000 level was in play as a serious threat to any downside and while S&P closed around 4,120 on Friday, few believed we would get there today, but we did… and closed below it…

Interestingly, while stocks puked their guts out, VIX underwhelmed in its spike-higher-ness, closing below last week’s highs (as stocks closed below corresponding lows)…

Here is SpotGamma to explain why and suggest how today’s close below 4,000 may trigger a capitulation that leads to a new VIX high…

The NYSE Hi-Lo Index fell beneath 1000.00 for the first time since March 2020.  This is not capitulation…yet.  That may come in August.  In the meantime, selling may intensify through the balance of the month.  The Cycles Model suggests a low in early June.

TNX gapped down in a clear reversal this morning after making a new (not a Master Cycle) high.  This reversal ma lead to a decline to the 50-day Moving Average at 24.77 by the end of the month.  What is significant about yesterday’s high is that it may have broken the downtrend since October 1981. 

USD futures appear to be consolidating beneath yesterday’s (not a Master Cycle) high.  The Cycles Model suggests a decline through mid-June as it completes a correction that may decline to the lower trendline of the Broadening Wedge at 97.00.

Crude oil made a new low overnight at 100.47 before a bounce brought it back near yesterday’s close.  It is likely to test the 50-day Moving Average at 104.43 before resuming its decline through late June (Wave 3).    The likely target may be the lower trendline of the Broadening Wedge.

3:33pm

SPX has declined beneath 4000.00 where there are virtually no calls.  This is a pure short gamma play with no support.  A limit down day (or two) awaits.  Watch out below!

ZeroHedge observes, “Nasdaq is now down 3% since Friday’s rebound off-the-lows close, and down 9% in the last three days…

And the derisking of all equity exposures is dragging the S&P ever closer to the 4000 line in the sand…

All eyes are now on the large 4000 support area (total OI: 220k calls & 450k puts). SpotGamma has noted its significance for some time, as its the last strike with any meaningful call interest.

You may note in the image above that to the left of 4000 there is no call gamma at any strike (i.e. positive gamma bars).

9:30 am

The Ag Index is treading water, which is a far cry from the equities index performance.  I am still waiting to determine the Master Cycle low, although the best candidate so far is last Monday’s low.  Food prices are set to go higher as multiple inputs aggravate the supply/demand equation.

ZeroHedge reports, “A combination of delayed plantings in Northern U.S. Plains and Canada due to soggy weather, a dry spell in Western Europe, chaos in Ukraine, and severe weather in India, have disrupted global wheat markets, sending prices in Minneapolis to the highest levels since 2008.

Spring wheat is used to make bagels, pizza crust, rolls, and croissants, among other specialty items, which touched a 14-year high on Monday morning at $12.31 a bushel due to delayed planting fears across the northern U.S. Plains and Canada because of abnormally wet conditions.

ZH further observes, “A massive backlog of grain shipments is piling up in Ukraine to the tune of nearly 25 million tonnes due to ‘infrastructure challenges’ and blocked ports in the Black Sea, including Mariupol, Reuters reports, citing a UN food agency official.’

Ukraine was the fourth-largest exporter of maize (corn) in the 2020/21 season, and the sixth-largest wheat exporter in the world, according to the International Grains Council.

“It’s an almost grotesque situation we see at the moment in Ukraine with nearly 25 mln tonnes of grain that could be exported but that cannot leave the country simply because of lack of infrastructure, the blockade of the ports,” said FAO Deputy Director Josef Schmidhuber during a Geneva press briefing via Zoom.

According to Schmidhuber, the full silos could result in storage shortages for this year’s July and August harvests.”

7:40 am

Good Morning!

NDX futures made a new morning low of 12349.50 after having crossed the Lip of the Cup with Handle for the last time on Friday.  NDX is trading deep in short gamma territory and, while NDX options are light, there are no bullish pockets beneath 13000.00.

QQQ (Close: 309.25) options show Max Pain at 313.00, but short gamma may begin at 312.00.   QQQ may open today at or beneath beneath 300.00.

ZeroHedge remarks, “Even the most committed long-term investor can learn a thing or two from how traders go about their process. The core tenets of trading are: 1) respect price action, 2) manage risk so you can meet your goals, and 3) maximize the impact of your time and attention. The last 2 days tell us US/global equities still have a slog ahead of them. The only goal now, for investors and traders alike, is to make it to the turn in asset prices (whenever that is) with the least amount of incremental damage to portfolios. A little bit of traders’ discipline can help.

Ever since I (Nick) started on Wall Street in the mid 1980s, there has been a bright line between “traders” and “investors.” The stereotypes for each tell the story. Traders are momentum-chasing volatility addicts. Investors buy and hold no matter what the tape is saying.”

SPX futures declined to a low of 4037.20 this morning before a mild bounce.  The Cycles Model suggests another two weeks of decline that may bring it to its Cup with Handle target.  This may be the worst week of the decline with Monday, Wednesday and Friday shaping up to be the worst down days.  To date, the largest holdings in the SPX are passive investors, who seem confident that they are adequately allocated to absorb any shocks.  Little do they know there is no place to hide.

In today’s options expiration the Max Pain zone is at 4170.00.  Options turn positive above 4175.00 with long gamma at 4200.00.  Options turn short at 4165.00 with short gamma starting at 4150.00.  This will not be a good day to be long.  I met a shop keeper who said, “I’m in it for the long haul.”  I told him he will regret ever hearing that thought.

ZeroHedge reports, “It’s a bloodbath.

With Bank of America conveniently reminding us over the weekend that markets never bottom on a Friday, and that Mondays tend to be the worst day of the week for markets…

… that’s exactly what is playing out today as risk assets are puking across the globe, with S&P 500 futures crashing, the Chinese yuan tumbling amid a growing slowdown in China, and the US 10-year Treasury yield climbing as high as 3.2% as risk parity funds are getting monkeyhammered… again.”

VIX futures made a weekend high of 34.37, beneath Friday’s high at 35.34.  It is poised to break out above the neckline of the Head & Shoulders formation.  I do not know what will push the VIX above the neckline.  Perhaps it will be the uptick in margin calls expected today or passive investors finally throwing in the towel after seeing all the profits from the pst year up in smoke.

TNX futures hit a new high at 32.03 while the cash market opened slightly lower.  This may be an expanded correction that is yet incomplete.  Another possibility is a “running ” correction that may leave an almost imperceptible jog in the overall trend.  The expanding or irregular correction is the most favored outcome.

ZeroHedge comments, “Some have used peak inflation to create the impression that the worse of inflation news is in the rear and that the Fed has less tightening to do than what many expect. Yet, peak inflation says a lot about what the Fed has to do, which should worry the Fed and scare investors.

In three out of the last four decades, the US experienced a cyclical rise in inflation (4% and above) that compelled policymakers to raise official rates in response. It didn’t matter if the inflation cycles were broad (the early and late 1980s) or narrow (oil spike in the mid-2000s). But policymakers had to raise official rates above peak inflation on each occasion to squash the price cycle.

No one is thinking the unthinkable that the Fed has to raise rates above the 8.5% increase in consumer prices over the past year. Yet, past experiences provide painful lessons on the level of official rates required to reverse inflation cycles.

USD futures made a new correction high at 104.21 this morning.  Like TNX, this is an example to an extended correction that indicates the strength of the long-term trend.  However, there is a need to finish the correction which may come down to the bottom of the Broadening Wedge formation.  The new Master Cycle ends near mid-June.

BKX has tested the Lip of the Cup with Handle formation and is poised for a deeper decline.  The next probable Master Cycle low may be coming due in the next two weeks.  This low may correspond with the Cup with Handle target, so this may have a detrimental effect on the entire market.

ZeroHedge remarks, “A few days ago, we brought readers’ attention to the one chart which we think is the most important in setting market tone and sentiment: that of emini liquidity, or lack thereof.

This morning, Goldman’s trading desk also brings attention to this most important market dynamic, and in an early note from trader Matthew Fleury, he writes that “this chart should be on everyone’s radar. This is the top of book depth of S&P futures divided by 1mo ATM vol. It is flashing red. The set up for an equity market crash is as high as I have seen it.”