8:20 am

Good Morning!

SPX futures spent most of the night in pullback mode, down to 4488.40 before rising back to breakeven.  It is hovering just beneath the 50% retracement value at 4519.16 and may test it one more time this morning.  The Cycles Model suggests a possible hourly pivot before 10:00 am that may shift stocks back into decline.  Month-end rebalancing may now be over.  Despite the rally, the NYSE Hi-Lo Index closed at -92.00.

Wednesday’s options expiration show 4500.00 as the dividing line between the bulls and the bears.  The calls have it above 4500, but gamma doesn’t turn positive until 4550.00.  Meanwhile, gamma turns negative at 4480.00.

ZeroHedge reports, “World stocks began the new month on firmer ground, after a volatile January, as reassuring comments from Federal Reserve officials helped to calm rate-hike jitters even though US futures failed to extend recent gains. After closing out January with a furious two-day, dip-buying meltup thanks to a flood of inbound month-end rebalancing, US index futures briefly traded through Monday’s highs, backed by decent rally in European equities where financials outperformed, boosted by solid UBS earnings, before dipping lower as the volatility seen in past days lingered. At 7:00am ET, emini S&P futures traded 0.23%, or 10.5 points lower, Nasdaq futures were also red, some 31 points or 0.15% lower, and Dow futures dropped 0.2% as investors weighed cautious rate-hike commentary from Fed officials and awaited earnings from firms including Alphabet and General Motors. Treasuries climbed and the dollar weakened. Oil fell, but held close to seven-year highs.”

VIX futures declined to 24.40 before beginning a probable bounce this morning.  The Cycles Model calls for a very large dose of strength coming in today.  The Elliott Wave structure also calls for an upcoming Wave (iii) of 3 of (3), a very potent Wave.

NDX futures rose to 14981.00, still short of the 200-day Moving Average at 15015.00.  It remains in correction territory with  more that a 10% loss to date.  It may also attempt to move higher, to overcome the overhead resistance and escape correction territory.  However, it has met a common Wave relationship in the correction Wave (c) = Wave (a) at 14802.00.

QQQ (price: 363.05) managed to close in the Max Pain zone and may attempt to maintain that level.  However, Wednesday’s Mas Pain level is 360.00 and options turn negative at 358.00.

RealInvestmentAdvice cautions, “Market bottom? Is it in? That was the main question I got last week, and I even discussed it with Charles Payne of Fox Business. It’s the one answer everybody is searching for. Is it time to “load up the truck” for the next leg of the bull market or go to cash?

It certainly is a problem now, given that January had a rough start for the S&P 500. But, of course, such brings up the age-old Wall Street axiom “so goes January, so goes the year.”

TNX futures may have reached its correction low overnight at 17.39 and appears to have begun a bounce.   Trending strength comes back on Thursday and may  encourage a breakout later in the week.

ZeroHedge warns, “A popular hedge fund trade – known as the Treasury Basis Trade which, reminiscent of what LTCM did back in the day seeks to profit from minuscule differences between prices in the futures and cash markets for Treasuries by using massive amounts of borrowed money – is set to make a comeback as the Federal Reserve plots to shrink its footprint in the U.S. Treasury market, even though it nearly blew up the financial world in late 2019.

The strategy, which as we explained in detail most recently here, involves taking leveraged positions in Treasury notes and bonds in order to exploit price differences with the corresponding futures contracts, backfired both in Sept 2019 (leading to the repo market crisis which ushered in the Fed’s “NOT QE” phase of reserve replenishment) as well as the March 2020 liquidity crisis, when the normal relationships between cash and futures broke down completely.”

3:25 pm

SPX rose to Short-term resistance at 4490.00 and may be reversing from less than a 50% retracement.  Confirmation of the reversal coms at 4457.00 and below.  Now we know the pattern that may follow through to the end of March.

ZeroHedge comments, “One day after even traditionally bullish Goldman flow trader Scott Rubner said that “sell the rally trading mode is still in place” (although a capitulation, especially if coupled with CNBC’s “market in turmoil” would spark a fierce rally), we get a reminder that nobody knows anything when the Fed throws market for a loop and pulls the Fed Put.

Case in point, two market notes this morning, one from JPMorgan’s trading desk, another from Morgan Stanley’s chief equity strategist, Michael Wilson, which look at the exactly same data and reach two diametrically opposing conclusions.

11:25 am

Today it has become abundantly clear that this decline has taken a different shape than the 5-Wave decline that I expected.  Last Monday I had issued a warning of a mid-course correction.  That extension and the fact that it had landed on day 257 of the Master Cycle should have warned me that this decline was shaping up differently.  Not making a new low on Friday and a higher correction today was the final straw.  This decline is taking the shape of what is known as a “Leading Diagonal” which, instead of having 5-Wave impulses, consists of zig-zag declines.  The good news is that the 1-2 week correction usually runs out of steam after attaining the mid-Cycle resistance at 4457.34.  We may already be there.

ZeroHedge notes, “Over the weekend, we reported on the record amount of put-buying that was occurring in US equity markets, with Goldman traders pointing out that we have been averaging $1 Trillion worth of puts per day.

There were several days last week where put notional set records, and Goldman indicates that hedgers tended to be institutional… and mainly focused on the indices:

“Monday for example $2.2 Trillion notional traded in US options market, with 64% puts ($1.4 Trillion) further adding LP hedges and taking the street further short gamma. We have maxed out our index put notional chart.“

6:30 am

Good Morning!

I am starting the blog early due to an appointment at 8:00-9:00 am.

SPX futures are down after a weekend of upside not exceeding last week’s high at 4453.23.  The 200-day Moving Average is at 4435.04, with Friday’s close beneath it.  This is an ideal setup for a panic decline lasting 2-4 days.  Having completed 17.2 days of decline last Friday, the most likely outcome is an extension to 21.5 days,  the same length of time as the March 2020 decline.

In today’s options expiration, there is a large stack of puts and calls at 4400.00.  Max pain is most likely at 4395.00 with short gamma starting at 4375.00.  The dealers positioned themselves well at Friday’s close in the SPX, but may not be accounting for the NDX (QQQ).

ZeroHedge reports, “After a rollercoaster week that ended just barely higher following a late meltup on Friday, overnight volatile US stock futures swung to start the week, with Nasdaq 100 futures leading gains after rallying on Friday, before turning red and threatening to fizzle a global equity rally amid persistent worries over the Federal Reserve’s plan to hike interest rates this year. Emini S&P futures were down 0.5% or 21 points to 4401, after rising as high as 4437 and dropping as low as 4395 in another extremely illiquid session where China being offline for the week due to Lunar New Year did not help; Nasdaq futures were down 0.1% while Dow futures were lower 0.7%. Technology stocks led gains on the Stoxx Europe 600. Meanwhile, the dollar fell and oil rallied.”

NDX futures are positive as I write but fading, having reached a weekend high at 14559.50.  That is short of last week’s high of 14646.50 and remains bearish.  On Friday NDX concluded 21.5 days of decline.  Should the decline continue, it may extend to 25.8 days.  The target for this decline is 12208.37, the Wave (2) low of a year ago.

In today’s options expiration, NDX is squarely in short gamma territory and also has to deal with very high margin.  Calls usually begin at losses of 10% or greater.  QQQ (price: 351.80) closed right on the MAX Pain zone at 351.00.  Options turn negative at 350.00 and gamma goes short at 345.00.  Should the decline resume, the margin desks may be very busy today.

There is talk of a short squeeze, but it appears the ammo for a further squeeze may have dried up at this point.  ZeroHedge observes, “In the end it was very close, but the bullish view of Goldman’s flow trader Scott Rubner proved accurate, even if it was a nail-biter with the S&P closing just barely green on the week after tumbling on several occasions last week only to stage one remarkable recovery after another. So what does Goldman’s veteran trader think will happen this week, when with China closed for its New Year holiday,  liquidity will be even below last week’s abysmal levels? As Rubner writes in his latest weekly Tactical Flow of Funds checklist, “Equity Supply vs. Demand Imbalance continues …but improves in February.”

VIX futures had an inside weekend, bottoming at 27.92.  A rally above the neckline locks in the Head & Shoulders target.  The Cycles Model calls for a particularly strong trending pattern over the next two days.

Today’s options expiration favors the calls over 25.00, while gamma turns positive at 30.00 and above.  Should VIX rise above 30.00, the rally may be self-reinforcing.

TNX futures are rising to challenge the Cycle Top resistance at 18.03.  Should it break above it, the rally may strengthen as the week progresses.  The next major resistance is at 19.71.  Thereafter, the Cup with Handle formation may dictate the final target.  The current Master Cycle  is due to end in strength at the end of February.

1:25 pm

Index options managed to close near the Max Pain zone at the open.  Now stocks and ETFs (retail) options expire at the close with 435.00 at the Max Pain zone.  Puts dominate at 434.00 and below, with short gamma at 430.00.  There’s no telling exactly were things can go downhill, so dealers are keeping a tight rein on the process for now.  Traders are hoping that month-end pension fund rebalancing ma pull the market out of its sticky wicket.  Unfortunately, Monday’s options expiration is even more loaded for bear than today’s.

This may be playing out similarly to the crash of 1987.  Will history repeat…or rhyme?

11:15 am

SPX continues to defend 4350.00 against further encroachment from the bears, but market momentum is turning against it.  The NYSE Hi-Lo Index is now at -267.00, hardly bullish.  Despite the apparent “success” of this defense, the dealers and hedge funds may have simply postponed the inevitable capitulation and may have turned it into a panic.

Note:  Stocks rallied into the 17.2-day pivot at 11:30 am, where I had originally proposed a Cycle low.  Instead, the pivot tells us to expect up to 4.3 days of decline from here.  Crash helmets required beyond this point…

ZeroHedge advises, “Arguably due to rising recession risks, rate-hike expectations are fading modestly this morning…

And that – it would appear – is all that anxious dip-buyers needed as they ripped stocks higher from an ugly overnight session. Nasdaq is now up 2% after being down 1%…

The ramp has lifted The Dow back to unchanged on the week…

ZeroHedge remarks, “This is not a Friday brimming with positive developments, to put it mildly. However, at time of writing Asian stocks were following US futures higher on what looks to my jaded eye to be nothing more than a good key earnings report. Here’s a Friday thought: perhaps we should dump all our chattering economic data and burbling/shilling financial reporting and just have the earnings and share price of one firm as a proxy for everything everywhere, the apotheosis of the agglomeration that globalized financial capitalism drives: but why am I even saying “perhaps” when one reads all the rest of the news that apparently doesn’t matter?”

8:15 am

Good Morning!

SPX futures have declined to 4274.90 thus far in the final series of declines, the first potentially to the Cycle Bottom at 4096.21, then the last potentially to 4000.00 as the final capitulation occurs.  We will attempt to monitor the progress of he decline during the day as the bottom may come as early as 11:am, depending on how well the dealers can defend the Max Pain zone at 4385.00.  Today’s expiring options are short beneath 4350.00 with short gamma at 4300.00 and below.

The NYSE Hi-Lo Index closed at -393.00 after trading modestly positive at 6.00.

ZeroHedge reports, ” If you thought that yesterday’s blowout, record earnings from Apple would be enough to put in at least a brief bottom to stocks and stop the ongoing collapse in risk assets, we have some bad news for you: after staging a feeble bounce overnight, S&P futures erased earlier gains as traders ignored the solid results from Apple and instead focused on the risk of higher interest rates hurting economic growth.  Contracts in S&P 500 dropped as negative sentiment continued to prevail, while Nasdaq 100 futures erased earlier gains after strong Apple earnings. As of 730am, Emini futures were down 48 points or 1.12% to 4,269, Dow futures were down 335 points or 0.99% and Nasdaq futs were down 77 or 0.6%. The dollar was set for a fifth straight day of gains, the longest streak since November, 19Y TSY yields were up 3bps to 1.83%, gold and bitcoin both dropped.”

VIX futures are climbing, but still inside yesterday’s range with a high of 32.82.  In Wednesday’s options expiration, calls dominate at 25.00 and above, with positive gamma at 27.00 and higher.  Despite Wall Street’s effort to keep a lid on the VIX, bad news may propel it to 50.00 or 60.00 in a heartbeat.  Today and Monday are days of trending strength for the VIX.  The only thing I can attribute to this is some outside event that jolts the market.

Bloomberg argues, “Seven straight jumps in the so-called “fear gauge” for the S&P 500 is a signal that it may be time to wager against volatility, if history is any guide.

Only 10 times in the past two decades has the Cboe Volatility Index — better known as the VIX — risen for that many trading sessions in a row. Investors who shorted the gauge after the previous nine streaks of that length would have earned a return of nearly 19% after 20 days, according to data compiled by Bloomberg.”

TNX futures hit a high of 18.54 this morning before settling back above the Cycle Top at 18.04.    Trending strength returns next week as it may stage a potential breakout to new heights.

ZeroHedge observes, “Analysts expected a mixed picture from income and spending data in December (with spending expected to drop and incomes rise – an odd pairing during the Christmas month) and they were right with incomes rising 0.3% MoM (slightly less than expected) but spending tumbling 0.6% MoM (meeting expectations). That is the first drop in spending since Feb 2021…

USD futures pulled back today after breaking out above the November high.  The Cycles Modle points out next week showing high trending strength, while the next Master Cycle appears to be due in the second week of February.  The potential target remains at 98.30.

ZeroHedge reports, “Relatively little talk about the dollar given the latest explosion higher. The mid January shake out has turned into a brutal squeeze, catching many by surprise. DXY is approaching the first big resistance here and RSI is very overbought, but as we all know, overbought can stay overbought for a long time…Second chart shows the last shake out in positioning.”

“

Source: Refinitiv

West Texas Crude made a possible Master Cycle high yesterday on day 254.  The chances are good that the Master Cycle may extend into next week.  A new high in crude simultaneously with a new high in the VIX appears intriguing.

OilPrice observes, ”

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The GSCI Ag Index had its Master Cycle high on Tuesday on day 258.  Usually there is a one-to-three week correction before moving higher.  All things considered, should it not go beneath the 50-day Moving Average at 400.30, we may see a possibly short and shallow correction before moving considerably higher.

ZeroHedge observes, “This was supposed to be the year that things “got back to normal”, but here we are at the end of January and things have only gotten worse.

As we move forward into February and beyond, there are two key global shortages that we are going to want to keep a very close eye on.

One of them is the rapidly growing fertilizer shortage.  A few days ago, the Wall Street Journal ominously warned that “high fertilizer prices are weighing on farmers across the developing world”…”

Gold futures are making new lows as I write.  This decline may continue until mid-February, when the next Master Cycle (low) is due.  It is on a sell signal as of yesterday.

7:55 am

NDX futures reached an overnight high of 14397.50 in a possible attempt to rise above the negative gamma beginning at 14400.00.  While NDX options are sparse due to the price, the QQQs (closing price $344.57) are a different story.  Tomorrow’s options expiration start with a massive put position at 350.00 and large positions every 5 points down to 300.00.  The inference here is that, should a short gamma panic ensue, the NDX may decline as far as 12000.00.

ZeroHedge reports, “After a rollercoaster overnight session, which saw S&P futures tumble as much as 2%, dropping as low as 4,260 following Powell’s hawkish comments, futures have recovered and briefly traded in the green while European stocks are still red though trading near session highs as traders spooked by the Fed’s comments started digging for bargains. At 7:20am ET (incredibly illiquid) emini S&P futures were flat at 4,341, Dow futures were up 0.1% or 36 points and Nasdaq futures swung the most and after dropping as much as 2.2% turned green some 0.5% higher or 75 points after Bill Ackman revealed late on Wednesday he had purchased 3.1 million Netflix shares.

SPX futures rose as high as 4376.00 in early morning trading.  Overhead resistance is at 4400.00.  In tomorrow’s options expiration, Max Pain is at 4415.00, while options gamma turns short at 4360.00.  This market is still ruled by the options market and the slightest accident may set off a chain reaction decline.  The SPX turns positive above yesterday’s high at 4453.23.

VIX futures remained range-bound inside yesterday’s trading range in the overnight session.  The Feb 2 options expiration shows calls dominating at 25.00 and above, while gamma turns positive at 27.00.  The bias is to go higher and positive gamma may propel it to 60.00.

CityIndex observes, “Stock markets have been volatile since the start of the year and it doesn’t appear to be letting up anytime soon.  There are 3 ongoing issues that are primarily causing the volatility in the markets.  They are as follows:

1. The end of monetary policy easing and the ensuing interest rate hikes.Most major central banks have their first meetings of the year within the next 2 weeks
2. The ongoing drama surrounding Russia’s buildup of troops on the border of Ukraine (presumably getting ready to invade)
3. Earnings season and forward guidance. NFLX did little to inspire confidence last week as they said they only see 2.5 million new net subscribers in Q1 vs analyst’s average estimate of 5.8 million. Could this be the beginning of the end for “Stay-at-Home” stocks?

TNX is hesitant after bursting above Cycle Top resistance at 17.99.  It may retest the Cycle Top before moving higher, as trending strength improves next week.

ZeroHedge observes, “With attention increasingly turning to how fast the economic slowdown will hit the US economy in 2022, growth cheerleaders will have a favorable, if brief, diversion today courtesy of the Bureau of Economic Analysis which moments ago revealed that in Q4, US GDP grew at a remarkable 6.9% annualized Q/Q clip, nearly three times faster than the 2.3% growth recorded in Q3 and well above the 5.5% expectation, even if the components of GDP are an ominous confirmation that the US is engaging in aggressive restocking which could soon lead to a deflationary liquidation wave.

USD futures continued their rise this morning to a morning high of 97.26.  The Cycles Model suggests that USD may rise in strength until the second week of February.  The potential target may be 98.30, the 61.8% Fibonacci retracement of the 2020 decline.

4:1o pm

ZeroHedge examines the entrails…

4:05 pm

How do the dealers do it???  The VIX closed at 31.16, neatly at its Max Pain expiration between 30.00 and 32.50.  SPX closed just 10 points beneath its “logjam” of puts…a potential  $80 million loss cut by three quarters.

SPX just crossed beneath the short-gamma line where there are 20,630 put contracts for tonight’s expiration.  This may be bigger than Monday.

2:32 pm

TNX vaulted above the Cycle Top resistance at 17.95.  This is starting to get serious.

ZeroHedge remarks, “Since the last FOMC meeting, on December 15th, Gold is the lone asset-class that is higher while bonds and stocks have been monkey-hammered and the dollar is weaker…

Source: Bloomberg

All US equity markets are lower since the last Fed meeting with Tech/hyper-growth hammered and all the bubble-markets blowing up.

Financial Conditions have tightened significantly since the last Fed meeting (after easing dramatically into the Santa Claus rally)…

1:45 pm

BKX has bounced from its trading channel trendline and made a 45% retracement of its decline from the peak made on January 13.  The retracement was resisted by the 50–day Moving Average at 136.14 and creates a potential confirmed sell signal.  The current Master Cycle may last through mid-February.  However, there may be another Master Cycle ending in late March that shows us the bottom of the coming decline.

ZeroHedge remarks, “While traders are mostly focused on what the Fed will say about the coming rate liftoff, with markets today expecting just over 4 rate hikes by the end of 2022…

… a much more relevant question is what the Fed’s balance sheet runoff – i.e., Quantitative Tightening (QT) – will look like both strategically and tactically.

As a reminder, two weeks ago Deutsche Bank predicted some $3 trillion in balance sheet normalization as the Fed undoes the emergency actions from the covid crisis which doubled the Fed’s asset holdings from 20% to almost 40% of GDP.

1:27 pm

The DJIA is challenging its perch above the trendline of the 40-month old Orthodox Broadening Top.  This is a very serious support near 34400.00.  Should it close beneath this level at the end of the month, it would be considered a monthly bearish reversal and have some serious long-term implications for equities.

9:45 am

NDX was turned away at 4th Wave resistance at 14500.00.  It is well beneath the 200-day Moving Average at 15010.00.  Should the decline continue, the minimal target may be beneath 13000.00.  The Cyclical Model suggests it may go as low as 12200.00.

8:35 am

Good Morning!

SPX futures rose overnight to 4431.40.  There is a rule of thumb that Wave 4 may not rise above the top of Wave [iv] near 4500.00.  Should the bounce go higher, we may have to review the Wave pattern.  The daily Cycles Model tells us today is day 259.  However, the hourly Cycles Model allows 2.5 more days to play out the decline.  There are possibly 2 more hours in this hourly segment to complete the bounce.

Todays options expiration show negative gamma beginning at 4360.00, so the dealers and hedge funds have an incentive to stay above that level.  The distribution of calls vs puts is pretty even to 4400.00, although I cannot presume to say where gamma turns positive, since the positions are light, compared to last week.  The NYSE Hi-Lo Index closed at -141.00.

ZeroHedge reports, “Yesterday, after Microsoft stock initially slumped despite beating across the board as the skeptical market latched on to even the smallest weakness to hammer the stock, dragging down both the Nasdaq and S&P futures close to session lows, we said that the reaction was premature and would reverse, as the earnings release did not include guidance and would promptly reverse once the company revealed its cloud guidance in its conference call a little over an hour later. Well, that’s precisely what happened and after first tumbling as much as 5% after hours, the 2nd largest US company (MSFT has $2.2 trillion in market cap) reversed all losses and is now trading solidly in the green, sparking broader tech momentum, lifting the Nasdaq as much as 2.1% this morning and (briefly) helping traders forget that today at 2pm the Fed is expected to unveil a March rate hike and balance sheet runoff a few months later.

Indeed, contracts on the Nasdaq 100 led broad-based gains – which would have been gaping losses had MSFT failed to reverse late on Tuesday – as U.S. stock futures rallied, with investors bracing for the Federal Reserve’s decision and preparing for a slew of earnings from companies including Tesla, Intel and Boeing. Nasdaq 100 futures jumped as much as 2.1% while S&P 500 and Dow Jones futures also rallied. The VIX fell from a one-year high, snapping six days of gains. Elsewhere, the Stoxx Europe 600 rose 2% in the biggest jump in seven weeks. 10Y TSY yields rose to 1.79% with the Fed’s policy announcement in the limelight; the dollar was slightly higher, as was Bitcoin while Brent oil traded just shy of $90 on its way to triple digits.”

VIX futures dipped to a low of 28.14 this morning.  Should VIX move back above the neckline, we may see it reach a high of 60.00.  The reason is that no one is expecting it, so this is the point where panic begins.  What analysts fail to recognize is the breakout of the VIX is a signal for more (higher) to come.

ZeroHedge calmly advises, “(interim) peak FED fear

Yes, the recent sell-off is very FED related and the uncertainties for how QT will be received are enormous and will not go away over-night. But we also know the “Miss Market’s” fantastic ability to quickly switch her view from “glass half empty” to “glass half full”. There are many signs out there that show that we have sold off too hard, that volatility is too high and maybe the meeting (without FED basically saying anything new) will be the improbable catalyst that will serve as a slightly more risk-on green-light for a few sessions.”

(There are many hoping they are right!)

TNX is consolidating just beneath the Cycle Top resistance at 17.92.  It may continue that sideways motion through the end of the week, as trending strength comes back next week.  However, there’s no telling what the Fed will announce, so stay tuned for some possible fireworks above 18.00.

ZeroHedge remarks, “Pre-FOMC drift” – but this time, thanks to a massive “kick-save” from Microsoft guidance which turned the entirety of global risk-assets from cratering lower in the after-hours trade last night to now, spasming higher into Fed later today (NQ +4.4% low to high) and with still substantial “short Gamma vs spot” out there for Dealer hedging purposes, as well as sharply “netted-down” exposure from Fundemental investors and outright “shorts” in CTA Trend….while conversely, we currently see a quiet Rates trade (we did see a buyer FVH2 in 5k / $254k / 01 of UST belly, as well as UPSIDE protection against a “dovish surprise,” e.g. FVH2 120C ppr pays 14-1.5 on 4k…although later see more of the same “momentum” reloading back into large downside FVH2 119.5 / 119 PS ppr pays 13.5 on 25k…and also a fairly largly “buy” of ED$ May Put Fly)

However, the meat of the note today into the FOMC will touch-upon the “potential” that a “no hawkish surprise” or even “dovish hawk” Fed commentary (vs well-managed expectations) in-and-of-itself could see some of that recent “downside Crash” hedge buying get unwound, which then could set-off a +++ “virtuous feedback loop” spiral from Vol –space into the Equities –space, where exposure has been netted-down with violence on the fundamental / discretionary side, is at a historically “low” allocation from the Vol Control side, and of course is outright “Short” on CTA Trend.”

2:20 pm…mid-course correction

It now appears that yesterday’s decline may have completed Wave 3.  I should have known, since it took more time than the pattern suggested for a lesser Wave.  It now appears that Wave 4 may be in its final stages.  The fact is, Triangles usually only fit Wave four of an impulse, so this may be the final surge, which is likely to be over near 3:00 pm.  The decline that follows may register another record.  4000.00 is still the target.

ZeroHedge informs, “In perhaps the best post-mortem of yesterday’s insanity, Morgan Stanley Quantitative And Derivatives Trading Desk (QDS) writes that yesterday intraday volatility was absolutely extraordinary with record cash volume of $1.16tr.

The good news according to Morgan Stanley is that a tame close-to-close return has kept systematic supply at bay, and the rebound in growth stocks helped stem the P/L drawdowns for both HFs and retail traders alike. The bad news according to the QDS trading gurus is that the afternoon rally was likely driven by short covering, and it is hard to draw a read from this into the future – i.e., not much has changed, and the market is still grappling with the concern of a growth shock while the Fed is likely on autopilot.”

ZeroHedge further analyses, “We previously discussed how a mystery put-selling whale emerged just around noon on Monday…

… and helped reverse a historic rout of nearly 5% in the Nasdaq, which then attracted a frenzy of retail dip-buying momentum chasers, who reversed near-record selling in the first half of the day to near-record buying in the second half.

But while there is still some speculation as to who or what may have been behind yesterday’s historic reversal, what is beyond dispute is what a massive difference the reversal meant for the market’s future demeanor, in other words the difference between the market closing down -4% on Monday and just slightly green.”

1:15 pm

There is a Triangle formation visible that tells us one more move may be necessary to complete Wave 3.  The target may be near 4150.00, then another tear-your-face-out rally into FOMC day.  This rally may be larger than yesterday’s, so it may be time to take some short profits.  However, stay tuned for another short opportunity tomorrow.  The roller coaster continues.

Gamma for tomorrow’s options expiration turns negative at 4350.00.

ZeroHedge relates, “US equity markets weakened from the moment cash trading closed yesterday, weakening overnight and puking at the open, erasing a large chunk of the unprecedented rampage higher in stocks yesterday afternoon (driven by put-sellers) before dip-buyers jumped in.

Nomura’s Charlie McElligott said that this morning so far is what happens after the “burn out” of part of that Dealer “short hedge” cover, in conjunction with the lost “bid” from the client short-covering hyperactivity.

And now to make things even spicier, the rally off the selloff lows yesterday on the US Equities Index has PERVERSELY brought us back to levels where Dealers are back near  “max short Gamma” in SPX and IWM (QQQ however a touch away from “max vs spot”).”

7:15 am

I will be leaving at 9:00 to attend a funeral of a member of my extended family.  I may return for comments this afternoon.

No, we’re not there yet.  SPX futures have declined to 4337.80 as I write and are due to decline beneath 4200.00 today.  Wave 3 needs completion today and it must be deeper than yesterday’s low, so be prepared for a lot of volatility.  The decline may hit bottom in the final hour of the day, so take appropriate action based on your flavor of trading.  Short profits may be taken beneath 4200.00.

Tomorrow’s options expiration offers its Max Pain zone at 4365.00 but becomes bearish at 4350.00.  Gamma goes short beneath 4300.00.  There may be some wild swings in the market with these parameters.

ZeroHedge reports, “Following one of the greatest intraday market reversals in history, US index futures resumed their decline led by the Nasdaq, signaling more pain for richly valued technology shares as investors braced for the highly anticipated Fed meeting and a flurry of earnings as geopolitical tensions between Russia and Ukraine persisted.  Companies including GE, J&J, Verizon and Microsoft report earnings on Tuesday, as the Fed starts a two-day meeting. As of 7:30am ET, emini S&P futures were down 60 points or 1.36% to 4,343, Nasdaq futures were down 1.88% or 272 points and Dow futures were down 236 points or 0.68%. The VIX was at 33, after swinging between 29 and 39 on Monday; 10Y Treasury yields were unchanged at 1.77% and the dollar gained.”

VIX futures have risen to 33.36, not exceeding the Head & Shoulders neckline.  Should we see the kind of moves in the SPX as described above, the VIX may hit it H&S target by the end of the day.

ZeroHedge remarks, “Heading into today’s rollercoaster session, we were – perhaps naively – confident that Friday’s massive $3.1 trillion opex would also mark the bottom for stocks (an option expiration which we correctly said would be surrounded by massive volatility, as explained last Tuesday).

And – in a roundabout way – it did, because after plunging more than 4%, stocks staged a furious rally the likes of which have been seen only on a handful of occasions, before closing green. Putting today’s historic reversal in context, this was only the sixth time since 1988 that the Nasdaq reversed a 4%+ intraday drop to close higher. The other days were 10/28/97, 10/26/00, 7/15/02, 10/10/08, and 11/13/08. As for the S&P, this was the biggest intraday comeback since November 2008 when the US was in the middle of the biggest financial crisis in recent history.

Despite the rip roaring rally, the NYSE Hi-Lo Index closed at its lowest point of the year.  Granted, the market was very oversold, but there appears to be little or no (net) new money buying stocks yesterday.   Buy-the-dippers were nowhere to be seen.  Shorts were furiously scrambling to cover.

NDX futures declined to a low of 14166.00 thus far in the overnight session.  While SPX flirts with a correction below 4336.00 (10% loss), the NDX appears to be entertaining a bear market (20% loss) at 13400.00.  It is on a similar pattern in the Elliott Wave as the SPX and appears due to complete Wave 3 of (3) today.  NDX”s deeper losses may pull the SPX further down than anticipated due to liquidity issues.  A probe beneath yesterday’s low will activate the margin calls which have a tendency to broaden the decline.  In other words, there’s more pain coming.

ZeroHedge remarks, “Monday likely marked a much needed gasp of air for Cathie Wood and those holding her ARK Innovation Fund (ARKK).

The fund, which is down 22% year to date according to Bloomberg, was able to finish the trading day on Monday up 2.82% at $73.54 per share after falling as low as $64.98, which marked a new 52 week low for the asset manager’s flagship fund.

After being down as much as 9.1% during the intraday session, ARKK rebounded with the rest of the market starting at about noon eastern time and, by the close, had posted what felt like one of its few meaningfully positive green days in 2022 so far.”

TNX futures are on the rise after bouncing from the Lip of the Cup with Handle formation, rising to an overnight high of 17.97.  It has broken through the Cycle Top at 17.64, creating a new buy signal.  This week shows a lack of strength, so it may revisit the Lip before the week is over.  However, strength returns next week, possibly elevating to the level where Wav (C) equals Wave (A) at 19.05.  The Cycles Model suggests the current Master Cycle may continue to the end of February.  I may have to recalibrate the Waves in (C) to reflect that reality.

RealInvestmentAdvice observes, “Rate hikes will be far fewer than the markets currently expect.

Currently, with inflation pushing more than 7%, the highest level in decades, it is not surprising to see the market “pricing in” a more aggressive rate-hiking campaign by the Federal Reserve. As shown via the Daily Shot, the markets expect a certainty of 4-rate hikes in 2022.

As Michael Lebowitz previously discussed, such is essential because the market tends to UNDER-estimate the Fed. To wit:

“The graph below shows how much the Fed Funds futures market consistently over or underestimates what the Fed does. The green areas and dotted lines quantify how much the market underestimates how much the Fed ultimately reduces rates. The red shaded areas and dotted lines are akin to today’s potential rising rate situation. They show estimates for rate cuts fall short of the Fed’s actual actions.”

USD futures rose above the 50-day Moving Average at 95.92 this morning after a brief challenge yesterday.  It is on a buy signal with a potential target near 98.30.  the current Master Cycle is due to end in early February, suggesting a possible hit in the next two weeks.

WTI futures appear to be consolidating after an early Master Cycle top on January 20 at 87.10.  It is on a new sell signal with a 7-week window to the next Master Cycle low.

10:47 am

VIX has broken through the Head & Shoulders neckline, which often gives the minimum target for Wave 3.  If you read the prior alert, the SPX Wave 3 may not be complete until tomorrow afternoon.  If so, Friday’s VIX may exceed 100.00.

10:36 am

There are two possible scenarios being played out.  The first is that the SPX may have complete Wave 3 and goes into a holding pattern to Wednesday (Wave 4) before completing its decline (Wave 5) on Friday.  The second is much more bearish, whereby Wave 3 may not be complete until near the close tomorrow and a target beneath 4200.00 with a brief pause on Wednesday and further decline to Friday.  A bounce today may go to 4350.00-4360.00, but the gap is likely to remain open.

ZeroHedge reports, “It’s official: as of this morning, the S&P is in a correction, having tumbled 10% from its all time high recorded at the start of the month…

… with the Russell suffering an even more humiliating fate, as it entered a bear market at roughly the same time, tumbling 20% from its early November all time high.”

7:45 am

Good Morning!

SPX futures are lower, declining to 4363.50 as I write, before a potential bounce this morning in an extended Wave [iii] of 3.  Should it follow the Cyclical pattern that it has established, it may bounce to 4435.00-4450.00 before resuming its decline in short order.  The extension may negate the need to take short profits until Friday.  The target for Wave 3 may still be 4250.00 or lower.  The target for Wave 5 remains near 4000.00 until further notice.

An exam of the SPX options chain shows virtually no calls in today’s and Wednesday’s expiations as those positions have been sold and moved to the puts column, which carries massive short gamma.  Open interest in puts doesn’t slack off until it reaches 4275.00.   In Friday’s options expiration, there are 14000 puts contracts between 4050.00 and 4125.00.   The pileup of short gamma pretty much dictates to the dealers and hedge funds to be short down to 4,000.00.  I will monitor this as Friday (day 260 of the Master Cycle) approaches.

ZeroHedge reports, “US stock index futures erased early overnight gains and turned negative, dimming hopes for a rebound after one of the worst stretches for global markets last week since the pandemic began, as investors prepared for the upcoming Federal Reserve policy meeting and as the prospect of a war between Russia and Ukraine quashed demand for riskier assets such as bitcoin, and bolstered the dollar and oil. Nasdaq 100 futures declined 0.7% after rising as much as 1.1%. Those on the S&P 500 dropped 17 points or 0.4% while the Dow Jones dropped 0.3%. Elsewhere, the Stoxx Europe 600 fell 2% with travel and leisure as well as technology stocks leading declines. The dollar rose, bond yields dropped and oil was unchanged.”

The NYSE Hi-Lo  Index plummeted to -517.00 on Friday as longs threw in the towel.  Nearly 16% of all NYSE stocks were sold to their 52-week low.  This approaches capitulation, but not there yet.  The March 2020 low was -2375.00.  We may see that number being approached again this week, but most certainly see worse in February during the decline of the next Master Cycle.

VIX futures rose to 31.29 thus far this morning.  It may be summoning the energy to challenge the Head & Shoulders target near 35.00 today.  Once above it, the Wave 3 target matching the Head & Shoulders may be reached or exceeded.

This Wednesday’s options expiration shows short gamma trailing off at 23.00 and higher, while long gamma takes over above it.  There are over 8,000 call contracts between 45.00 and 50.00 which have a high likelihood of a payoff.

NDX futures have declined to 14121.00 this morning as it continues to descend in an extended Wave 3.  Options gamma has ben increasingly negative, forcing a self-fulfilling decline.  Today’s options expiration shows negative gamma building down to 13600.00.   There may be a bounce to 14500.00, but the decline may resume quickly.  The NDX Hi-Lo closed at -1293.00 on Friday, a nearly 40% slice of NDX stocks hitting their 52-week low.  However, in March 2020 the Hi-Lo made a low of  -2087.00.

TNX appears to be declining to the Lip of its Cup with Handle formation at 17.00.  There is a lot of support there, so the likelihood of declining through it is small.  The Cycles Model gives little directionality until next week when trending strength comes back.  We may see a flat performance in TNX this week.

USD futures have risen above the 50-day Moving Average at 96.88.  It may reach a Master Cycle high during the second week of February.

3:30 pm

Watch the 4300.00 level.  Should the SPX close at or beneath it, it would be time to take short-term profits.  Monday’s open may be messy.

2:58 pm

SPX has crossed beneath the 200-day/43-week Moving Average at 4422.00 which defines the long-term trend.  In addition, it has crossed beneath the 4450.00 options (over 21,857 put contracts) that may cause an acceleration to the downside.

3:11 pm

SPX crossing beneath 4400.00 strike with 25,445 contracts… another $110+ million of market cap being shorted.  Large strikes at 4375.00 and 4350.00.  Will the pain stop?  Another $86 at 4300.00.

2:20 pm

NDX may be making its most spectacular decline yet.  The potential target for this hourly Cycle appears to be 13550.00.   Another 1100 points lower in the next 2 hours.  It’s hard to tell yet whether the decline lasts over the weekend.  We may see a volatile open on Monday in order to make this target.  It may hit bear market status should it hit 13400.00.

ZeroHedge advises, “For the past year BofA Chief Investment Strategist, Michael Hartnett, has been one of Wall Street’s gloomiest strategists (perhaps just below Albert Edwards and Michael Wilson on the permabear scale) warning that global markets are on the precipice of disaster, and predicting that 2022 will unleash a “rate shock” that will hammer risk assets, and as 2022 gradually rolls out doling out major pain for the bulls, his predictions are coming true. In fact, just last Friday we published his outlook for a “Stagflationary Hellscape For Markets In 2022″, and over the past week traders have watched in shock as this view imposes itself on markets.”

10:39 am

SPX bounced at 4420.00.  Will it escape the short gamma claws?  Hardly.  It may resume with a top-of-the-napkin target near 4250.00. at the end of the day.

ZeroHedge comments, “As this morning’s chaotic open uncoils into another leg lower, Nasdaq is now suffering its worst start to a year in at least 30 years (it is very slightly worse than 2008), and the S&P’s longest weekly losing streak since Sept 2020.

Crucially, the S&P 500 just broke below its 200DMA…

Which now means all the US majors are below their 200DMAs…

10:0 am

SPX declined beneath a massive tranche of  21,870 put contracts which may entail the sale or short sale of over 97 million market cap.  This is what may accelerate the decline.  Should that take place, margin calls may also be de rigeur.

What Do Markets Look Like When They Panic?

Read ZeroHedge.

They look like today.

ZeroHedge observes, “As we noted last night, today we see a whopping $3.3 trillion in total notional option expirations, of which $1.3 trillion in single stock options expirations, the 2nd largest ever, and ~2.7% of the Russell 3000 market cap. According to Goldman, single stock options trading activity remains robust, with an average daily notional of $506bn in January, consistent with the elevated levels of 2021 (average daily notional of $468bn).

Why does this matter? Well, as we have discussed extensively in the past, at major expirations, options traders track situations where a large amount of open interest is set to expire. In situations where there is a significant amount of expiring open interest in at-the-money strikes (strike prices at or very near the current stock price), delta-hedging activity can impact the underlying stock’s trading that day. If market makers or other options traders who delta-hedge their positions are net long ATM options, expiration-related flow could have the effect of dampening stock price movements, causing the stock price to settle near the strike with large open interest. This situation is often referred to as a “pin” and can be an ideal situation for a large investor trying to enter/exit a stock position. Alternatively, if delta-hedgers are net short ATM options (have a “negative gamma” position), their hedging activity could exacerbate stock price moves.”

7:50 am

Good Morning!

NDX futures continued their decline last night, reaching a low of 14617.00 before a bounce.  NDX is caught in a short gamma scenario that has yet to play out.  This may keep the decline underway through options expiration and possibly at the open on Monday, where a searing bounce is brewing.  However, that is not the end of the Master Cycle, which may resume through Thursday/Friday (another options expiration?).  There are large nests of expiring puts at 50 point intervals down to 14500.00 today.  They are large enough to have been bought by hedge funds against a potential crash.  Unfortunately, this activity may make the decline more severe.  Most analysts are not used to this and expect the bounce sooner than later.

This may also raise the spectre of margin calls on the NDX, which closed down 11.4% from the high.  Margin usually kicks in in a decline that exceeds 10%.   The NDX Hi-Lo Index closed yesterday at -653.00.

ZeroHedge advises, “Facing a massive $3.3tln of options notional, including $1.3tln of single stock options, expiring on Friday, Nomura’s Charlie McElligott warned yesterday that “it’s a doozy of epic “short Gamma, short Delta”…

But, SpotGamma points out that the shift lower in markets over the past several days has increased the concentration of put-heavy gamma tied to Fridays OPEX.

We now see >=30% of S&P, and >=20% of QQQ rolling off on 1/21. You can see below that as long as the S&P is <=4600 the expiration brings a reduction in negative gamma (via the closure of puts).

SPX futures probed beneath the mid-Cycle support at 4449.00 in the overnight session where another short gamma bomb is set to go off.  The 200-day Moving Average is at 4427.63.  In today’s options expiration gamma turned seriously short at 4500.00 and there are large holdings of puts at 50-point intervals down to 4350.00.  The NYSE Hi-Lo Index closed at -232.00 yesterday with sellers coming in late in the day.

The hourly Cycles suggest the decline may continue through today and may bleed over to Monday’s open as the dealers and hedge funds “true up” their positions to reflect the drop-off  of  today’s expiring options.

ZeroHedge reports, “Futures, yields, oil, dollar, cryptos – everything is lower on this $3.1 trillion option expiration day…

… as US traders relocate from their bedroom to their basement on the last day of the week, discovering a sea of red in most assets and a “total meltdown” in others. Emini S&P futures are down 0.5% or 22 points to 4,452 which by the way is well off the session lows which saw the S&P plunge as low as 4,429. Nasdaq futures are down 0.8% or 122 and Dow futures are lower by 95 points or 0.25%, while European stocks touched the lowest level in a month weighed by miners, travel and leisure and automakers. 10Y TSY yields are at 1.778%, rising from 1.76% at the session lows, but down from Thuesday’s close around 1.80%.”

VIX futures made an overnight high of 27.18 after closing above the Cycle Top yesterday.  Today’s question is, will it break out above the Head & Shoulders neckline?  In next Wednesday’s options expiration, options turn positive at 23.00 and gamma turns seriously long at 24.00.  While there may be a pullback on Monday, the Master Cycle ends in strength on Thursday/Friday next week.

TNX is in a serious pullback due to the migration of liquidity from stocks to bonds, but it may not last beyond today as trending strength returns over the weekend.  The Cycles Model suggests a continued uptrend through late February, possibly awaiting the FOMC meeting/announcement on the 16th.

MikeShedlock observes, “In his 4th Quarter Review and Outlook, Lacy provides some interesting charts on negative real rates and recessions.

Please consider the Hoisington Management Quarterly Review and Outlook Fourth Quarter 2021. Emphasis Mine

Real Treasury Bond Yields

Real Treasury bond yields fell into deeply negative territory in 2021. In elementary economic models, this event, taken in isolation, would qualify as a plus for economic growth in 2022 and would be consistent with the strength indicated by fourth quarter 2021 tracking models.

Lacy a different view however. His analysis shows that negative real yields are associated with recessions.

Debt overhang and demographics make the matter worse.”

11:00 am

VIX may be making a shallower retracement than normal.  We may be seeing a reversal higher in the next hour or so.  The next VIX options expiration is Wednesday, January 26.  VIX guy may be right this time.

ZeroHedge comments, “VIX guy just called us…

Regular readers of TME are familiar with the “VIX guy”. He is our contra indicator when it comes to VIX as well as short term market directions. Let us remind you of what we wrote about his latest VIX call on Dec 31: “…his latest logic is basically the inverse of what he said in late November. He has also managed picking up the January effect logic and argues for this market to remain trending higher with diminishing volatility. We did not plan to get excited on the last day of the year, but given his perfect track record, executing the first part of the planned long volatility trade suddenly seems like a good idea.” We suggested to look at hedges and pointed out: “…exploring put spreads as a hedge (skew is high).”

This was only twenty days ago and since then a lot of things have changed. The VIX guy called us today outlining his bearish thesis and is basically telling us VIX must go higher: “have you seen the pricing of the rate hikes, tech is going much lower bro, Fed is behind the curve, ARKK is crashing etc”. Given his perfect track record (inversely speaking), we find closing out those put spreads and any long vol trades very attractive (would even consider shorting some vols to fit direction trades).

10:50 am

SPX has hit its round number resistance at 4600.00 and an important hourly pivot.  We may see a reversal here that takes SPX down for the next two days.  Good Luck and good trading.

8:45 am

Good Morning!

I apologize for the delay.  The website server went down this morning and has just been restored.

NDX futures declined to 15010.00 this morning, just above the 200-day Moving Average at 14995.00.  The bounce has taken it over 15200.00.  Natural resistance lies at 15382.00 and the 38.2% Fibonacci retracement is at 15444.00.  The Cycles Model suggests a sort retracement this morning with a resumption of the decline by this afternoon.  The NASDAQ Hi-Lo Index closed at -731.00.  Those going short late in the day may be forced to cover.

SPX futures declined to 4523.50 before bouncing.  Straight line support lies at 4531.10 and may form the neckline of a Head & Shoulders formation.  The minimum H&S target appears to be 4242.00.  This may be in line with the Cycle Bottom at 4077.97 which often provides support for the bounce of a Wave (1).  The Cycles Model suggests that target range may be met by the close on Friday.  The Master Cycle may not be complete until later next week.

The NYSE Hi-Lo Index closed at -262.00.  That suggests short covering may be the impetus for the bounce.  Natural resistance for the bounce lies at the 100-day Moving Average at 4577.00 and round number resistance at 4600.00.  The 38.2% Fib retracement is at 4631.00.

ZeroHedge reports, “Whereas the stock plunge on Tuesday could be blamed on surging rates, the repeat tumble on Wednesday took place as Treasury yields dropped sharply, so with markets at a loss how to read rate signals, so far this morning S&P e-mini futures have rebounded by 23 points ot 0.5% from yesterday’s low just above 4,500 – a key support level according to JPMorgan – as volatility eased and global bond yields appear to have stabilize for now, and hours after China’s latest easing measure when Beijing lowered mortgage lending benchmark rates on Thursday as monetary authorities step up efforts to prop up the slowing economy. 10Y Treasuries rose from session lows, last trading at 1.84%, European stocks fluctuated as the dollar index was little changed and crude oil slipped after a three-day rally as gold held around a two-month high.”

VIX futures declined to a low of 22.83 in the overnight session after testing the Cycle Top resistance at 24.53 yesterday.  The VIX may retest its 50-day Moving Average today, but should be higher by the end of the day.  Yesterday’s monthly options expiration took much of the downward pressure from the VIX as short gamma resided beneath 22.00 in spades.  Long gamma takes over at 25.00 and above, with a self-reinforcing drive higher that may  surprise the experts.

TNX sits at the bottom of its two day trading range, unlikely to fill  the gap beneath it.  The Cycles Model suggests that trending strength returns by tomorrow and may heighten over the weekend.

ZeroHedge reports, “After a furious rout in bonds, rates traders were carefully looking at today’s 20Y auction to see if the recent blowout in yields meant less demand for US paper at auction, or inversely, if the drop in prices had sparked a hunt for bargains. And if the 20 year reopening auction which just closed with the sale of $20BN in 19-year 10-month cusip TC2 is any indication, the answer is resoundingly the latter.

While yields had dropped sharply on the day (granted after yesterday’s surge), some were worried that the lack of a concession would lead to a tail in today’s sale. However, not only did that not happen, but the auction – which priced at a high yield of 2.210% – stopped through the When Issued 2.225% by 1.5bps, the second biggest stop through since June 2021. That said, with a yield some 27bps above the December auction, today’s auction cleared at the highest yield since June.

The bid to cover was solid, and while it was below last month’s stellar 2.59, at 2.48 it was well above the six-auction average of 2.39%.”

4:05 pm

Is this time different?

Wishfully thinking, ZeroHedge comments, “It’s crunch time for the buy-the-dip crowd.

The S&P 500 is threatening to close below its 100-day average — having already slipped below that measure intraday Tuesday for the first time in more than three months.

Drops through moving averages can be seen as concerning because they may signal a change in momentum — but in this case, buying the next day has been an almost sure-fire winner for the past 19 months.

Since June 2020, the benchmark has closed below its 100-day average eight times, data compiled by Bloomberg show. Three of those instances, it never traded lower after that, even intraday, and three times there was never a lower close after. One of the occurrences there was one lower close — by 0.03% — before it headed higher, and the worst time was one close 0.16% lower before it recovered, the data show.”

1:06 pm

This is the hour the Cycle was meant to turn.  It appears that SPX could not get above the options “logjam” at 4600.00.  That leave SPX in a short gamma position…about to resume its decline.  If my hourly Cycle calculations are correct, this Wave 3 decline may last through the open on Monday.  The final low for this Master Cycle may be late on Wednesday, day 259, or Thursday next week.  It’s time for the longs to panic.

ZeroHedge comments, “US equity markets just cannot catch a bid and are puking below critical support levels this morning:

The Russell 2000 is now down 4% on YoY basis (its first YoY drop since July 2020)…

And these shifts are starting to shake the unwavering bullish foundation that so many have stuck to in recent years as TINA is dead (bonds are now trading at their ‘cheapest’ to stocks in three years)…

11:55 am

VIX has finally broken above its previous high and emerged from a massive short gamma zone.  Gamma turns positive above 25.00.  This may create a self-reinforcing panic rally in VIX.  However, it is due for a pullback that may last through the end of the day.  It may revisit the Max Pain zone at 22.00 by the end of the day (monthly options expiration).

11:05 am

SPX aborted its rally in just an hour.  The hourly Cycle may have also been cut short.  It is possible that short gamma for today’s options expiration was simply too much to overcome.  SPX has also crossed the 100-day Moving Average at 4577.00.  My instinct and observations suggest the next 7 days may be a panic (literally).  Hang on!  This could be very exciting.

ZeroHedge observes, “US equity markets have given up all their overnight ramp gains with Small Caps back at the overnight lows (down 1% on the day). The Dow, S&P, and Nasdaq are back to unchanged…

This has pushed all the majors back to or below key technical support levels…

The S&P and The Dow have both broken back below their 100DMA, Nasdaq is pushing further below its 200DMA”

7:30 am

Good Morning!

NDX futures dove deeply to the mid-Cycle support at 15077.00, then bounced.  Should it retrace, the 50% level is at 15540.00.  It may go as high as the trendline in a retest near 15600.00.  The hourly Cycles allow about 4 hours to complete the retrace/retest.  In today’s options expiration, gamma is sort beneath 15400.00 and options turn positive at 15500.00.  For Friday’s (monthly) options expiration calls prevail above 15600.00.  The calls are thinning.  For QQQ (370.55) today’s Max Pain level is 372.00 while gamma turns positive at 378.00.  Friday’s monthly options expiration carries a Max Pain at 373.00.  There are a lot of long options at 375.00 and higher, as investors have bought out-of-the-money calls as long as a year ago.

The NDX Hi-Lo Index closed at -728.00 yesterday.

ZeroHedge remarks, “NASDAQ – welcome to must hold levels

NASDAQ futs are trading close to the huge 15k level. We are well below the 100 day moving average, sentiment is horrible, but 15k is basically the longer term make or break level. Note the 200 day around those levels.

SPX futures made an overnight low at 4544.10, having declined through the 100-day Moving Average at 4576.00.   Futures are positive as I write and expect to bounce for the morning session.  A most likely retracement would be to the top of Wave (iv) at 4655.13, not far from the 50% retracement level at 4659.16.

Today’s expiring options favor puts beneath 4650.00 while calls dominate at 4660.00 and above.  Max Pain appears be hover near 4655.00.  In Friday’s monthly options expiration, there is a massive logjam of both puts and calls at 4600.00.

ZeroHedge reports, “After what earlier looked like another assured overnight rout, especially after 10Y yields hit 1.90% and Brent rose as high as $89/bbl, US equity futures reversed earlier losses to trade higher as earnings optimism outweighed concerns over soaring bond yields and a 50bps March rate hike.  As of 7:00am ET, emini S&P futures were up 14 points ot 0.3% to 4,585, Nasdaq futures were up 65 points or 0.44% and Dow futures were also in the green by 89 points or 0.25%. The dollar slumped after several days of sharp gains, the 10Y yield traded at 1.8826%, down from the session’s highest levels, and Brent was at $88.23.

The NYSE Hi-Lo Index closed at -202.00 yesterday, the lowest reading thus far in 2022.  What that means is that the bounce in the SPX may only be a short squeeze.  Once the powder runs out, the panic begins.

VIX futures have declined to 21.89 as the retracement takes hold.  Today is monthly options and futures expiration.  Max Pain is near 22.00 while long gamma takes hold at 25.00 and above.  That may have been the reason for suppressing the VIX until after today’s options expiration.

ZeroHedge offers something to watch, “As SpotGamma details below, this Friday, January 21st, deep in the money calls worth billions of dollars are set to expire.

Deep in the money calls are unique, because they are valued as being essentially equivalent to shares of stock (referred to as a Delta 1 position). Most of these calls were purchased in 2021 and have participated in the massive stock rally over the last year (S&P500 +24% since 1/1/21).”

TNX is taking a brief rest from its surge this week.  However, the rally is not over.  The Cycles Model points out a double dose of strength over the weekend.  This suggests that TNX may be approaching 20.00 by the end of the month.  This may make the reluctant Fed raise the rate by .5% or more in March.

ZeroHedge remarks, “It all started with another silly forecast from Jamie “Bitcoin is worthless” Dimon who predicted “six or seven” rate hikes, and a tweet from Bill Ackman (who apparently had read the latest Michael Hartnett “Flow Show” in which the BofA strategist said that “Joe [Biden] needs 50bps from Jerome at Jan FOMC” but won’t get it) in which the billioniare hedge fund manager best known for talking his book – in this case being very short bonds –  said that “the @federalreserve  could work to restore its credibility with an initial 50 bps surprise move to shock and awe the market, which would demonstrate its resolve on inflation.”

USD futures challenged the 50-day Moving Average at 95.80 yesterday and have pulled back to 95.49 this morning.  The Cycles Model suggests a continued rise through mid-February.  The potential target for this move appears to be 98.30.