The Practical Investor

1:46 pm

The question “Who’s on first?”  is being answered today.  I had previously commented about the unusual flow of liquidity in the markets.  But the behavior of the market tells us some big player was (or soon to be) at work.  That something or somebody was Janet Yellen who, in a panic took the reins of “operation twist” from the Fed to buy back treasuries, flooding the market with liquidity.  According to the Cycles Model, this may continue to November 15.  As a result, the 10-year yield took a dive beneath its Cycle Top support at 40.70.  No doubt this was done to support the incumbents in the upcoming election.

ZeroHedge comments, “Three weeks ago, when the topic of collapsing Treasury liquidity was only barely making the rounds, despite relentless coverage on this website which flagged lack of TSY liquidity as the most likely driver of a wholesale market crash, we quoted BofA’s iconic rates strategist Mark Cabana who warned that the ongoing liquidity collapse meant a “Treasury Market Breakdown Was At Risk.”

But there are “knock on” effects, such as a lower demand for treasuries from foreign buyers.  ZeroHedge reports, “With yields tumbling all day tracking the collapse in the dollar, investors hoping to get some concession out of today’s $42BN 2Y auction could kiss said hope goodbye. It may be why when all was said and done, today’s sale of Cusip FQ9 maturing on Halloween 2024 with a cash coupon of 4.375%, was a bust.”

10:18 am

SPX has completed 13 days from the low at 3491.58.  Yesterday’s comments were in anticipation of 12.9 days which ended at yesterday’s close.  This may be the close of a double zigzag Minor Wave E of Intermediate Wave (B).  Both Waves have a tendency to be rogues and can be manipulated by outside forces.  Should this be the apex, a 12.9-day decline may begin into the next Master Cycle low in stocks.  Otherwise, an inversion may occur, with new targets at 3885.70, the 50-day Moving Average, 3908.00, the 50% retracement value, or 3918.00, the 100-day Moving Average.  In the end, the decline may re-assert itself.

8:20 am

Good Morning!

SPX futures sank to a morning low of 3779.80 and remains near the low.  This may be the beginning of a 17.2 calendar day decline to new lows.  There is an alternate view of an inversion that may cause a high instead of a low.  We may know more later this week.  Thus far, the retracement went to the 38.2% level at 3806.20 and pulled back, but the chatter from analysts is bullish.  A new high after today is likely to support the alternate view.  I wonder if this has anything t do with the election?

In today’s op-ex, Max Pain is at 3795.00.  Long gamma may begin at 3820.00, while short gamma may start at 3750.00.  Today’s option queue is lightly populated, but tomorrow gets heavier, with long gamma starting at 3750.00 and short gamma at 3700.00.

ZeroHedge reports, “US equity futures erased modest earlier gains and traded modestly in the red, after rebounding from session lows as they struggled for direction while investors awaited major earnings reports and weighed last week’s conflicting comments from central bankers who are now in a blackout period. As of 7:30am, contracts on the S&P 500 dropped 0.1% to 3,803 after positive corporate results boosted the underlying index on Monday; on Tuesday, Coca-Cola, General Motors and United Parcel Service all beat analysts’ earnings estimates, while 3M and General Electric fell short.  Alphabet Inc. and Microsoft Corp. are among major companies still reporting after the close. Nasdaq 100 futures were flat, with traders awaiting earnings after market hours from tech giants including Microsoft, Texas Instruments and Alphabet. Treasury yields tumbled for a second day and the dollar was steady even as the Yuan plunged to the lowest on record after the weakest PBOC fix since 2008.

VIX futures are holding steady, but near the low.  The Cycles Model does not anticipate a new low.  However, the next Master Cycle high is not due until mid December, where it may sync up with a new low in the SPX.  .

In tomorrow’s op-ex, the 30.00 strike is hotly contested, with 4,795 call contracts and 5,170 put contracts.  Short gamma begins at 30.00, while long gamma starts at 32.50.

TNX is making a new low, possibly aiming for the Cycle Top support at 40.70.  The Cycles Model suggests a Master Cycle low in mid-November, supporting the thesis that stocks may sell off, rerouting money into treasuries.  The target may be the 50-day Moving Average at 35.21.

3:30 am

This is like reporting on a runaway train.  It is on the same track, just gone further.  I had mentioned a seventh reversal may happen instead of five.  Such is the case.  Prepare for a 12.9-market day decline.

ZeroHedge notes, “The last few days of trading have been driven the new narrative imparted by Powell’s favorite new ‘fed whisperer’ that the elites in the Eccles Building are considering “stepping down” their pace of hiking and then a subsequent pause (not a pivot, mind!).

Nomura’s Charlie McElligott is not buying what Timiraos is selling…

I’m a bit underwhelmed by the Timiraos stuff to be completely honest, as instead of a “signaling an earlier end to tightening,” I simply took it as a “Fed-tervention” to take some “left-tail” instability out of the front-end after Terminal projections touched 5.00% last week, which then too had the dual-benefit of their cause via an “impulse steepening” in curves to push-back against their infatuation with inversions (5s30s cash from -22bps to FLAT, 2s10s cash from -38bps to -24.8bps, 2s30s cash from -39bps to -13.4bps!)

Interestingly, the dovish shifts in Fed rate trajectory expectations have started to unwind today…

9:55 am

The Ag Index is hovering near its Friday low at 463.32, which appears to be its Master Cycle low at day 262.  Should the new Master Cycle begin , it may extend to the week of Thanksgiving.

TheEpochTimes reports, “OSCEOLA, Arkansas—Jeff Worsham is a realist regarding the weather because he believes what he sees.

That the regional drought is a bad one, getting worse, is beyond dispute. The Mississippi River is at the lowest it’s been in decades, he said.

Worse, the barges are backing up because of it, running aground, and wreaking havoc on the regional supply chain.

“There’s no relief in sight as far as rainfall,” said Worsham, port manager of Poinsett Rice & Grain’s loading facility in Osceola, Arkansas.

When will it rain next?

Worsham said, “Who knows?”

7:55 am

Good Moring!

NDX futures rose to 11483.90 before pulling back.  You can see the Intermediate-term resistance at 11502.90, which may be the target for this rally.  Most are reading this chart as a 5-wave decline, which would call for a rally 12100.00, the 50% retracement.  I don’t.  The Broadening Wedge identifies the pattern as an A-B-C instead, with Wave 1-2 of (C) now completing.  While the retracement is approaching the top of the Broadening Wedge at 11650.55, it is more likely to remain beneath it with Intermediate resistance close by.  Although the market seems ready for take-off, it is nowhere near the 38.2% retracement at 11693.00, the minimum retracement for this decline.  Finally, the one hard-and-fast rule of Elliott Wave is that Wave [3] cannot be the smallest.  Therefore, the minimum decline for Wave [3] is beneath 8000.00while the Cup with Handle formation has a lower target.  In the meantime analysts are calling for substantially higher highs.

ZeroHedge remarks, “Coordinated?

We had the WSJ Timiraos piece hit the wires on Friday that changed some of the bearish narrative. Shortly after that we had the BoJ intervene. We won’t speculate on whether or not this was a coordinated effort, but the market was not ready for this. The crowd is short equities, short the JPY and a lot of people see yields moving higher. Fed is in black out as of Friday, equities are exiting the buy back black out in a few days and mid terms are coming up. Got upside crash calls?”

SPX futures rose to 3802.30 over he weekend, making this a close call indeed.  Wave twos may fully retrace their prior decline.  While SPX has exceeded Intermediate-term resistance at 3769.10, there is the smaller Cup with Handle just above 3800.00.  Should it rise above its current Wave (B) high at 3806.91, the current rally marks the end of Wave B.  the 38.2% retracement of the decline from the June 16 high is also at 3806.21.  So, while this rally seems to have legs, it has not yet made a more substantial retracement.  Again, Wave [3] cannot be the smallest Wave.  By definition, in order to equal Wave [1], it must decline to a minimum of 3143.00, while the guideline that Wave (c) may seek equality with Wave (A) show a possible target of 3065.  This does not take into account the Cup with Handle formation and its proposed target.

The next Pivot point occurs in the next two hours, so prepared for a reversal.  A ‘limit down’ day may have the SPX testing the recent low.  Options are light, suggesting no big move is expected.

In today’s op-ex, the Maximum Pain for options investors is at 3715.00.  Long gamma starts at 3750.00 while short gamma begins at 3700.00.

ZeroHedge reports, “US stock futures steadied following a rollercoaster move earlier in the session and after Friday’s sharp rally as traders assessed moves by Chinese President Xi Jinping to tighten his grip on the nation’s leadership while keeping an eye on macro data now that the Fed is in a chatterbox blackout. Contracts on the S&P 500 edged 0.7% higher at 7:30a.m. in New York after earlier rising as much as 1.3% and dropping 0.7%, while the yield on the 10-year Treasury slipped for a second session. Nasdaq 100 futures were up 0.4% after bouncing between gains and losses earlier. Both underlying gauges are coming off their best week since June, and are entering the busiest week of the earnings season with 46% of the S&P 500’s market cap due to announce third-quarter results.

VIX futures have turned positive this morning, indicating a probable reversal may be at hand.  Should the SPX have been making new highs, the VIX would have been beneath its mid-Cycle support at 26.52.  Instead it rose to 30.95, breaking out of Friday’s trading range.

Wednesday’s options expiration shows Maximum Pain at 32.50, with long gamma starting at 32.50.  Short gamma begins at 30.00.  VIX is at the tipping point, options-wise.

TNX declined lower after Friday’s reversal.  It is still above the Cycle Top support at 40.53.  There is a possible Master Cycle pivot in mid-November that may mark the bottom of this correction.  The target appears to be the 50-day Moving Average currently at 34.96.  This may be due to money flows out of stocks and into treasuries.

8:20 am

Good Morning!

SPX futures are now beneath the Lip of the Cup with Handle formation at 3650.00, having reached a low of 3632.40 thus far.  The probability is that the formation is being activated with the anticipation of meeting its target in the next few weeks.  According to the Cycles Model, the decline may be about to intensify with a possible “limit down” as early as Monday.

In today’s op-ex, the puts have the upper hand all the way to 3800.00.  Short gamma becomes intense at 3750.00.  Today may be shaping up to be a bloodbath for the longs.

ZeroHedge reports, “US equities extended their recent slump, set to trim their modest weekly advance even further as soaring bonds yields and poor earnings renewed the gloom that’s sent stocks into a bear market this year. Contracts on the S&P 500 dipped 0.4% at 7:30 a.m. ET, putting the underlying index on track to sharply pare this week’s 2.3% gain…”

VIX rose out of its decline this morning at 30.40.  On the surface, this appears to be another short squeeze developing.  However, the gamma-induced volatility may end up catching some large players flat-footed.

In Wednesday’s op-ex, Maximum Pain for options speculators is at 32.50.  Short gamma begins at 30.00, while long gamma starts at 35.00 and is well populated to 70.00.

ZeroHedge notes Goldman’s expectations, “With $1.8 trillion in OpEx on deck Friday, here are some “quick” thoughts from Goldman star trader Brian Garrett on what to expect.

Option expiry, open interest, second order greeks, positioning, etc: we continue to monitor all of these heading into an “oddly” large expiry tomorrow … this bear market has teeth, but there have been some tactical opportunities along the way. Here is a rundown of things on our dashboard:

• in short, index option usage is at the highs with conviction at the lows
• open interest is at the highs while net exposure is a the low
• tomorrow’s SQ looks “fine”
• market calls for a(nother) bear market rally are getting louder

October SPX expiry is shaping up to be quite large, as these levels of option open interest are generally reserved for quarterly expiration (chart 1 of SPX option OI – largest non-quarterly in over 2y).”

TNX continues to rise strongly, while the Cycles Model suggests even greater strength by mid-week.  Indications are that TNX may rise to 45.00 before finishing its correction.  The Cycles Model indicates that the uptrend may continue to mid-November.

Investing.com explains, “The effective overnight interbank lending rate is now 3.08%. It was just 0% a little over six months ago. According to the Fed’s current plans, the Fed Funds Rate (FFR) is heading to at least 4% by the end of this year; and perhaps all the way to 4.5-5% by early 2023. Is that going to cause a problem, you ask? Well, rising rates have already caused stocks, bonds, gold, crypto—and just about everything else—to plunge. Even the commodity sector, which worked well in the first half of this year, has fallen sharply. Indeed, virtually nothing has worked on the long side except for cash and the US dollar. Sadly, for most, the carnage isn’t over yet, and the pace of the decline is only going to intensify. Here’s why that should be the case.”

USD futures continued their climb to 113.92 this morning before a consolidation.  This rally is anticipated to continue to mid-December.  The stronger USD is causing other currencies to go into “waterfall” declines.

ZeroHedge remarks, “Despite intervention chatter overnight, the Japanese Yen is puking hard this morning, crashing above 151/USD just hours after breaching 150/USD for the first time in 32 years…

That Finance Minister Shunichi Suzuki reiterated Friday that Japan was ready to act, saying that the recent sudden, one-sided yen weakness was undesirable and he was watching markets with a high sense of urgency.

160/USD (from April 1990) looks like the next support…”

Gold futures broke down this morning to 1621.10, crashing through the Cycle Bottom support at 1626.60 and exceeding its prior low.  The Cup with Handle formation is activated and its target has a high likelihood of being met.  There are about five weeks left to the bottom of this Cycle.  No one seems to be talking positively about gold lately.

1:55 pm

SPX has tumbled beneath Short-term support at 3672.00 for the second time in two days and has made a lower low.  The next support lies at 3650.00, where short gamma intensifies.

Zerohedge informs us, ” Short term options speculation mania

Regular readers of TME are familiar with the explosion of extremely short term options that we have covered over past weeks. As a reference GS pointed out the phenomena in 2019 already (here), but things have become much more extreme lately. Nomura’s quant guru, McElligott, explains the latest developments in this speculation game, now mostly practiced by institutional traders and not the retail day trading community.

“…we see the “big boys” having surpassed the prior Retail YOLO set (which had been the largest users of the of the 0-1DTE stuff), and have become full-tilt DAY TRADERS, using the certainty of Dealer hedging flows that their orders create to then amplify and “juice” the intended directional market move…before closing-out positions mere hours later by EOD.” Some stats to ponder:

1. On 9/20/22, 53% of total SPX options volume was from 0 days-til-expiration options—and 65% of the overall was from 0-1DTE options combined

2. 46% of SPY options volume was from 0DTE’s alone on 9/19/22—while on 9/30/22, 61% of total SPY options volume that day was from 0-1DTE’s

3. For QQQ, we saw 0DTE’s make a high print of 41% of overall options volume on 10/14/22—with 56% of the overall QQQ options volumes that same day coming from 0-1DTE’s alone

Most have never run a big volatility book, and even fewer have managed these type of extreme options risks on a daily basis. This is magnifying an already unstable market that is desperate for liquidity…”

1:20 pm

The Ag Index may have put in its Master Cycle low yesterday, on day 260 of the Master Cycle.  This may be the end of the correction which was much milder than I had anticipated.  Trending strength returns next week and maintains through November.   There may be a pullback around the Thanksgiving Holiday, then the uptrend continues through the end of the year.

ZeroHedge reports, “Drought closed a portion of the Mississippi River earlier this week, as the major waterway has been an absolute nightmare for tugboat captains to navigate.

A stretch of the Mississippi River just northeast of Memphis, near Hickman, Kentucky, was closed on Monday because water levels reached record low levels. This caused a logjam of vessels and barges. And it’s the third time a portion of the river has been shuttered in weeks.

We’ve reported dangerously low water levels have left farmers with a barge shortage as freight rates hyperinflate. Some farmers have piled up beans and other crops as logistical pipelines to transport farm goods from the Heartland by barge to export terminals in the US Gulf Coast are paralyzed due to extraordinary conditions on the Mississippi. ”

Michael Snyder sounds the alarm, “I am trying to sound the alarm about this as loudly as I can.  The global food crisis just continues to intensify, and things are going to get really bad in 2023.  As you will see below, two-thirds of European fertilizer production has already been shut down, currency problems are causing massive headaches for poor nations that need to import food, global weather patterns continue to be completely crazy, and the bird flu is killing millions upon millions of chickens and turkeys all over the planet.  On top of everything else, the war in Ukraine is going to restrict the flow of agricultural and fertilizer exports from that part of the world for a long time to come, because there is no end to the war in sight.  In essence, we are facing a “perfect storm” for global food production, and that “perfect storm” is only going to get worse in the months ahead.”

9:00 am

Good Morning!

SPX futures swung from an overnight high of 3718.70 to negative this morning.  It has challenged short-term support at 3670.00 and may confirm the bear trend by declining beneath it.

In today’s options expiration, Maximum Pain for options investors is at 3695.00.  Long gamma may begin at 3700.00 and is confirmed above 3750.00 in a lightly populated options market.  Short gamma may begin at 3685.00 and intensifies at 3650.00.  There is a war of options at 3700.00 in tomorrow’s op-ex with 47,550 put contracts vs 37,161 call contacts at the 3700.00 strike.  What makes options such a troublesome market is that hedge funds are buying one-day and same-day options that makes trading rather fluid, depending on the direction.  The difference between long gamma and short gamma is becoming smaller, which intensifies the moves.

ZeroHedge reports, “US equity-index futures have swung wildly in the illiquid, overnight session, and after earlier dropping as much as 0.5% following the rapid move higher in US Treasurys and UK gilts, they have since erased all losses to trade near session highs, up 0.3% with Nasdaq futures also up 0.2%, as investors the surge in yields fizzled and as investors assessed disappointing earnings from Tesla against resilient reports from AT&T and IBM. Oil jumped, Chinese stocks spiked (but then fizzled) and both the offshore and onshore yuan rose after a Bloomberg report sparked market optimism that Chinese officials are mulling shortening the amount of time people coming into the country must spend in mandatory quarantine, an implicit tempering of the country’s much maligned coved zero policies. The US dollar slumped as sterling spiked as UK Prime Minister Liz Truss began meetings with a key Conservative party official, stoking speculation that a change in leadership may be afoot. US 10-year yield holds steady at about 4.12%.”

VIX futures made a new overnight low at 30.58, but have since turned positive.  I am highlighting a new Head & Shoulders formation that may be triggered in the next day or tow.  The upper trendline may actually be the Lip of a Cup with Handle formation that has a similar target as the old Head & Shoulders.

ZeroHedge proclaims, “Nomura’s Charlie McElligott began his must-read note overnight by warning “go home options, u r drunk!”

And ‘drunk’ they are, as the cross-asset strategist details below a few market-structure / behavioral dynamics contributing to the outrageous intraday volatility of the past week+ period in US Equities, alongside a few stunning charts / metrics…

WHY THIS WEEK HAS BEEN SUCH A HOT-MESS OF SWINGS, FUELED BY AN UNUSUALLY PROFILIC AMOUNT OF $DELTA TO TRADE INTO OP-EX:”

TNX made a new high at 41.80 this morning, but may be ready for a short-term reversal over the weekend.  It must relieve the overbought issue, but not a change of trend.  That may limit the pullback either to Intermediate-term support at 36.85 or the 50-day at 34.40. Trending strength may return by mid-week.

USD futures consolidated this morning after yesterday’s jump out of the Master Cycle low.  The Cycles Model suggest the USD may be gathering strength this weekend, suggesting a large flow of incoming money from overseas countries.  Europe is heating up, politically and economically, driving liquidity into the USD>

1:40 pm

TNX has spiked higher, partially due to the Band of England putting bonds on the market in November ad partially due to the reaction the bond market in the US has received.  Today’s 20-year Treasury auction is the pits.

ZeroHedge remarks, “While it’s safe to say that nobody expected a solid 20Y auction today, today’s reopening of 19-year 10-month cusip TK4 was a debacle.

Pricing at a high yield of 4.395%, this was the highest yield since the 20Y tenor returned in May 2020 (and far above last month’s 3.820%). It also tailed the 4.370% when issued by 2.5bps, the biggest tail in the auction’s 2.5 year history. Ugly.

The bid to cover was 2.50, below both last month’s 2.65 and the six-auction average of 2.58. Also ugly.

But what was most notable is that while Foreign buyers took down just 63.7% of the auction, the lowest since February, and far below the 72.4% recent average – extremely ugly; and with Directs awarded 19.9% (above the recent average of 16.8%), Dealers were left holding 16.4%, far above the six-auction average of 10.8% and the highest since January. Definitely ugly.”

1:30 pm

NDX has declined beneath the Lip of the Cup with Handle formation at 11100.00.  This may trigger a panic decline that may last up to 16 market days (22 calendar days).  The target is illustrated on the chart.  Keep in mind this is an estimated target that may fall short or be exceeded.  Should this be a panic decline, we may see several 10% down days.  We may also see bounces that may cause people to lose their short positions.

10:08 am

The Ag Index may be forming a Master Cycle low.  Yesterday’s low was on day 259, but the correction may be missing a final probe to the low in the next few days.  This may be an ideal time to accumulate shares (DBA) of the Ag Index.  The rise in food prices is multi-dimensional, as discussed below.

ZeroHedge reports, “Supply chains across the Midwest face significant constraints as a portion of the Mississippi River is closed again.

Bloomberg reported a stretch of the Mississippi River, about 125 miles northeast of Memphis, near Hickman, Kentucky, closed Monday as water levels continue to plunge.

Dredging operations began in the afternoon to clear debris from the waterway. The US Coast Guard said three vessels and 51 barges were waiting in the line at Hickman.

According to the National Weather Service, waters in Memphis reached negative 10.79 feet and continue to decline, reaching record-low levels. ”

8:15 am

Good Morning!

SPX futures rose to 3761.70 in the overnight session, but declined beneath 3700.00 since then.  Wild swings are still common as short gamma rules the options market.  The Cycles Model shows 16 days left to the bottom of the current Cycle.

Today’s op-ex shows Max Pain at 3705.00  Long gamma starts at 3740.00, while short gamma begins at 3700.00.

ZeroHedge reports, “US stock futures erased overnight gains  of over 1% as worries about the impact of scorching inflation and a looming recession took the shine off a strong start to the corporate earnings season. Contracts on the S&P 500 dropped 0.4% in an extremely illiquid session at 7:15 a.m. in New York after earlier rising as much as 1.1%. Nasdaq 100 futures were also down 0.4%, despite a boost from a better-than-expected report from Netflix which sent the stock soaring 13% in premarket trading.

Behind the sudden, violent slump is today’s renewed surge in interest rates which pushed the 10Y Yield to 4.10%, the highest level since October 2008, potentially driven by news that the BOE would launch gilt sales on Nov 1.”

VIX futures rose to 31.50 this morning, but remained within yesterday’s trading range.  VIX trading remains compressed in the upper half of its monthly trading range,  The Cycles Mode suggests it may break higher.

Today’s options expiration sows Maximum pain for options investors at 30.00with Long gamma beginning at 30.00.  Short gamma starts at 29.00 in a hotly contested options day.  The next heavy options expiration day is November 16, with Max Pain at 30.00.

Invessting.com notes, “I’m back after a rare day taken off. Stocks finished mostly higher yesterday, with the S&P 500 rising by around 1%. The index finished at approximately 3,720, with options expiring on Friday and the big gamma level still at 3,700. I doubt we will see much and advance from here.

That gamma level should work to keep the S&P 500 index pegged at least until Friday morning, but we will see. What complicates things is that VIX options will expire today, which means we should see it begin to trade more freely and break either higher or lower from this 30 to 32 region.

TNX vaulted higher this morning on the announcement by BoE that bond sales would begin on November 1.  The increased demand for US Treasuries is depressing the price of UST and increasing yields.

RealInvestmentAdvice suggests, “Last week, the FOMC published its minutes from the September meeting, confirming its recent stance that Fed rate hikes will continue until inflation is vanquished. To wit:

“Many participants noted that with inflation well above the Committee’s 2 percent objective and showing little sign so far of abating, and with supply and demand imbalances in the economy continuing, they had raised their assessment of the path of the federal funds rate that would likely be needed to achieve the Committee’s goals.”

As noted previously, the problem with this view is that the Fed is managing monetary policy based on lagging economic data.To wit:

“As the Fed continues to hike rates, each hike takes roughly 9-months to work its way through the economic system. Therefore, the rate hikes from March 2020 won’t show up in the economic data until December. Likewise, the Fed’s subsequent and more aggressive rate hikes won’t be fully reflected in the economic data until early to mid-2023. As the Fed hikes at subsequent meetings, those hikes will continue to compound their effect on a highly leveraged consumer with little savings through higher living costs.

Given the Fed manages monetary policy in the “rear view” mirror, more real-time economic data suggests the economy is rapidly moving from economic slowdown toward recession.”

USD futures broke higher, to 112.86 this morning after a possible Master Cycle low yesterday on day 256.    Another probe lower may be forthcoming in the next few days, so I may remain flexible.

1:30 pm

SPX opened…and peaked today at the completion of market day 43 from the June 16 top…to the hour.  This leaves us 17.2 market days of (panic) decline to complete Primary Wave [3] in a 60.2 market day Cycle.  That would be 86 calendar days.  Aggressive investors may employ their cash in new short positions.  Those who are short may remain so.  Confirmation lies below short-term support/resistance at 3667.26.

ZeroHedge remarks, “With just minutes until the European close, US equity and bond markets are puking back earlier gains with Nasdaq is in the red now on the day (after being up almost 3% in the pre-open)…

The selling started the moment the cash market opened – after another big short-squeeze…”

10:00 am

SPX may be about to make its final push in this retracement.  Both the 38.2% Fibonacci retracement and the top of Wave (B) [thus far] are at 3806.00.  The retracement may stop short at or beneath 3800.00, leaving Wave (B) in its current position.  The Broadening Wedge is often called a 5-point reversal pattern and Wave (B) is at point 5.  Should the SPX go to or above 3806.00, then it will have created “point 7,” a rare, but possible extension.  We should know the final result in the next few hours.

8:25 am

Good Morning!

SPX futures rose to a morning high of 3758.80 (as I write), just above the 78.6% Fibonacci retracement level at 3739.00.  Should the SPX open beneath that level, the likelihood of a resumption of the decline is high.  An alternate path may be a further rise to the 3800.00 level, completing Intermediate Wave (B) and the Broadening Wedge.  The Cycles Model suggests a potential turn at mid-day, giving credence to the alternate path..

In today’s op-ex, the Max Pain level is 3690.00.  Long gamma begins at 3700.00, while short gamma begins at 3680.00.

ZeroHedge reports, “It was another overnight emotional and markets rollercoaster session thanks to the constant chaos of newsflow  and confusion out of the UK.

Just around midnight ET, the Financial Times reported that the Bank of England would delay the start of its gilt-sale program (i.e. Q.T.), sending UK gilts, sterling and US equity futures sharply higher. Those gains, however, turned to losses when the central bank denied the report in a statement just around 5am ET, pushing the yield on the UK 10-year bond seven basis points higher to 4.05% while cable dumped 0.5%. That said, the BOE didn’t rule out the prospect of the BOE announcing a delay at a later time. The central bank has already delayed the start of the sales once, during the fallout from the government’s fiscal plan last month”

VIX futures declined to a morning low at 30.59.  VIX is not supporting the rally in stocks.  To do so, the VIX would need to drop beneath 28.50, creating a new low.  As it stands, the VIS shows investors are still (fully) hedged.

Tomorrow’s op-ex shows Max pain remains at 39.00, where short gamma begins.  Long gamma starts at 30.00 and has a long tail, stretching to 75.00.

TNX appears to be consolidating in place, just above the Cycle Top at 39.74.  It may be forming a continuation pattern for Minor Wave B into the low 40’s.

10:40 am

BKX rose above the lesser trendline at 100.00 as the short squeeze got a new lease.  However the sell signal is at 100.00 and the Head & Shoulders neckline is at 97.00.  The decline may resume until the end of October.

ZeroHedge advises, “Two weeks ago, Bank of America’s credit strategists made a startling observation: in a note titled “This Is How It Breaks” published by BofA’s high yield strategy team, strategists Oleg Melentyev and Eric Yu wrote that distress, dispersion and debt-to-enterprise-value ratios were all above their June highs, and have pushed pushing the bank’s measure of Credit Stress to a “borderline critical zone” to wit:

Our Credit Stress Indicator (CSI) has jumped 4pts on the week to close at 74th pctle. This level exceeds the June peak of 71 and stands borderline critical zone, which we estimate to be north of 75. Most CSI components have deteriorated away from issuance input, which was already at historical peak stress going into this. Low quality distress, dispersion, and debt/EVs are all above June peak levels now.”

10:28 am

SPX rallied to the 78.6% retracement of Friday’s decline, just above the Short-term resistance at 3665.12.  Beneath the Short-term is a sell signal.  Traders are quicker to go short, so the squeezes are getting larger.  There is an outside chance of the SPX rising to 3700.00 under an even more brutal squeeze in an attempt to force investors out of their hedges.

ZeroHedge comments, “Over the weekend, we pointed out that Friday’s bloodbathery was dominated by hedge fund shorting, setting the market up for a major squeeze higher… yet again…

The overall Prime book saw the largest notional net selling in 4 months (-2.1 SDs), driven by short sales outpacing long buys nearly 5 to 1 – this week’s notional short sales ranks in the 94th percentile vs. the past year.

Setting the market up for the negative delta squeeze…”

8:50 am

Good Morning!

SPX futures jumped to a morning high at 3639.70, sort of the 50% retracement level at 3645.06.  Broadening formations normally  have a 50% retracement before proceeding toward their target.  As mentioned last week, the combination of short gamma and lack of liquidity have made the indices more volatile than usual.  The effect is large daily swings in both directions.  The Cycles Model suggests an increasingly volatile market through election day.  The Lip of the Cup with Handle formation has been tripped and is likely to have its target met over the next four weeks.

In today’s op-ex, Maximum pain for options investors is at 3605.00.  Long gamma begins at 3625 and short gamma starts at 3600.00.  While not heavily populated, options may “steer” performance, especially on bad news.

ZeroHedge expects a meltup day, “As we discussed and previewed over the weekend in “Behind Friday’s Market Massacre: A Huge Burst Of Hedge Funds Shorting, Setting Up Another Squeeze“, futures are indeed sharply higher to start the week as Treasury yields slumped and the dollar eased as the British peso (also called Britcoin) rallied and UK bonds surged as the new Chancellor Jeremy Hunt scrapped plans to cut taxes and signaled consumers would shoulder more of the increase in energy prices from next April as he set out a package of measures to get a grip on the public finances, effectively reversing pretty much all UK tax cut measures announced just a few weeks ago. Sentiment was also boosted by company results after Bank of America reported beats on the top and bottom line, rising in premarket trading while utilities and auto stocks led gains in Europe. That was indeed enough to spark a modest (for now) squeeze and as of 730am, S&P 500 futures trade higher by 1.3% and Nasdasq 100 futs rose 1.5% bouncing back from a selloff on Friday that left the technology-heavy gauge at its lowest since July 2020; Europe’s Estoxx50 rose 0.7% in early London session, which sees cable higher by 1%. The BBG Dollar index was down 0.2% and the 10Y traded at 3.95%.

And if all those record retail puts purchased in recent days get monetized, expect another epic meltup today.”

VIX futures are making a low of 31.72 this morning, within Friday’s trading range thus far.  The Cycles Model suggests that, while there may be a breakout above the Head & Shoulders formation in late October to mid-November, it may not peak until mid-December.

In Wednesday’s op-ex, Max Pain remains at 29.00.  Short gamma begins at 29.00 while long gamma starts at 30.00.  Massive call positions are being taken starting at 35.00 and extending to 75.00.

ZeroHedge remarks, “Less than a month ago, we noted a peculiarly ‘scary’ position that one trader had put on, betting on a major crisis occurring in financial markets that prompted The Fed to return all the way back to ZIRP before mid-2024.

Since then that bet size has increased…

Source: Bloomberg

During the last week’s chaotic headlines and market movements, we have seen further bets on a very serious crisis occurring… even sooner.

Bloomberg reports that shortly after 1pm on Friday, a trader used options to put on a wager that the VIX could jump to 100 by April, up from its current level of around 32.”

TNX is testing the Cycle Top support at 39.58.  Once clearly beneath it, there may be a shallow decline to the next technical support at 36.02.  A Trading Cycle low may appear later this week.  The following week shows trending strength returning.

USD futures tumbles to 112.31 this morning, as the correction continues.  We may see the next Master Cycle low by the end of the week.  A retest of the Cycle Top is likely.

12:00 pm

The beginning of earnings season (read: here and here) has not been kind to banks as we are seeing a reversal from yesterday’s short-covering surge.  It is still bearish, despite the rally, and especially so, now that it has crossed beneath the minor formation trendline.  Banks have been hit with interest rate losses and investment security losses.  I wonder how much of the “investment banking” is in the options market?

1:45 am

SPX tested the 61.8% retracement level briefly this morning, then reversed down to the Lip of the Cup with Handle formation at 3610.00.  The panic Cycle is underway and we may see more days like yesterday, but at a much lower level.  Remain/sell short.

ZeroHedge remarks, “A large short in both stocks and bonds triggered a burst of position covering yesterday, causing stock prices to surge and yields to drop. However, while this may be a bottom in equities, it is unlikely to be the bottom while financial conditions remain very tight and real money is still very long.

One veteran trader friend described it to me as “the wildest 60 minutes since the flash crash, an inverse flash crash”. This was a short-covering rally at base. The market was not only very short equities, it was very short bonds too. According to the CoT data, the net short in US equities and Treasuries is as large as it has been going back to 2004.”

Further remarks from ZeroHedge, “When Goldman’s flow trader John Flood discussed yesterday’s tremendous market squeeze, he refused to hide his skepticism that the rally would continue, to wit: “From my seat this does indeed appear to be yet another bear market rally that should be sold. CTAs dont become size buyers until north of 3900 and buybacks will remain in blackout until 10/25. No signs of FOMO buying from L/O community (yet) as they still sit on over $230b of cash (ATH).”

So far he has been spot on, although that too may be a fluke, and merely a case of calling anticipated short-term mean-reversion. Indeed, as JPMorgan TMT trader Ron Adler wrote last last night in “THE REAL TEST”… ” for all of those who called up on the day this morning because they knew no one would remember or care if we ended the day -3%, OR had someone send them the obligatory circuit breaker email and decided that the contra indicator had occurred” the question is “UP OR DOWN FRIDAY….AND HOW MUCH?*”

7:50 am

Good Morning!

NDX futures rose to 11132.00 in the overnight session, but has since eased down nto the red.  Yesterday’s close was beneath the Lip of the Cup with Handle formation at 11040.00 and also beneath the 38.2% Fibonacci retracement level of last week’s decline at 11077.00.  The overnight session bounced short of the 50% retracement level at 11188.00, a weak bounce but expected in a Wave [3].  There are four weeks left in the current Master Cycle, soon to be a panic decline.

In today’s op-ex, Maximum Pain for options investors is at 10980.00.  Long gamma begins at 11000.00, so the rally elevated NDX out of short gamma, possibly beginning at 10950.00.  The QQQ (closing: 268.82) shows Max Pain at 366.00-267.00.  Long gamma begins at 270.00.  Short gamma starts at 265.00.

Yesterday afternoon ZeroHedge remarked, “A little over an hour before today’s CPI report, we published a snapshot of current hedge fund exposure, warning that “net equity positioning fell to fresh 5-year lows ahead of the US CPI data”…

… and concluding that “sentiment has completely bombed out – yes the CPI may come in hot, and will likely lead to more selling, at least initially, but everyone is already positioned for this.”

Fast forward a few hours, when shortly after the dismal CPI print which even Bloomberg said a “disaster for Democrats“, the market reaction has been precisely as expected, with stocks first tumbling as much as 3.3% before soaring 5%.”

SPX futures rose to 3702.40 in the overnight session before declining beneath the close.  I mistakenly said that the 50% retracement of this week’s decline was at 3681.00.  It was 3687.21.  The significance is the daytime high was beneath that level.  So, although retracement rallies may run hot, they may still fall short of normal Fib retracements.  That is the nature  of panic declines, which began a week ago.  There are four weeks left in the current Master Cycle.  Fasten seat belts, please!

Today’s op-ex shows Maximum Pain for options investors at 3665.00.  Go figure.  Long gamma begins at 3680.00.  Puts were sold yesterday, lowering short gamma down to 3625.00, while both puts and calls are heavily populated at 3650.00.

ZeroHedge reports, “Welcome to the final day of the week and first day of Q3 earnings season, which coming after yesterday’s torrid post-CPI reversal, has already seen a flood of newsflow and market volatility: while JPM reported solid earnings this morning to launch the latest earnings season helping push its stock higher in the premarket, followed by mediocre results from Wells and Citi and a soggy update from Morgan Stanley which sent its price down 3%, the big news of the day is the unexpected termination of UK chancellor Kwasi Kwarteng who was summarily fired as a scapegoat for the unprecedented chaos gripping the UK over the past month.

And with traders desperately scrambling to stay on top of all the flashing red headlines, futures are surprisingly flat, as S&P 500 and Nasdaq 100 futures flip between losses and gains as corporate results started rolling in. US banks are expected to post the biggest profit decline of any S&P 500 Index sector, according to data compiled by Bloomberg Intelligence, even as energy props up the entire market. The fear is Fed tightening will spark defaults and force banks to set aside higher provisions against losses.”

VIX futures declined to 31.59, but have rebounded as I write.  Frankly I was curious why VIX had not risen during the 2% slump yesterday morning in the SPX.  The reason is that the hedge funds were selling their SPX puts right out of the opening gate, suppressing the VIX.

VIX is finally beginning its season of trending strength this weekend.  It may be especially strong through October monthly options expiration and November monthly options expiration.  The current Master cycle does not reach its end until mid-December.

There is no Max Pain level in next Wednesday’s op-ex.  Long gamma begins at 30.00 while short gamma starts at 29.00.   Calls were sold and puts were bought (heavily), adding fuel to the coming rally in the VIX.  What is interesting is that calls between 35.00 and 75.00 are being heavily bought.  Hedge fund activity?

Yesterday, the NYSE Hi-Lo Index fell to -905.00.  This tells us there was no serious buying, only short covering which has no impact on the Hi-Lo.  Long ownership appears to be dropping.

TNX declined to 38.51 to continue the probable correction to Intermediate-term support at 35.74.  There may be a shallow low sometime next week as ther appears to be a Trasing Cycle low due.

3:05 pm

SPX was slowed at short-term resistance at 3675.00, then moved on to test the 50% retracement at 3687.21.  Gap resistance is at 3706.00.  I still view this as a retracement of the decline.

ZeroHedge comments, “A little over an hour before today’s CPI report, we published a snapshot of current hedge fund exposure, warning that “net equity positioning fell to fresh 5-year lows ahead of the US CPI data”…

… and concluding that “sentiment has completely bombed out – yes the CPI may come in hot, and will likely lead to more selling, at least initially, but everyone is already positioned for this.”

1:16 pm

SPX made a slight overshoot of the 38.2% Fibonacci retracement at 3658.64.  Should it go higher, the 50% retracement is at 3681.00.  It is testing long gamma at 3650.00, so act accordingly.

10:01 am

There has been some downside profit-taking at the low this morning.  While there may be a chance of a retest of the Lip just above 3600.00 on a rebound, the structural damage may have already been done.  Earnings season starts today which may dampen the ardor of the longs.  Today’s action is a good indication of more downside, regardless of the short-term outcome.

ZeroHedge comments, “US inflation is at a 40-year high, Europe is enduring an energy crisis and major economies are nearing recession. The impact on earnings is about to be laid bare.

Analysts will scrutinize results and conference calls over coming weeks for details of how firms plan to navigate pressure on margins from rising input and labor costs. Soaring interest rates and China’s Covid restrictions are also fanning worries that they haven’t been fast enough to cut earnings estimates.

“No one expects the profit warnings to date will be the end of the story,” said Danni Hewson, an analyst at AJ Bell.”

7:52 am

Good Morning!

NDX futures bounced to an morning high at 10937.90, (before the CPI report) but may be easing lower.  The Lip of the Cup with Handle is near 10960.00.  Today is day 262 of the old Master Cycle, currently terminated at 11660.60.  This may be the “last chance” for a rally that is strong enough to decisively break through resistance at the Lip.  Even so, additional resistance remains at 11293.00 where the NDX gapped down on October 7.  In summary, trendline resistance lies at 10960.00 while the 38.2% Fib retracement is at 11080.00 and the 50% retracement lies at 11188.00.

In today’s op-ex, Max Pain is at 10875.00.  Long gamma is at 11000.00, while short gamma begins at 10840.00.  The key for dealers is to stay above short gamma.  QQQ (closing price: 262.66) is at Max Pain at 269.00.  Puts dominate at 268.00 and below with short gamma in full force at 265.00.  Long gamma starts at 275.00.

ZeroHedge comments, “It’s understandable that traders, both retail and hedge funds, will be nervous ahead of tomorrow’s CPI print: as we noted earlier, with just one exception – the CPI report for July –  the S&P 500’s response has been to slide every time the data was released as inflation has chronically come in hotter than expected. In fact, as shown in the chart below, core CPI has come in at or above expectations on 9 of the past 11 occasions.”

SPX futures rose to 3628.00 pre-CPI, then plummeted to 3500.00.  I won’t bother to change the commentary on the NDX, which is also plummeting.  This morning’s high speed plunge in the indices sets the pace for Wave (C) of [3] which may last another 4 weeks.

In today’s op-ex, Max Pain is at 3605.00.  Long gamma may begin at 3650.00.  Short gamma starts at 3600.00 and is especially strong at 3540.00 and 3500.00.

First, ZeroHedge reported, “US equity futures traded heavy for much of the overnight session ahead of the much-anticipated (and gloomy, having hammered stocks on 7 of 9 CPI days so far in 2022) inflation data at 830am ET (full preview here), even as gilt yields suspiciously slumped overnight as if someone was aware of some non-public news, before futures ripped sharply higher around 730am ET when first SkyNews…”

Then, ZeroHedge did a double take, “While the market’s volatility this week has been focused on UK pension funds and budgets and systemic risk, this morning’s US CPI print will likely determine the next leg from here with expectations for an acceleration in core inflation and small slowdown in headline growth of consumer prices.

Disappointingly, for the hopeful bulls, Headline and Core CPI printed hotter than expected.

Headline CPI rose 0.4% MoM (double expectations) and up 8.2% YoY (hottere than the +8.1% exp)…

Source: Bloomberg

Core CPI is up 28 straight months, soaring to +6.6% YoY – the highest since August 1982…”

Something odd is going on here.  VIX futures rose to 33.70, then dropped to 32.65 before levelling off.  A major breakout should have been anticipated after the CPI print.  Has the market been caught flat-footed, buying calls instead of puts, keeping the VIX suppressed?  Or perhaps there may have been a delay in reporting?  We may find out more after the open.

ZeroHedge comments, “US inflation is at a 40-year high, Europe is enduring an energy crisis and major economies are nearing recession. The impact on earnings is about to be laid bare.

Analysts will scrutinize results and conference calls over coming weeks for details of how firms plan to navigate pressure on margins from rising input and labor costs. Soaring interest rates and China’s Covid restrictions are also fanning worries that they haven’t been fast enough to cut earnings estimates.

“No one expects the profit warnings to date will be the end of the story,” said Danni Hewson, an analyst at AJ Bell.”

TNX decisively broke over 40.00 this morning, reaching a morning high of 40.75.  Rates are acting like a runaway train, with the Cycles telling us it won’t stop until mid-November.  A potential target appears to be 5.3%.

ZeroHedge reports (without the picture), “The hotter than expected CPI print – following a hotter than expected PPI print – has sparked chaos in markets this morning…

Most importantly, rate-hike expectations have soared with the terminal rate now over 4.85%…

Critically, the market is now pricing in 18% odds of a 100bps hike in November…”

USD futures made a high at 113.83, just above Cycle Top support at 113.50.  The Cycle Model suggests a boost in strength next week, leading to a possible new Master Cycle high at the end of the week.

Gold futures plummeted to 1650.50 this morning after crossing beneath the Lip of the Cup with Handle formation yesterday.  This may have triggered a likely panic decline in gold that may last until Thanksgiving week.  Note the potential target.

Crude oil declined to 85.56 this morning, beneath Intermediate-term support at 86.15.  WTIC is now on a confirmed sell signal.  The Cycles Model suggests the decline may continue until the end of the month of October.

10:18 am

BKX, our liquidity proxy, dipped lower this morning before a small bounce.  The current Master Cycle is due to extend to mid-November, indicative of the Panic Cycle due or taking place in other markets, including our own stock market.

ZeroHedge comments, “BofA Chief Investment Strategist Michael Hartnett has a favorite markets phrase that may be the only one a trader in this day and age needs: “Markets stop panicking when central banks start panicking.”

Well, in what may be the best news to shellshocked bulls after the worst September and worst Q3 in generations, in a harrowing year for markets, central banks are starting to panic. First it was the BOJ, then the BOE and now, it’s Switzerland’s turn.

Two weeks ago after the (first) panicked pivot by the BOE, when global markets were in freefall, we said that markets desperately needed some words of encouragement from the Fed, or failing that – and with the dollar soaring to new all time highs every day – the Fed had to make some pre-emptive announcement on USD Fx swap lines, if only to reassure global markets that amid this historic, US dollar short squeeze, at least someone can and will print as many as are needed to avoid systemic collapse.”

8:10 am

Good Morning!

SPX futures rose to an overnight high of 3623.30, well beneath the 38.2% retracement of Friday’s decline.  The reason this is important is this:  Should the decline be the beginning (Wave 1) of Intermediate Wave (C) as illustrated, the retracements may fall within one of the lesser Fibonacci retracements, or possibly lower.  The 38.2% retracement is at 3658.96.  The 50% Fibonacci retracement is 3687.58.  Any rally to or beneath these levels tells us that this is a retracement of Minor Wave 1 of Intermediate Wave (C).  The implication is that the Panic Cycle may have already begun.  Thus, my reluctance to take short profits.  Many other analysts are calling this decline a “Wave 5” and taking profits.  Unfortunately they may be caught wrong-footed, since a Primary Wave [3] may be 1000 to 1500 points in length and may already be underway.  Should they be correct, there is stiff resistance at 3807.00 for the retracement.

In today’s op-ex, Maximum Pain for options holders is at 3605.00.  Long gamma begins at 3650.00.  Short gamma may begin as high at 3600.00, but certainly kicks in at 3575.00.  As you can see, the options market holds sway over the cash market.

ZeroHedge reports, “US stocks were set to bounce, ending a brutal five-day losing streak, amid confusion over what the BOE will do in two days, amid hope that tomorrow’s CPI print will come in lower than expected, and as Treasury yields eased off multi-year highs – at least initially – and investors put aside concerns that overheating inflation could offer more fodder to hawkish Federal Reserve policy makers amid speculation that things are breaking in far too many markets after it emerged that the Fed had sent a substantial amount of dollars to Switzerland this week in the first material use of the dollar swap facility in 2022. Nasdaq futures gained 0.9% by 7:30 a.m. in New York while S&P 500 futures rose 0.7% a day after the benchmark index nearly erased its October gains, while UK bonds tumbled and the pound rose amid UK policy confusion. While global risk sentiment earlier received a boost from a report suggesting the Bank of England could extend its emergency bond repurchases, a bank spokesperson quashed that speculation and said the program would still end on Friday, leaving traders in the dark as to what will happen.”

One telling indicator is that the VIX futures remained well within yesterday’s trading range and has become positive this morning as it may be prepared for a breakout.

In today’s op-ex, Maximum Pain moved up from 29.00 to 32.5o in the last 24 hours, showing a heightened concern for risk.  Puts and calls are both equally high at 30.00.  Short gamma begins there, while long gamma may begin at 35.00.  Long gamma may extend to 60.00 with 6197 calls at that strike.

ZeroHedge observes,”VIX panic is here

VIX 2/8 months futures spread continues moving sharply higher. This “under the hood” VIX measure is basically in panic mode.”

TNX rose to 39.74 this morning with a jolt from the hotter-than-expected PPI print.  This trend may continue to mid-November.  Today’s 10-year auction may provide some fireworks.  Banks must purchase Treasuries unsold to the open market…

ZeroHedge reports, “PPI is the under-card ahead of tomorrow’s main event CPI print, but nevertheless will offer some insights into how the inflation picture is evolving in the US and is expected to slow at the headline level but flat at the core level.

The headline PPI printed +8.5% YoY (which was hotter than the expected +8.4% YoY) but down from August’s 8.7% (jumping 0.4% MoM after 2 straight months lower)…

Source: Bloomberg

Ex-Food, Energy, & Trade, PPI rose 0.4% MoM (double the expected +0.2%).”

Yesterday ZeroHedge reported, “With Treasury prices and yields gyrating like high-beta penny stocks now that liquidity in the world’s “deepest” bond market is practically gone, bond traders were casting nervous eyes at the results of today’s 3Y auction results, the first coupon offering of the week and one month after the ugliest 3Y auction of 2022. Luckily, there were no fireworks this time even if the auction was decidedly of the subpar variety: pricing at a high yield of 4.318%, the highest yield going back to pre-Lehman levels, today’s sale of $40BN in 3Y paper tailed the When Issued 4.310% by 0.8bps, which while hardly good, was better than last month’s 1.4bps tail.”

USD futures were marginally higher this morning, at 113.49.  It remains above Cycle Top support at 113.36.  The Cycles Model suggests a triple dose of trending strength next week as the current Master Cycle comes to a close.