Market Context: Rallies should be categorized as short covering and subject to failure.
S&P 500 Levels:
- $4,000.00 is significant overhead resistance.
- $3,900.00 is a pivot above which volatility should decrease.
- $3,800.00 is major support below which there may be an accelerated sell-off.
What To Watch:
- Larger ranges following the July 15 (equity) and July 20 (VIX) options expirations.
- Equity markets may jump into the Wednesday, July 20, 2022, VIX expiration.
- Implied volatility is likely to rise as we approach the July 27, 2022, FOMC event.
Rally Criteria:
- QQQ/SPY/SPX > 300/400/4000
- Call positions building overhead (Call Walls > Absolute Gamma Strikes)
- MOVE Index aka “Bond VIX” breaking lower
Daily Note:
Futures have recovered Fridays losses, back to 3982. Resistance remains heavy in the 4000-4010 range (SPX/SPY Call Wall). Support shows at 3973, then 3950.
As we’ve been stating there are two forces which should keep markets contained just under 4000 into FOMC:
- 400 SPY & 4000 SPX large gamma strikes create resistance/pin areas into which the market may mean revert, particularly if breached to the upside.
- The equity tail wind from vol sellers has been mainly drained off ahead of the Fed (see Friday AM note). Generally we view declining vol as fuel for market rallies, but vol should now stop declining.
While 4000 is important for today’s trading, it remains the critical put/call (or bull/bear) pivot line in through FOMC. In the “Rally Criteria” bullet points at the top we’ve outlined our criteria for an extended rally to form, and the release of IV post-Fed could be the spark that slides these 3 conditions into place.
Its clear in the chart below that put positions (negative gamma bars) are very light at strikes >4000. This is why we mark 4000 as the transition from a put-driven market to a call-driven market.
With this, a major part of our work is to build trading ranges based on large options positions. The top end of our range is the Call Wall (4000 SPX, 310 QQQ), and we look for it to roll higher as a signal markets have more upside room. In theory as calls (and the Call Wall) systematically roll higher, the market shifts higher in coordination. We want to see positive gamma bars build >4000 in the chart above to help support market rallies.
Because we remain below 4000, our view is that the ~5% rally off of July OPEX has primarily been short covering (puts decaying, IVdropping) and therefore markets are inherently stable underneath. A rejection off of 4000 with some Fed disappointment slips markets back into a negative gamma feedback loop, which reinvigorates volatility.
We’d anticipate a rather large directional move post-FOMC, and so our view is that traders can afford to wait for to see the markets hand before jumping on board.
| SpotGamma Proprietary SPX Levels | Latest Data | SPX Previous | SPY | NDX | QQQ |
|---|---|---|---|---|---|
| Ref Price: | 3962 | 3957 | 395 | 12396 | 301 |
| SpotGamma Imp. 1 Day Move: Est 1 StdDev Open to Close Range |
1.24%, | (±pts): 49.0 | VIX 1 Day Impl. Move:1.45% | ||
| SpotGamma Imp. 5 Day Move: | 2.86% | 3962 (Monday Ref Px) | Range: 3849.0 | 4076.0 | ||
| SpotGamma Gamma Index™: | -0.04 | 0.39 | -0.08 | 0.02 | -0.05 |
| Volatility Trigger™: | 3920 | 3920 | 393 | 11750 | 300 |
| SpotGamma Absolute Gamma Strike: | 4000 | 4000 | 400 | 12500 | 300 |
| Gamma Notional(MM): | -132.0 | -134.26 | -497.0 | 3.0 | -336.0 |
| Additional Key Levels | Latest Data | Previous | SPY | NDX | QQQ |
|---|---|---|---|---|---|
| Zero Gamma Level: | 3973 | 3968 | 0 | 0 | 0 |
| Put Wall Support: | 3800 | 3700 | 370 | 11000 | 280 |
| Call Wall Strike: | 4000 | 4000 | 400 | 11925 | 310 |
| CP Gam Tilt: | 0.99 | 0.92 | 0.82 | 1.36 | 0.78 |
| Delta Neutral Px: | 4019 | ||||
| Net Delta(MM): | $1,447,075 | $1,467,197 | $162,332 | $53,496 | $95,240 |
| 25D Risk Reversal | -0.07 | -0.05 | -0.06 | -0.06 | -0.06 |
| Call Volume | 349,003 | 379,822 | 1,758,073 | 7,315 | 674,265 |
| Put Volume | 761,897 | 719,431 | 2,909,903 | 7,802 | 1,202,469 |
| Call Open Interest | 5,415,122 | 5,446,135 | 6,709,187 | 57,688 | 3,979,358 |
| Put Open Interest | 9,509,905 | 9,656,297 | 10,947,366 | 56,017 | 6,371,253 |
| Key Support & Resistance Strikes: |
|---|
| SPX: [4000, 3950, 3900, 3800] |
| SPY: [400, 395, 390, 380] |
| QQQ: [310, 305, 300, 290] |
| NDX:[14000, 13000, 12500, 11925] |
| SPX Combo (strike, %ile): [4002.0, 4049.0, 4006.0, 3851.0, 3911.0] |
| SPY Combo: [399.04, 403.78, 399.44, 384.03, 389.95] |
| NDX Combo: [12310.0, 12731.0, 12235.0] |
