Macro Theme:

Key dates ahead:

 

Founder’s Note:

Futures are off more that 1.3% after Friday’s OPEX & the Moody’s Debt Downgrade.

TLDR: We lean on the short side as long as SPX <=5,905.

We, of course, thought a reversal was in the cards due to the very call heavy, low risk premium market heading into Friday’s expiration – and so we look at the downgrade as simply the declines raison d’être – the excuse.

The truth is ES futures (below) are only back to Thursday’s price levels, and we viewed Friday’s rally as a 0DTE driven jam – a blow off top.

SPX vols are up 1/2 – 1 vol point from Friday’s close, which is not too shabby, but hardly a panic. Again, we closed on Friday night at 3-month stock highs/VIX & IV lows – so this (so far) doesn’t scream much more than a causal adjustment.

So, where do we stand?

For the moment the overnight fade has stopped just below 5,900, which is the location of some very large SPX gamma strikes – namely the 5,905 end-of-June JPM call. South of there, for the SPX Index positions, there is nothing. You can see this via the purple GEX curve, which is just a flattish wave, suggesting there are no material long or short put positions below 5,900.

Most of you know, though, that its been the SPY which drives our downside potential, and we see plenty of negative gamma down to 530 which would be our max downside target at this time. Does this mean that we test 5,300?

No – Thats a full 10% from current price levels, and not what we are calling for. But, that negative gamma does inform us that some slippery downside remains in play assuming that we see negative HIRO values come into play on the open.

This has largely been a flows driven market, meaning for most of April we did not lean on key gamma strikes but instead used flows (i.e. HIRO) and changes in vols to detect changes in sentiment/direction. If traders start selling calls/buying puts at the open, and IV/VIX is stable-to-higher, then we will be eyeing 5,800 as “first stop”.

Consider if we saw the opposite positioning – a giant layer of positive gamma near 585/5,850 – then we’d be suggesting that the dip was over due to major support. Support doesn’t appear to be there, and so its up to active dip-buyers.