Macro Theme:

Short Term SPX Resistance: 4,365

Short Term SPX Support: 4,300

SPX Risk Pivot Level: 4,315

Major SPX Range High/Resistance: 4,400

Major SPX Range Low/Support: 4,200

‣ Equity direction is likely to be driven by Wed PPI/FOMC mins + Thursday’s CPI. 4,400 is the short term upside target out of these events*

‣ 4,200 is the short term downside target if these datapoints are bearish*

*updated 10/10

Founder’s Note:

ES Futures are 25bps higher at 4,380. Key SG levels for the SPX are:

• Support: 4,315 & 4,300
• Resistance: 4,350, 4,365 (SPY 435), 4,375 & 4,400
• 1 Day Implied Range: 0.80%

Futures are extending yesterdays gains, with the S&P breaching our key 4,315 (SPY 430) resistance line into yesterdays close. This is a short term bullish development, with major resistance now seen at 4,350-4,360 (SPY 435).

Based on our earlier targets, we had been looking for a test of 4,400 if the SPX broke 4,315. We’ve adjusted those targets today due to changes with implied volatility, which we discuss in the paragraphs below.

4,300 is seen as support for today.

Shown below is gamma by strike for SPY, and you can see there are heavy positions at the 430 & 440 strikes. This is what makes these levels (430SPY/4,300SPX & 440SPY/4,400SPX) significant as support & resistance. You may also note >440

call gamma

drops significantly (call bars) suggesting that momentum would stall >440/4,400. We also draw your attention to the large orange gamma bar between these 430 & 440, which lies at 435 (4,360 SPX) – that suggests short term resistance at that level (and is reflected in the resistance lines above).

Given a break of 4,325, we have been outlining the target of 4,400 because of the fuel provided by both negative gamma (which propels directional moves) and high vanna. In this case, we can see that our IV-adjusted delta (purple line) troughs at 4,400. This suggests at this strike the effects of an IV drawdown will wane, which removes momentum into this 4,400 zone.

We also highlight the grey line, which is a model of base delta (i.e. delta not adjusted for changes in IV). This model troughs at 4,360, which coincidentally lines up with 435 (highlighted above). This implies that a short cover rally without a “vanna-kicker” (i.e. IV decline) has fuel to ~4,360.

In yesterday’s AM note we felt that the chances for a break higher was reduced because IV was likely to be sticky before tomorrows PPI/FOMC mins & Thursday’s CPI. This means that “vanna” would not be available to help fuel a rally, which zaps upside momentum.

Concerning the rally, we were off. Why? It appears yesterdays rally was an automated response to lower rates. As an example, you can see that 10Y yields came off at the equity cash session open, and the SPX responded with a rally. Over this same period we saw roughly $2bn in S&P500 0DTE

call deltas

bought (vs nearly $0 0DTE

put deltas

), which helped to push the rally higher into the afternoon.

Here is the twist…concerning IV’s being sticky ahead of key data points – it appears we were correct.

Shown below is our Fixed Strike Vol Matrix, which displays IV’s for every strike, over all expirations. In this case, we are comparing the IV change for each strike/expiration from Friday’s close to this morning. As you can see, the entire plot is green, which suggests that IV’s for all strikes/expirations are higher from Friday, despite yesterdays market rally.

In other words – IV did not release with yesterday’s rally. This implies yesterdays rally did not come with much assistance from vanna/IV decay.

The options market is not yet offering momentum to support yesterdays rally, which removes the stability/stickiness of current SPX prices. This implies that moves today are only “intraday-tradeable”, and subject to quick reversals.

A larger directional move likely only spurs from the longer term changes in IV’s out of Thursday and we think that will be a “fatter pitch” to swing at, as the directional move that sets up may extend from Thursday into next weeks October OPEX.

What does all of this mean?

We very much would have liked to wrap a bow around Friday’s/yesterdays rallies, with an overhead target of 4,400 “in the bag”. The failure of IV’s to decline suggests that yesterday’s rally was not due to material changes in options positions (ex-0DTE), and more the function of something like a mechanical rate-response (i.e. rates lower, stocks higher).

This makes today’s price action a bit cloudy. If IV’s do come off (i.e. VIX presses lower) then we think the S&P can move to 4,350-4,360 (SPY 435), but we think that may be it for today. Following positive data out of tomorrows PPI/FOMC, the rally could have more legs if the data points are equity-positive.