Macro Theme:

Short Term SPX Resistance: 4,770

Short Term SPX Support: 4,715

SPX Risk Pivot Level: 4,700

Major SPX Range High/Resistance: 4,815 (SPY Call Wall)

Major SPX Range Low/Support: 4,600

‣ 4,800 – 4,815 is our current max upside target into 1/19 OPEX. Call Walls in QQQ/IWM are at 409/200.*

‣ A downside break of 4,700 is our interim “risk off” level.*

‣ January OPEX is setting up to be a major event, with a risk that expiring large long call positions could pull markets lower mid to late January.*

‣ Implied volatility remains muted despite recent equity market weakness, with a surge in demand for long volatility (i.e put buying) is a potential driver of equity weakness.*

*updated 1/16

Founder’s Note:

ES Futures are down 40bps to 4,790. Key SG levels for the SPX are:

• Support: 4,715, 4,700
• Resistance: 4,750, 4,765, 4,800
• 1 Day Implied Range: 0.63%

For QQQ:

• Support: 405, 403, 400
• Resistance: 409, 410

IWM:

• Support: 185
• Resistance: 190, 194, 200

TLDR: Our view is unchanged from those outlined several days ago, that 4,800 is heavy resistance into Friday, and the twin risk-catalysts of a low IV & large Jan OPEX lurk below 4,700 in the SPX.

This morning we see equity futures higher, with the VIX shifting lower. This implies that volatility sellers are coming out to extract what little premium was build up over the last few days. We stress that its a small amount of premium because, despite yesterdays VIX of 15 and SPY test of 470, underlying IV metrics never showed much concern.

This low level of concern is reflected in the SPX term structure, below. As you can see, today’s reading (teal) is equal to that of yesterday (gray), but well above the very low readings from Friday’s pre-holiday weekend IV’s (yellow). These current IV’s, while ~3 vol points higher than Friday, are not exactly rich at ~10-11%. A 10% IV equates to traders pricing in ~65bps of daily movement in the SPX, which is right in line with our SG 1-Day implied move of 63bps.

Objectively, while we have been flagging these twin-risks of OPEX & low IV’s (which are in place through Monday), the equity market is doing what its been priced to do. Further, without a break of 4,700, negative vanna flows can’t overwhelm dip buyers and force equities lower.

We note that while the Mag 7’s, S&P & QQQ’s are fairly stable this week, an equal-weighted basked of the S&P500 (RSP) and IWM’s are fairing worse, which is likely in response to the higher rates seen over the past week.

Where does this leave us going forward?

For the remainder of this week, one has to give edge to the S&P remaining inside of the neural zone of 4,700-4,800. If <4,700 gives way, we think larger downside must be respected (ex: buy dips with a stop just <4,700). This is the range in which the large OPEX gamma has built up, as shown below in SPY. In particular we flag the large gamma at SPY 470 (yesterday’s low), and 475 (major resistance for today). While 480 is a smaller strike for SPY, 4,800 is a very

large gamma strike

for the SPX, which should contain upside into Friday.

In an upside scenario we think that the SPX will likely wrestle with 4,800 in through 2/1, but we will let the roll-up of

Call Wall’

s dictate that upside resistance. Currently the SPX Call wall shifted to 4,900, with SPY’s wall remaining at 480. To the downside, a break of 4,700 likely invokes a test of 4,600.

Out of FOMC we likely see a broader directional move set up. When we look out in time, there isn’t a clear downside strike setting up, but we do see 5,000 as a major upside level due to an increase of positions at that strike several weeks ago.