Informe SG Levels

Futures are down sharply, near overnight lows of 4620. While we are not qualified to comment on headlines – we’d simply note that headlines matter more when gamma is negative. Our main levels remain similar to that of Wednesday: support at 4600 and resistance at that 4650 area which is also the gamma flip point. The bulk of positive gamma is positioned up into the 4675-4700 which is where we see major resistance. As gamma is negative we anticipate large directional swings in todays shortened session.

The VIX is currently at 25, which infers that the VIX complex is in backwardation (shown below). This is generally what we see when markets are crashing, however we do not consider (yet) consider this an S&P500 crash. Through much of last week we commented that gamma was quite low, and along with holiday liquidity it was likely markets were poised for a lot of “volatile chop”.

For today we look for volatility to be sold near the open, and for markets to make at least an attempt at recovering 4650. What would cause the situation to rapidly deteriorate is if traders do elect to purchase put options. Dealers would in turn likely need to short futures, which would lead to sharper drawdown in markets. We opine the easiest way to monitor for this activity is with watching the VIX – a higher VIX indicates traders are purchasing put options. In this case we see a markets dropping quickly to 4550, which is a significant hedging “node” per the EquityHub model.

Conversely if the VIX declines sharply at the open its a signal that traders are selling put options, and that could lead to a vanna-induced rally back over 4650. Zooming out, we do not see the S&P as “out of the woods” until/unless 4700 is regained.

Model Overview:

As gamma is negative we estimate high volatility until/unless the market recovers the 4650 strike.