Informe SG Levels

Futures had overnight highs of 4425, but are down to lows of 4375.  Fridays expiration leads to a reduction in gamma, but we still anticipate high volatility for today. Resistance is at 4400 followed by 4453. Support lies at 4356 and 4330.

This is a very fragile, unstable market which is likely prone to large, directional swings.

As there was a substantial expiration on Friday, we expect that many hedges need be settled across indicies and single stocks. Based on this we anticipate some opening chop due to these hedge adjustments. However, we generally believe that the expiration of large put options can lead to a short cover rally in markets. Due to large negative gamma position, we think these rallies could be violent, but offer little stability and could mean revert quickly.

As stated several times last week, we do not think there cannot be a material rally in stocks until after Wednesdays FOMC. Aside from various policy implications holding inflows, its likely that traders are hedging the event which will hold implied volatility[IV] high. This limits the positive vanna flows that could enter the market.

With this in mind, we note both short dated S&P options & the VIX are at 30 which implies a 1.8% 1 day move. This places the term structure in a backwardated position, which suggests a fair amount of fear in markets. Again, given the FOMC, we think that traders may look to sell very short dated IV (Monday expiration, possibly Wednesday) which could provide a market tailwind, too.

Should our bullish read be incorrect, we note there are essentially 2 zones for support. One is at 4275, and the other is well south at 4080. If traders elect to initiate new put positions that would pressure markets lower, and increase elevated IV levels. This could accelerate the velocity of any downside move.