Macro Theme:

 

Short Term Resistance: 4,550 – 4,565

Short Term Support: 4,500

Risk Pivot Level: 4,500 – 4,515 (SPY 450)

Major Range High/Resistance: 4,600

Major Range Low/Support: 4,400

‣ A window of weakness may open with 7/19 VIX expiration, in through the following week (7/24) which may result in a break <4,500

‣ The bullish case remains intact with SPX >4,500*

‣ Risk shifts higher on a break of 4,500, wherein we would look for a test of 4,400 with a VIX shift towards 20*

*updated 7/24

 

Founder’s Note:

Futures are 10pts higher to 4,575. Resistance for today is at 4,550 & 4,565. Support is at 4,515 & 4,500.

In QQQ support shows at 375, then 370. Resistance is at 379-380.

The SPY/SPX

Call Walls

have rolled higher to 460/4,600 due to Fridays expiration. This is now the top our trading range as the August OPEX cycle kicks off.

4,500 is the critical level here. Bulls continue to hold the edge while the S&P is >=4,500, and volatility likely jumps on a break < 4,500.

Having a look at updated positioning, we think its unlikely 4,500 is lost before Wednesday’s FOMC, and we look for 0 & 1 DTE (aka “Pre-FOMC”) positions to fill in at 4,500 – 4,515 support below & 4,550-4,565 resistance above.

Following FOMC, should 4,500 break, then we think it leads to a test of 4,400 which would be interim support.

The predominant shift from Friday’s OPEX was the closing of in-the-money calls, with new calls layered on in the 4,550 – 4,600 area. Further, we saw some put additions <=4,500. The end result of this is that our SG Implied move contracted to 77bps, from 80bps on Friday. Generally we look a bump in trading ranges due to OPEX, however enough positions rolled in that our model still estimates low volatility.

We are still looking for post-OPEX weakness and a test of 4,500, however our estimated trading range/volatility is likely to remain low until/unless 4,500 is broken.

The lurking risk here is with volatility. Short term IV’s are slightly elevated due to FOMC, and several other catalysts this week:

Tuesday, July 25 (at the close): MSFT, GOOGL, V, and TXN earnings

Wednesday, July 26 (2pm EST): Fed Interest Rate Decision

Wednesday, July 26 (before open): Earnings for BA, KO, and TMO. At the close: META earnings.

Thursday, July 27 (8:30am EST): GDP

Thursday, July 27: AMZN earnings (time not yet specified). MA earnings (before open). INTC and TMUS earnings (at the close).

Friday, July 28 (before open): PG, CVX, and CL earnings

However anything out past 1 month is pricing in benign equity movement. What typically happens into FOMC’s is that the Fed does little to provoke downside market movement, and FOMC event volatility is drained off. This helps to give bulls a bump.

The risk is that Powell delivers a message that shakes markets up, which is, of course, always the FOMC risk. However, as we have been discussing, volatility is currently compressed in unusual ways, creating an underbelly of “jumpiness” (vol of vol).

This can most easily be seen through the SDEX, which measures the IV of a 1 month ATM SPY put, vs a 1 month SPY OTM put (specifically 1 standard deviation OTM).

As you can see, this index is at major lows suggesting that not only is long put demand low, it infers there is a meaningful short put position on. The risk here is a “flare up” that forces some downside hedge demand – but first those short puts have to cover. We don’t think this is a “limit down” scenario, but “VIX 20” feels reasonable (if you consider that the long term average VIX premium to 1 month SPX realized is 3-4pts, if we have 1% daily SPX moves = 16%RV + 4% VIX premium to RV = 20 VIX).

If the S&P breaks 4,500, this is a scenario which becomes much more meaningful.