Macro Theme:

Short Term Resistance: 4,400

Short Term Support: 4,350

Risk Pivot Level: 4,500

Major Range High/Resistance: 4,500 SPX Call Wall

Major Range Low/Support: 4,370 SPY 435 Put Wall

‣ Catalysts this week: VIX Exp & FOMC (20th). *

‣ Our trade is to enter “long volatility” positions out of CPI & into FOMC, with current ATM IV’s for a 30 day SPX option ~12% (too low, in our view). A bullish CPI/FOMC could produce a sharp upside shift, in which case we’d target >4,600 into the end of Sep. A bearish reaction could move the market <4,400. We think the market is underpricing market movement out of these events.*

*updated 9/18

Founder’s Note:

ES futures are lower to 4,421. Key SPX support levels for today are: 4,367 (SPY 435

Put Wall

) and 4,350 & 4,300. Resistance above is at the 4,400 SPX

Put Wall

, then 4,415 (SPY 440). Our daily range estimate remains at 0.81%, which has already been mildly breached in the premarket, however we are in strongly negative market gamma at -2.47 on the SG Gamma Index™.

For QQQ, support is at the 360

Put Wall.

Resistance above is at 370.

Our view from yesterday was that the SPX would close at one of these key levels: 4,500 or 4,400. As Powell sparked downside, the SPX closed at 4,402. This lower close opened up the downside scenario that we have been outlining, of a move down toward the 4,200 area by end-of-month. Based on current futures levels, the SPX is currently 3.5% above this key 4,200 strike.

Additionally, we noted yesterday that we wanted to see the

Put Wall

(s) roll lower to confirm further downside for today’s session. Interestingly,

Put Wall

s shifts were mixed. The SPX

Put Wall

held at 4,400, and the SPY

Put Wall

shifted from 440 to 435. The QQQ

Put Wall

shifted higher, from 350 to 360.

Further, what we find this morning is that both the SPY & QQQ are testing their

Put Walls

, with current pre-market levels of $435.4 & $360.9.

Technically we consider a market move <

Put Wall

as oversold as it suggests there is a lack of put demand at lower strikes. In this case we do anticipate the

Put Wall

s rolling lower into tomorrow’s session which would confirm further downside.

The other area of intrigue is with implied volatility. While expirations >2 weeks out show mildly higher IV’s, we see that shorter dated IV’s are lower. This can be seen in the skew plot of 9/29 SPX contracts, below. What happened here is the FOMC event-vol came off, and there isn’t much of a bid to short dated puts.

With both

Put Walls

, and IV’s sluggish, it suggests that a market decline may be more of a grind, akin to that of August, vs a sudden sharp drop. Recall that through the first two weeks of August the SPX was -5%, with the VIX peaking near 19 (chart below).

This morning we have the VIX at 16, with some rather large support lines posted below. These support lines may slow the speed of a further descent.

Finally, we turn to the gamma model, which we’ve recently been highlighting. Here you can see the lines, which depict rate of change of gamma, curve higher <4,300. This suggests that the SPX is well supported in a move toward 4,300 as dealers may be buying delta on market declines <4,300.

None of this means that equities cannot go lower, particularly if macro players offload equities. What is does suggest is that volatility should remain fairly contained because options hedging flows are not strong sellers into weaker markets. This has implications for how you may chose to express downside trades, with high delta puts and/or short stock possibly outperforming longer dated, out-of-the-money, vega-sensitive puts.

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