Macro Theme:

 

Short Term SPX Resistance: 4,210 (SPY 420)

Short Term SPX Support: 4,100

SPX Risk Pivot Level: 4,220

Major SPX Range High/Resistance: 4,300

Major SPX Range Low/Support: 4,100

‣ Nov 1st FOMC is a major turning point for equities*

*updated 10/27

 

Founder’s Note:

ES Futures are 50bps higher 4,175. Key SG levels for the SPX are:

• Support: 4,162, 4,150, 4,111, 4100
• Resistance: 4,174, 4,200, 4,250
• 1 Day Implied Range: 0.81%

For QQQ major

Put Wall

support has rolled lower to 340. Resistance above is at 350 & 355.

 

Our 1 day range remains at 80bps, which suggests that price action, while anxious, should remain rangebound. We therefore recommend traders actively monetize positions, as price action should remain unstable. The SPX

Put Wall

has rolled lower to 4100, which syncs with the SPY 410

Put Wall

. We consider this a bearish development as key options positions are rolling lower. This 410/4100 area is now support, with 420/4200 key resistance.

 

Traders will be watching this mornings 8:30AM PCE data, which may set the tone for today. We do not think there will be a material rally, as VIX/IV likely remains bid into this weekend.

In last night’s Founder’s Note we posted some statistics around the

Put Wall,

and what happens when that level is breached. The takeaway from that data is that things get volatile. Volatility is not simply an expression downside movement, as forward 1 & 5 day returns after a Put Wall breach actually have a positive edge – but there are some nasty tails in there.

 

Why is this?

When markets are under the influence of/controlled by put options (as they are now), implied volatility is generally elevated. Adding the element of higher IV’s to underlying price movement means that the value of put options is changing at a much more rapid pace – and with a larger magnitude. This infers that traders are required to more actively adjust positions as options prices rapidly fluctuate. Positions not only means opening & closing of options, but also hedging with the underlying.

Shown below is yesterdays

HIRO

action in the Magnificent 7.

 

• Orange = all expiration calls
• Dark blue = all expiration puts

• Green = Friday’s expiration calls
• Light blue = Friday’s expiration puts

At yesterdays market lows (heading into 1pm) you can see that the pace of put buying slows down (via the blue lines flattening out). What follows the 1pm ET 7 year Treasury Auction trigger was huge Mag7 put selling. This is seen through the blue lines jumping higher, which informs us traders are selling puts. Equally as important here is the fact that the light blue and dark blue lines maintain a fairly tight spread. This signals that a great deal of this put selling action was for Friday’s puts – essentially 0DTE flow.

Put selling generates dealer hedge short covering as traders that owned long puts (dealer short) sell out those puts (dealers buy puts back). This implies that if dealers were short stock as a hedge vs short puts, then can buy back short stock as they buy back puts. This is short covering, which is inherently unstable as it is often price insensitive stock buying, and can cause large market impact.

You could picture traders that were short Mag7 names into & after this weeks earnings, and being up handsomely on these 0DTE puts. As it appears a short term bottom is in, it becomes a scramble to cover. This, along with some 0DTE call buying in both Mag7 + S&P500 creates a violent market rally into 3pm ET. There is nothing to back up this rally once the flow stalled out, as so much of the flow was ultra-short dated.

If the positive delta flow (i.e. color lines moving higher on the chart) is driven by longer term call buying, that pushes long term upside hedging obligations onto dealers as call values increase with higher stock prices. Dealers should be buyers of stock as the stock goes higher. When positive delta is driven by put selling, the amount of stock required to hedge/purchase decreases as the stock goes higher. This is because puts move towards 0 as stock rallies.

As we touched on yesterday, there is nothing to fully release IV’s and create a more long term trend and so price moves should be considered unstable. This instability is driven by this large, short dated order flow. A release, or more meaningful “permanent” reaction, comes with Wednesdays FOMC. This means that the flows we should see in the plot above should be driven by the orange and dark blue lines – longer dated flows. This should be paired with a meaningful shift in implied volatility/VIX.

Therefore through Wednesday we would anticipate trading action looking like the last few sessions – fast mean reverting price action. Then we may be served a larger directional move after 11/1.

Finally, we wanted to take a look at the elevated VIX and what it means for forward price action in the S&P. This data is from the last 5 years, and we’ve marked the last 10 sessions in red. As you can see we have been maintaining fairly tight returns that are within the context of previous returns. What is clear from this data is that major equity returns (both higher & lower) seem to occur on days after the VIX closes + 20. We’re in this environment now, and will likely be so into the trigger of 11/1 FOMC.

Additionally, we’re including a plot of the VIX opening price vs the SPX intraday change. As you are all aware, our SPX 1-day implied move forecasts the open to close range of the SPX (currently 81bps). We’ve again market the last 10 sessions in red, and as you can see we seem to be maintaining moves <=1% (on an absolute basis). Its with the VIX +20 that the data points disperse, which backs the idea that if the VIX nudges up a bit more (+22) we’re likely to see a large breakout/breakdown equity move. Ideally our 1-day implied move would shift higher in order to confirm expectations of higher moves, but we regardless recommend traders be on alert if VIX slides slightly higher.