Macro Theme:

 

Short Term SPX Resistance: 4,800

Short Term SPX Support: 4,700

SPX Risk Pivot Level: 4,700

Major SPX Range High/Resistance: 4,800

Major SPX Range Low/Support: 4,500

‣ We look for higher volatility (i.e. more market movement) starting this week (12/18), out of the huge 12/15 OPEX.*

‣ 4,800 is our current max upside target, due to a Call Wall shift on 12/19. Call Walls in QQQ/IWM are at 410/205.*

‣ A downside break of 4,700 is our interim “risk off” level.*

‣ January OPEX is setting up to be a major event, with a risk that expiring large long call positions could pull markets lower mid to late January.*

*updated 12/20

 

Founder’s Note:

ES Futures are up fractionally to 4,795. Key SG levels for the SPX are:

• Support: 4,740, 4,720, 4,700
• Resistance: 4,750, 4,764, 4,775, 4800
• 1 Day Implied Range: 0.76%

For QQQ support is at 405 & 400, with resistance at 410.

In IWM, support is at 196 & 190, with resistance at 200 & 205.

As we discussed in yesterday’s Q&A, there was a lot of confusing action yesterday (particularly in the morning), best described as noise. 0DTE activity was high, the VIX perked up to 14.5, and our major “risk off” level in the SPY/SPX at 470/4,700 was tested.

Thus far that major risk level held, and the SPX reverted back up into this “fair value” zone near 4,750. We label this as “fair value” as there are several large S&P levels in this zone, and its also the equidistant between the SPX

Call Wall

&

Absolute Gamma

strike. So, there are a fair amount of both calls above this zone, and puts below. Its likely traders are short the bulk of this interest, placing high positive gamma local to this zone.

One of the throttles we flagged for a bounce higher yesterday was volatility, however volatility thus far seems unwilling to mean revert, as seen in the VIX subplot. Similarly, VIX backed off after the SPX tested the 4,700 support level – a point at which higher IV’s may have sparked a more meaningful selloff. The point is that both bulls & bears have had their shots and neither wanted to step up.

If we break vol down a bit more, we can see that clearly short dated IV’s have repriced (Today = teal, yesterday = gray) vs Monday (yellow), which is not surprising given the volatility over the last two sessions. What’s a bit more interesting is that there is a shift higher in those longer dated expiration IV’s. Granted its not a huge jump, but it seems that whatever may have happened on Tuesday disturbed longer term expectations, too.

It could simply be that too many were caught offsides by really low volatility expectations into Wednesday selling, and IV’s have just come up off of the floor. What strikes us as odd is that one would assume this holiday period would draw in volatility sellers. It’s certainly possible that those sellers show up today, and so traders should be on watch for any VIX plunge as a signal that equities will revisit highs. We give edge to markets not doing much today, relative to the last two sessions. We’d further extend this edge toward next week, with “positive holiday drift” in the zone above (up to 4,800) a likely scenario.

To the downside we still hold 4,700 as our “risk off”, as we think below that level negative gamma hedging flows come into play, which may result in a longer term equity decline.