Macro Theme:

 

Short Term SPX Resistance: 4,668

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

‣ 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 12/26

 

Founder’s Note:

ES Futures are flat at 4,809. Key SG levels for the SPX are:

• Support: 4,745, 4,710, 4,700
• Resistance: 4,750, 4,769, 4,775, 4800
• 1 Day Implied Range: 0.82%

For QQQ support is at 405 & 400, with resistance at 409 & the 410

Call Wall.

 

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

Call Wall.

 

As we enter the final week of trading, two S&P500 strikes have emerged as major levels to watch: The first is SPY 475 (~4,768 SPX), and the second is 4,800 SPX. These levels, we believe, should create a sticky upside zone into 4,800 for the S&P500 into year end. We also see a large build-up of strike-gamma a 409/410 QQQ, & 205 IWM. For S&P/QQQ these major resistance zones are ~25bps overhead, while for IWM the 205 level is 1%, implying IWM may have a bit more upside available vs the other major indexes.

You may note that the gamma strikes to the downside are much smaller, which suggests less material support if equities jump lower. For this reason we continue to mark 4,700 SPX as a major support line, and our “risk off” level. It’s <4,700 we see dealer hedging flows flipping to a negative gamma stance, which would likely couple with a spike in implied volatility. Both of these factors (gamma & vanna) would potentially serve to push equities lower.

Regarding volatility, the VIX starts the week at an elevated 13.77. However, we see little on the data side this week that is significant. This is reflected in the SPX term structure, which is rather flat, and reflects ATM IV’s near 12%. This equates to traders pricing in 75bps of daily SPX movement, which is in line with our 1-day SPX range of 82bps. Based on this, IV’s are pretty fair.

However, this AM’s 13.7 VIX is reading as a bit rich, but is likely higher due to some noise around the extended weekend. A VIX of ~13 (Friday’s close) is used to calculate the plot below, which compares the VIX to 1-month SPX realized volatility. As you can see, the current metric is right on the long term mean (dashed red line), due to last weeks pop in 1-month SPX realized volatility (which happened to due last Wed’s test of 4,700).

Into last weeks VIX expiration we spent some time looking at the elevated VIX (note here), which is calculated from the price of SPX options expiring near 30 days to expiration. In that previous note, the focus was on the VIX not behaving in line with SPX movement (i.e. the sleepy SPX vs elevated VIX), and the idea that last Wednesday’s VIX expiration could “re-snap” the VIX/SPX beta. Interestingly, last week saw a lot more price action/movement in the SPX, which brought up SPX realized volatility to 9.5% (from ~7%). This essentially pushed SPX volatility up toward the elevated VIX (vs VIX dropping down to new lows).

For this week, we would anticipate SPX realized volatility sliding lower (i.e. a quiet holiday week), but if the VIX remains elevated (i.e. above the red dashed line) it could be a forewarning of volatility ahead.

This somewhat syncs with the gamma positioning that we framed at the start of this note, wherein there is some sticky upside due to large gamma bars, but equity downside seems particularly more exposed to jumps in volatility. This is akin to what happened last week on Wednesday, wherein the SPX quickly lost 1.6% with no apparent trigger (outside of 0DTE, note here). We don’t think that this jumpy-SPX-downside is something you necessarily want to bet on, but its something you should respect if you see it take shape in price action.

We do, however, think that traders can lean on SPX resistance into 4,800, with that likely forming as a top into Friday.