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: 4,600

‣ 4,800 is our current max upside target, due to a Call Wall shift on 12/19. Call Walls in QQQ/IWM are at 414/205.*

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

‣ SPX IV’s for the final week of 2023 are extremely low, and we warn traders of “jump risk” embedded with this (see note).*

‣ 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 12/27

 

Founder’s Note:

ES Futures are down 35bps to 4,770. Key SG levels for the SPX are:

• Support: 4,724, 4,700
• Resistance: 4,750, 4770, 4,800
• 1 Day Implied Range: 0.75%

For QQQ support is at 407 & 405, with resistance at the 409

Call Wall.

In IWM, support is at 194, with resistance at 200, and the 205

Call Wall.

Today there are two key data points, ISM at 10AM and FOMC minutes at 2pm ET.

Equities were under a bit of pressure yesterday, with the major indexes finding support at 470 SPY (SPX ~4,725) & 400 QQQ. This morning it looks like those levels will come under pressure again today, with SPX 4,700 being the critical support level below yesterdays lows. As we laid out yesterday, should 4,700 break then we think markets come under heavier, longer term duress.

With the S&P down ~50bps, we saw a bid come in to downside strikes. This can be seen via the Fixed Strike Matrix below, wherein the highlighted shade of green (in the green box) reflects a shift higher to downside strike IVs. This level of shift in IV’s is what one would expect given some mild selling, and we would anticipate a much higher relative jump in IV’s if the SPX goes <4,700. Higher IV’s into a declining market increases downside pressure, via downside vanna pressure.

This reinforces the importance of 4,700, because if 4,700 holds one could make this case that these mildly higher IVs are “bounce fuel” that could help pop the market back toward highs. This fuel added to a rally would come from traders selling these higher IV’s, producing upside vanna flows.

Where pressure was higher was in tech, with the Mag 7 Index -1.88%. AAPL was particularly ugly (-3.5%), with the stock indicating an -50bps opening, today.

Looking at AAPL vols, whats interesting is that there was a general shift higher in IV, but it was “parallel”, meaning both downside (puts) and upside (calls) saw higher IV’s. This can be seen in the closing IV (green) being uniformly above that of Friday’s close (gray).

One would expect to see more of a skew in this situation, wherein downside strikes would be up more relative to calls. We think this is the market so far reading yesterdays selling as consolidation, and not anticipating a more extended downside.

The updates to the position and volatility shifts above lead us to believe that the market treated recent selling as simple consolidation. There was not much fear in the way of demand for downside protection, and a positive trigger (say from today’s data points) could quickly revert the market back toward 4,800.

However, yesterday’s selling did stage the SPX down near our critical 4,700 risk-off level. A close below this level would qualify as risk off, but more active traders can watch how both

HIRO

and the VIX respond to any downside tests, today.

Yesterday was a great example of this, wherein there were heavy negative

HIRO

values down into SPY 470 (red line), at which point the

HIRO

signal turned higher (red arrow).

HIRO

turning higher resulted from traders selling puts and/or buying calls, which resulted in the S&P rallying back into the close.

Had the

HIRO

signal not flattened out and turned higher at SPY 470, it would have been a warning that that support may not hold.