Macro Theme:

Short Term SPX Resistance: 4,750

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 409/205.*

‣ 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 1/4

Founder’s Note:

ES Futures are down 10 to 4,717. Key SG levels for the SPX are:

• Support: 4,675, 4,665, 4,650
• Resistance: 4,700, 4,720, 4,750
• 1 Day Implied Range: 0.74%

For QQQ:

• Support: 400
• Resistance: 403, 409

  Call Wall

IWM:

• Support is at 198,
• Resistance at 200, and the 205

  Call Wall

NFP is out today, at 8:30 AM ET.

Yesterday’s SPX close to 4,688 has triggered our risk-off condition, which may now lead to accelerated selling and a spike in implied volatility/VIX. First, traders are fixed on today’s NFP, as evidenced by the rather elevated 0DTE IV, shown below. Today’s ATM SPX IV is as high as we’ve seen in the last 60 days. We do think it will take a fairly strong, positive reaction for the SPX to punch up through 4,700 – 4,720 (SPY 470).

Downside, we think, is a path of lower resistance. Assuming the NFP doesn’t somehow kick-save markets >4,700, we think the 4,600

Put Wall

is the first target.

Critical to our downside projection is a spike in implied volatility. However, yesterday’s break under 4,700 has not yet sparked concerns. This can be seen in our Fixed Strike Matrix [FSM], shown below. In this case we are comparing fixed strike volatility from the close of Tuesday night to this AM for the SPX.

As you can see, there is a sea of light red for strikes <ATM (red box), which informs us that IV’s are lower for these downside strikes vs Tuesday’s close, despite the SPX being down nearly 1% yesterday. The implication here is that trader’s are selling volatility (puts) into this market decline. To be clear, these IV changes aren’t massive (just on the negative side of flat), but it speaks to traders somewhere between “not hedged” and “shorting puts” into weaker markets. That strikes us as odd.

Should they flip to long volatility positions (i.e. put buying), it could accelerate downside action in equities.

The takeaway here is that while we remain under 4,700, this lack of response in IV elevates market risk, because traders have not yet started to position for further downside. If they decide to do so, they may first have to cover short put positions, which adds to long put demand. We laid out these mechanics in yesterday’s AM note, too.

The second factor here is that looming Jan OPEX, which we covered in depth on Tuesday.

There is still a very large amount of

call delta

(purple) set to expire on 1/19, which suggests there are plenty of long hedges to unwind if the market starts to decline.

If you couple this with the lazy IV response from above, you have a recipe for high risk.