Macro Theme:

Short Term SPX Resistance: 5,100

Short Term SPX Support: 5,050

SPX Risk Pivot Level: 5,000

Major SPX Range High/Resistance: 5,115 (SPY 510)

Major SPX Range Low/Support: 4,800

‣ We look for index volatility to now contract after hitting the 5,100 is the upside target.*

‣ 5,000 is critical support, up from 4,900 the week ending 2/16.*

‣ March Quarterly OPEX (3/15) is the next major inflection point.*

*updated 2/23

Founder’s Note:

ES futures are -25bps to 5,068. NQ futures are -20 at 17,880.

Key SG levels for the SPX are:

• Support: 5,050
• Resistance: 5,065, 5,100, 5,115 (SPY 510)

  Call Wall

• 1 Day Implied Range: 0.62%

For QQQ:

• Support: 435, 439
• Resistance: 440

  Call Wall

IWM:

• Support: 195
• Resistance: 200, 210

  Call Wall

Traders are watching the 8:30AM ET PCE print, which has 0DTE IV’s a bit more elevated than earlier this week. To this point today’s ATM 0DTE straddle is 60bps ($30, ref 5,060) vs 30-40bps earlier this week. We also note Fed speakers today: Bostic 10:50AM, Goolsbee 11AM, and Mester 1:15PM. Attention then turns to tomorrows 10AM ISM.

A 60bps straddle is hardly a signal of alarm, but it does suggest markets should move a bit more than the “nothing done” featured earlier this week.

With that, we think the SPX pulls either into 5,100 or down toward 5,000 into tomorrow. The lift to 5,100 would be provided by the a drain off of small PPE-derived IV premium. To the downside things get a bit more interesting in respect to volatility.

We think 5,000 offers major market support, but a drop down to that likely leads to an initial shift higher in volatility. Recently this has resulted in a situation wherein the VIX pops higher, but fixed strike vol shows that higher vols are met with vol/put selling into weakness (ex: 2/1 note). And, what has happened thereafter, is markets bounce. Accordingly, we think any test of the SPY 500(SPX 5,010) – SPX 5,000 area results in a market recovery.

Before proceeding to the next point, we hold 5,000 as our “risk off” level, and a break of this level likely invokes a real jump in volatility and a quick test of the 4,900 area. Said another way, any selling above 5,000 we’d consider consolidation/basing, below 5,000 is a signal for a larger, longer term sell-off.

Zooming out, there has been a very clear cadence to markets this year. As you can see, prices have been trapped between major round strikes (which get packed with gamma positions) between major expirations/events, and the passing of those events “unlocks” the next stage higher as options positions roll and IV shifts.

In this case we don’t think that PCE/ISM is going to be what unlocks the next stage, but its enough to shift things around in the 5,100 – 5,000 range.

This also draws us back to NVDA, which was the focus of much of what we were writing about into last week (ex: here). The argument was that many tech/semi stocks had heavy call skews into NVDA earnings, and the passing of NVDA earnings would lead to a decline in IV’s and a flattening of skews. In this case it seems clear that the NVDA earnings were mostly pulled-forward/front-run, and the stock is now consolidating as it has into other earnings which featured heavy call-skews. This is a loss of momentum, and its a bit of a challenge for that momentum to be recovered as rich tech calls start to burn up. The decline in tech call values in theory reduces upside dealer hedging pressure. This leads to consolidation which fits in with the range-bound behavior that we’ve been seeing.

While these calls are arguably decaying, skew ranks are still quite high. This is shown by the zone of red in the plot below, which tells us that the bulk of top options-volume stocks have high call prices relative to puts. This suggests that if single stocks can quickly regain upside momentum if given a catalyst. There is nothing obvious on the docket to trigger upside, but if vol picks up a little, and is then sold, that could provide some juice.

Conversely we’d imagine that a break below 5,000 in the SPX would result in skew ranks shifting down, and IV ranks shifting up. This would result in the red “blob” moving down and to the right.