1. Macro Theme:

 

Short Term Resistance: 4,325

Short Term Support: 4,250

Risk Pivot Level: 4,325

Major Range High/Resistance: 4,400

Major Range Low/Support: 4,200

‣ We look for a rally >=4,400 the week of 10/2*

‣ 4,200 likely remains a zone for major market lows into 10/20 OPEX.*

*updated 10/2

 

Founder’s Note:

ES Futures are flat to 4,325. Key SG levels for the SPX are:

• Support: 4,275, 4,250 4,225 & 4,300
• Resistance: 4,300, 4,315
• 1 Day Implied Range: 0.81%

Key for today, and this week, is that both gamma & vanna related hedging flows should be large, and set to drive price action. As noted last week, we are giving edge to a market rally for this week, with an upside target >=4,400. A recovery of 4,325 remains the key rally signal.

We’d also note this bullish stance was looking good this morning, as pre-market futures were up near 4,355, only to give those early gains back. This highlights a key feature of this market dynamic: large and unstable price swings. In this environment price levels and/or action which seem unlikely to happen, could well be in play, which infers sizing trades down and being light on your feet!

Today, traders will likely be queuing from 9:45AM ET S&P PMI, 10AM ET ISM & Powell speaking at 11AM ET.

Friday removed ~$100bn of total

put delta

across the major Indices. That served to reduce the amount of delta & gamma at key levels, which had built up to be rather large. However, it was not enough to remove those levels as major zones. 4,200 is still showing as a max downside area, with first major resistance in the 4,300-4,325 area, followed by 4,400.

 

Looking further at these key zones, on the left is our gamma plot which shows that the “elbow” major support area still down at 4,200 (see Friday’s note). On Friday the low reading on this gamma curve, which represents change in gamma, was -$2bn vs -$1.7bn today.

As we are in a negative gamma regime, dealer hedging should assist in pushing directional moves, particularly up into 4,400 (we’re positive gamma is likely to materially increase) or down to 4,200 (where negative gamma pressure starts to subside).

On the right is our vanna model, which we are using to target upside in the event of a short-cover rally. In this case the “trough” of this model was, and is, at 4,400. This is where we see the vanna fuel burning off. Conversely should IV’s increase here, it adds to downside dealer hedging flows.

There is not really a “stop” to this model to the downside, as it is based off of implied volatility.

Per IV’s – we can see by the S&P term structure, IV’s are mildly elevated vs a week ago, and in a backwardated position. It is from this backwardated stance that large vol spikes tend take place (vs in a contango), but “early” backwardation was seen several times over the recent months (ex: May, July, August).

However, in each of those cases, including this current selloff, downside price action has been a “grind down” and not a “plunge”. We still do not anticipate a plunge due to options positioning, as per the SG 1-Day Implied move at 0.81%. This generally suggests that puts at this level are relatively expensive, and if the S&P fails to perform to the downside in short order (i.e. IV’s increase), put values will start to decay which adds to upside pressure.