Informe SG Levels

S&P 500 Levels:

• $4,000 is significant overhead resistance.
• $3,900 is a pivot above which volatility should decrease.
• $3,800 is major support below which there may be an accelerated sell-off.

What To Watch:

• Bulls have the edge if markets can hold $4,000, however the Rally Criteria below has not been met which is a cause for concern.

Rally Criteria

• QQQ/SPY/SPX > $300/$400/$4,000
• Call positions building overhead (i.e., Call Walls > Absolute Gamma Strikes)
• MOVE Index (i.e., “Bond VIX”) breaking lower.

Daily Note:

Futures were very quiet overnight, and are currently trading near 4012. For today we see support at 4000, then 3960. Resistance shows at 4022 then 4050. Critically, our Call Wall rolled lower to 4000 (from 4100) which is technically the top end of our range.

There was an excessive bullish froth to the afternoon rally yesterday, leading to a rally that smacked of short covering. Futures holding north of 4000 is certainly equity positive, and while there were some call positions added to to overhead strikes, it was rather unimpressive.

4000 remains the dominant strike here, and should function as some support. However, the fact that our Call Wall rolled lower goes against our “Rally Criteria” listed above.

Our vanna model is decidedly neutral here, which is a reflection of being in this transition zone between calls & puts. As call positions build you will see the skew of the model shift towards the left as suggested by the blue dotted line. A left skew would suggest that declines in implied volatility will suppress volatility via a build in call positions (i.e. if dealers are long calls vs short stock then declining call values lead dealers to sell futures on rallies and buy on dips).

The other factor we are watching here is the MOVE Index. Initially this has shifted lower which we see as equity positive. We want to see a few more days of this metric trending lower to confirm. We’d also note that the VIX is punching to fresh lows <23, which is equity positive, too.

The bottom line is this: We are very cautiously optimistic here as markets hold 4000. The MOVE index declining gives us 2/3 “Rally Criteria” met. Is it a concern for us that Call Wall rolled lower suggesting that lack of call activity at lower strikes.

The one caveat with this could simply be that the equity move was so strong (kind of a short-covering move) such that we overextended and will rebase today. In other words traders were positioned for a 1% rally yesterday into 4000-4010 (SPY 400), not a +2% rally up into 4050. A bit of call volume at 4050 and/or 4100 could shift that Call Wall up for tomorrow which would meet our requirement for “call positions building overhead”.

One last thing…

We’re certainly happy to see everything line up for an extended bull run, and many traders seemed ready to jump on that bandwagon yesterday. Our data is just not quite there yet.

Below are the returns for the last 3 FOMC days, and on the previous 2 FOMC days we saw very strong returns which were reversed the next trading day. This is clearly not enough of a data set to draw any material correlations – but it does remind us that there can be false breakouts.