SPY Tech Anal: September is the Shittest Month of the Year

[The_Ni]

Agreed, @Yong . At this moment, it feels like we should have a bit of a relief rally.

First reason is simply because we sold off from 4100 to 3700 in 2 weeks. That’s … a lot.

Second reason follows how we ended Friday. Turns out it was a classic “wag the dog” situation, where massive amounts of put positions were closed in that last hour, along with plummeting VIX. Between the vanna effect and MMs de-hedging, put sellers spoiled what would have been a bearish climax to end the week.

We’ve seem some version of this image making its rounds that illustrated the massive amount of these put flows:

SG has a nice thread out looking into this:

SpotGamma (@spotgamma) on X

The gist of it is, most of the closed puts were very short DTE - 0 to 7. Likely a sign that degen WSBers and likeminded gamblers have now turned to puts. (This thread has additional background.)

Nevertheless, the market movement was real, and if Monday opens calmly enough, we might drift up for a bit. All we have during the week are more talking heads from the Fed.

Until Fri, that is, when PCE inflation numbers come out. That could be the trigger to go back to our regular bearish programming.

If we have a bear market rally this week, I’ll be looking to top up on all my short positions. Especially if we hit the 3900 level.

[The_Ni]

The option complex is chock full of put positions and almost no significant call positions anywhere near where we are. All else being equal, this complex should provide a downward pull on the market. Vol trigger is up there at 4000; anything below that is negative gamma, which means MMs exacerbate market movements.

Puts have been rolled lower. (Opens are above x-axis, closes are below it.)

As have calls, which is interesting - most OI opened is at 3700:

Overall, this would suggest a market that glides lower.

Having said that, we’re in quite oversold territory though so market could consolidate a bit more before beginning this journey again.

[Yong]

TLDR: I expect a move to the 200 MA on the weekly on SPY, which would be around 359, then have our relief rally.

So SPY did make a move to the 371 level and then died right after. Today had 2 huge moves, but int he grand scheme of things, it was mostly just consolidation. I think this is the consolidation before the next leg lower to the 200 MA on the weekly which would be 359. That’s around little over 1% move down from here. Very likely to happen, even with us being this overextended to the downside. SPY on the hourly has a bullish divergence on the RSI and MACD, but I think we’ll make another leg lower to form a bigger bullish divergence. The trend is clearly strongly down as we can’t hold above the 21 EMA and riding down along the 8 EMA.

On the daily, we are very overextended to the downside and I don’t think that we will stay this overextended for much longer. The sell volume has decreased and there does seem to be buyers coming in at these levels. Also, the RSI is reaching oversold, which on a daily timeframe, usually leads to a rally or a bottom. Either way, I’m expecting us to rally back towards the 8/21 EMA on the daily before running back down to make a new low or retest the lows that we make. There are no bullish divergences on the RSI or the MACD on the daily, so I’ll be expecting us to form one when we form a bottom.

VIX is blasting off again. I think that we’ll make a new low because VIX isn’t right at the levels where we do see bottoms, which would be near the 34 range. We still got some room to go up so I’ll be expecting stocks to shit lower.

Another reason why I think SPY will move lower right now is because there’s no signs of the 2 year yields even taking a break. Shits just rocketing higher and higher. I do believe that it will cool down for a couple days allowing stocks to take a breather rally, but until this makes the top in the bigger timeframes, stocks will continue to track lower.

The dollar also shows no signs of slowing down, which is bad for stocks. Very overextended so I expect some cooling down, which can help the markets rally a bit. Dollar is bearish because of how they affect earnings or whatever nano said.

Now here are the bigger reasons why I’m expecting for a rally. A ton of puts got closed or a ton of calls were bought today. The PCC is showing that we’re potentially seeing a bottom carve out right now. We were at the levels where we do typically see bottoms form, and seeing how the PCC shat today, makes me believe more that we will rally soon

The bigger reason why I’m looking for a rally is because of the market breath. Shits at historic lows. It’s at the same lows as the other big bottoms we had this year. Only around 3% of stocks are above their 50 MA. This is when markets typically tend to have a rally or a bottom. Combined with the other overextensions I’m seeing, I think there is a good chance that we do see a rally coming soon.

Overall, markets are in a bigger downtrend and I doubt that’ll stop until the fed changes their tone. I’m looking for a test of the 200 MA on the weekly on SPY to enter calls and then cut probably in the 375 level. But afterwards, I’m still expecting a retest of the lows or even make a lower low. Good luck everyone

[Yong]

TLDR: Sure looks like another dump is incoming to 359.

SPY on the hourly is failing to break the 21 EMA, which is not a good sign. We’re also nearing the 50 level on the RSI, which is where we have topped numerous times during this consolidation. Based on how we’re continuing to make lower lows and failing to make higher highs, I’m betting on that we’re going to make another leg down.

The sell volume today was pretty big. That’s not a good sign folks, esp with our huge gap up overnight which was all erased. We’re still in the overextended level, but it seems like sellers are strong enough to keep it better and look for another leg lower. Overall, still bearish.

The VIX tagged the 34 level where bottoms typically form. We’ll see if it can close over that level and confirm that we’re going to bottom, but right now, still very volatile and bad for stocks.

Good news is that although the dollar isn’t dying, the 2 year might be taking a breather. This could help us lead into a rally on stocks. We’ll see if the 2 year does continue to go down though.

Overall, we’re in a consolidation range and looks like the markets have enough sellers for one more push down. Good luck everyone

[Yong]

TLDR: We might be having a short term relief rally

Looking at the SPY hourly, we broke through the 21 EMA and the 50 level on the RSI and currently holding above them. A good sign for bulls and it looks like we might want to have a little rally up, especially since we broke above our trading range which was around 370. Good signs for bulls but let’s see if this was an actual breakout or just a bull trap.

On the daily, we are no longer in the overextended to the downside. This means that this could have been just another bull trap day and we go shit down. I personally don’t think this is the case, esp with the volume that we had. The volume increased hella EOD and we ended up powering through and testing the 8 EMA on the daily. The first goal for bulls would be to break that level, which would be 373 and then test the 21 EMA which would be 386. I expect this rally to fizzle out somewhere near the 21 EMA if this does continue, which it does seem like it will. Some key things I’ll be looking for is the 50 level on the RSI for the top of this relief rally and the 21 EMA.

These another technicals are all supporting that we should continue to rally in the upcoming sessions. VIX got shot down after hitting 34 and looking like it wants to just roll over. We’ll see what happens, but if VIX is cooling off, markets should have some more tailwind behind them for a move up.

This is a key one. The 2 year yields are starting to roll over finally and this will give stocks a major boost for a good bull run short term. Obviously, nothing changed in the macro scale so we’re going to be in a bigger uptrend for 2 year and bigger downtrend for stocks, but right now, it’s leaning bullish for stocks.

Another key development was that the dollar is weakening too. If VIX, Dollar and the 2 year yields are all weakening, that’s a damn good sign that stocks are able to rally. That is a lot of down pressure released and able to give stocks a good boost from here.

Overall, although we have barely broken out of the consolidation range (360-370), it does look like everything is pointing towards more upside. Be careful everyone and good luck

[TheMadBeaker]

Yeah, when you look at these past 4 trading days, we’ve been touching 370 every day… Lows been around 363. Just 7 dollar ranging at the moment…

[Yong]

Haha this was a lie

[The_Ni]

We’re all eagerly waiting for PCE numbers to drop tomorrow, but just wanted to make sure we don’t miss the other, perhaps even more important source of market movement - positional flows.

It is important that we recognize, and thus play the two pieces in their own right.

Here’s why positional flows matter so much tomorrow:

• VIX is quite high right now. (Image 1) Much of this is event vol tied to PCE, and will unwind. When vol unwinds, its tailwind. With vol this high, VIX falling to 25 will be a significant tailwind. Some of it as related to the situation in the UK, but I’m assuming most of it is not.
• Folks bought a TON of puts today, hoping for a gap down tomorrow. (Image 2) Note that IV is high enough that one really needs a gap down to make money on these. If there is no gap down, those that were hedged will now be de-hedged. This is the second source of tailwind.
• There is were a ton of puts already when we started off today, with significant amount of gamma at them. (Image 3) These will also be de-hedged if we have a rally. This is an extension of above.
• We’re deeeep in negative gamma territory, with vol trigger at SPX 4000. This means that as the movement upward begins, MMs will fuel the move in that direction. This is the third source of tailwind. This tapering off of MM support at the 4000 level is evident in image 4, where the blue arrow is.

Thus, if PCE does not elicit heavy sell-off, we could have a glorious rally tomorrow!

Now… where could this go wrong? A few ways:

• PCE is bad enough that the sell-off is extremely strong - strong enough to counteract the vol unwind, and then some more. In that case the negative gamma setup makes MMs fuel the dive downward.
• Putin or Kwarteng get bright destructive ideas overnight.
• Quarterly rebalancing. While we don’t know that this will necessarily be negative, its likely that there will be a rotation from risk to value, and also to safety. I.e. bonds which are yielding > 4%.

If any one or more of these come to pass, we’ll have a spectacular dive instead.

Silver lining… the 3600 support level is quite strong, and there’s the 43,000 OI-strong JPM collar right under at 3580. We can see this in Image 4, at the red arrow. That should arrest the fall for tomorrow. For a bit, anyway.

[Kevin]

On the quarterly rebalancing theory, Bloomberg posted an article explaining why we should not expect it to be a lift in the markets, but rather as another reason for drawdown.

https://www.bloomberg.com/news/articles/2022-09-29/pension-fund-rebalancing-could-spur-a-26-billion-equity-selloff

Basically it’s saying that because US stocks have outperformed relative to international stocks, it is more likely that “rebalancing” will mean selling US stocks and buying international stocks.

Coupled with the stocks vs bonds rebalancing, it doesn’t look good for bulls on this theory in particular.

[The_Ni]

Great to have confirmation from BB that equity rebalancing will probably have a net selling effect on US equities, @Kevin !

Two thoughts as corollaries to the observations above.

First, one can also play sharp moves with TQQQ (bullish) or SQQQ (bearish). Performance over the last month below. Both are leveraged and suffer from roll decay, so best not to hold this for too long, but they are decent alternatives if one doesn’t want to deal with IV and theta that plague options.

Second, we can use the response of the bond market to the PCE news to guesstimate what the markets will do. Assuming DXY is not raging around, VIX will just mirror equities, so bonds should be useful as a signal tomorrow.

Specifically, the probabilities for the next fed fund rate decision (also available with !fedrate in TF):

And how the overall distribution changes over time.

Rates going down will make markets rally, and them going up will make it tank.

[Kevin]

I noticed that the !fedrate has been showing increasing odds of 50 bps as opposed to 75 bps, over the past few days.

!fedrate moving towards 50 bps over time means that the market is pricing in a softer rate hike which means expecting a not-so-bad core PCE print. So a higher-than-expected core PCE would mean there is room for market downside associated with algos that look at the !fedrate in their calculations.

[Kevin]

Possible tailwind for stocks is China potentially steppign in to strengthen their yuan, which will bring DXY down which will algorithmically bring stocks up

[The_Ni]

The options gamma complex, as of today. Much of this will be expiring. For possible interesting interactions with post-PCE movements, please refer to the post above. Vol trigger is 4000, so still very much in negative gamma territory.

[BONER]

if history repeats itself 2nd year Dem president there has always been a low going into end of september/oct. then a market rally till mid oct, followed by a complete flush end of oct into november with new lows created.

[The_Ni]

A quick post-mortem on Friday, which turns out to be another one of those very instructive days for anyone studying the markets.

The expected that happened: The initial vol crush happened, which was accompanied by a rally into about 11.15am. I got QQQ calls at open, and doubled down around 11am.

The unexpected: Neither a clear rally nor an organic sell-off happened after the vol unwind had cleared. Yes, there were bouts of sell-off but they seemed to be driven by idiosyncratic triggers:

• First, DXY fired up around 11.30am (yellow arrow). I don’t know why, but it did, from 111.9 to 112.4. This took equities down a full 1%.
• There was a second trigger that caused selling at 1.30pm (teal arrow). I couldn’t find what happened then to move markets down ~ 0.5% - perhaps its Wall St coming back from lunch =P
• Third, JPM started rolling their call around 2.40pm (red arrow). This caused some volatility, and a 0.5% selloff. Strikes are in second image.
• Finally, 10 mins before close (green arrow), a decent 0.6% sell-off saw the 3600 line breached, with prices falling close to e old JPM collar strike of 3580.

I have held the QQQ calls through all this, because I did not see signs of organic sell-off, which is sustained, high volume selling. Rather, there seemed to be prolonged periods of consolidation between each of these idiosyncratic triggers.

This could turn out to be a costly mistake, and am prepared to roll on Monday, but will likely let the calls in either form run before taking them off completely.