OPEX is here
Market commentary for May-17, 2023. Elaborated by Point-Blank Trading team and Román González. Gamma data from @TradeVolatility
REVIEW
Yesterday bad news on retail sales and HomeDepot's earnings miss and its sour outlook for the rest of the year, coupled with news that meetings to resolve the debt problem were postponed to next Sunday unnerved the market, which opened in the negative, bounced strongly looking to enter positive territory, only to reverse again and spend the day bouncing around before finally selling off sharply in the last half hour.
Is this the change in sentiment or is it just the reaction to a bad news day?
INDICES
Nasdaq Composite (IXIC) is now leading the DJI by 18.3%, its widest margin of outperformance since 1991. For the year S&P 500 is up more than 7% , Nasdaq more than 18%, while the Russell 2000 is down 1%, primarily due to weakness in the energy and SMID regional banks.
The day's results favor the bears who managed to print bearish candlesticks on higher volume than the previous day when the market closed higher. It is a confirmation of the clear distribution pattern that we have mentioned in these spaces.
The bulls favored the defense of key levels during the day thus preventing a vertical drop.
More cracks appeared today: SPX closed below its 20DMA, which had served as support for the past week.
Dow Jones erased its YTD gains and closed below 50DMA, key support that had provided a place to bounce from for the last 8 days.
VIX closed above its 20DMA, it has printed higher lows for the last three days, but still remains below the important resistance at 18.30.
VIX1D bounced off its support, printed a long bullish engulfing candle, but remains below important resistance at 14.57 and its 20DMA.
VVIX has been in divergence with the VIX for several days, announcing the possibility of high volatility in the coming days. Today it closed positive, although without much upside, respecting its uptrend line of support. It continues to herald a storm, but it will not materialize before it closes above 100.
MARKET BREADTH
Yesterday's market breadth was abysmal, it was very negative impacting all breadth indicators. The equity only put/call ratio that generated a SPX Sell signals days ago, the strength of the signal was confirmed yesterday.
The percentages of index values above their moving averages suffered quite a bit.
Just compare this chart with the one from 5 days ago when DJI and Nasdaq were 100% green and SPX had two green squares as well. Now well over half of all the stocks that make up these indices are below their moving averages.
The Total market enters bear territory as more than 60% of all its components are below their 50DMA and 200DMA.
For the NYSE, where most of the Dow and SPX components are traded, the breadth was quite damaging, with a Adv/Dec ratio of almost 1:4, a number normally associated with larger percentage declines.
Our favorite SPX internal health indicator, the index of SPX stocks below 200DMA broke an important milestone today: it closed below the 200DMA, and added one more day below the important 50% level.
GTH
Despite the futures markets being positive in premarket, SPX put options have been very active. In the futures market large put orders hit the tape around 9:00am ET taking the P/C ratio as high as 19. As we write this note the P/C ratio has subside to 6.8. It suggest a bearish bias from traders, it’s possible to see a SPX drop after an initial pop to 4130/4135 area.
SUMMARY
It was a bad day, no doubt about it, the deteriorating market breadth, the volatility indicators coming to life and the sell off in the late afternoon are a trio that does not bode well. However, we should always give the market the benefit of the doubt and give it two to three days to resolve its conflicts. This time frame would be broken if yesterday's pattern is repeated the next two days.
The great hope, and perhaps also the culprit for these moves, is Gamma. We have monthly and weekly SPX options expiration next Friday. One notable difference is that monthly options trade through Thursday at 4:00pm and weekly options trade through Friday also at 4:00pm. Also, as you might expect, the monthly expiration has much larger Open Interest, implying Market Makers have greater risk exposure in that expiration than in the weekly expiration.
We said yesterday that the open positions of the longer-term expirations are "stubborn" because they are not actively settled but, being part of institutional strategies, they remain in place impassive until expiration regardless of what the market does. Because of this and the large accumulation in some strikes, they become more immune to the onslaught of 0dte, which has a greater impact on weekly options. Being, presumably, part of institutional strategies, it becomes easier and more accurate to interpret the Gamma structure. In these cases we can safely assume that puts were bought and calls were sold by traders which leaves Market Makers short put Gamma (negative) and long call Gamma (positive). Remember puts and calls both have positive Gamma. In such a situation, if the Gamma is predominantly negative, and the price is in negative Gamma land, it is simple to assume that the price will unfailingly go for the larger negative Gamma stack, currently at 4050.
In our experience Market Makers can start herding the market as early as Tuesday, most certainly on Wednesday - usually in the afternoon - and finalize their settlements on the last trading day of those options on Thursday. Futures will always be available to hedge or move the stock in the desired direction in the premarket, but the bulk of the hedge adjustment occurs on Wednesday and Thursday. That’s an important reason to observe the market direction today.
Be careful with your trading today, OPEX is here.
See you.
want to know same with discord service.. I missed the move due to work :(
hi, is sharpshooter service active already?