SPX, building a base or a top?
Market commentary for the week from 05/15/23 to 05/19/23. Gamma data and charts provided by @TradeVolatility.
REVIEW
Bulls have not been able to shake or push SPX higher despite the good news of a CPI falling more than expected. This is loss of momentum
Bears have not been able to knock the market down and break key levels such as 4100, despite bad news such as concerning the banking crisis. This is bullish.
SPX and DJI have negative divergences with market breadth indicators and some classic indicators. This is bearish.
QQQ and FAANG, the locomotives pulling the train, broke above resistance and are above all their moving averages. That is bullish.
QQQ has rallied three weeks in a row with declining volume, plus it has divergence with market breadth indicators and with classic indicators as well. This is bearish.
We could go on and on indicating various bullish and bearish signals. This could be the obvious result of the time the market has been locked in a narrow range.
What is the reason for this? As we mentioned last week we believe the GEX structure has had a lot to do with it. We indicated that there was a huge put OI at 4100 and a huge call OI at 4200. We also said that 4150 and 4200 should be considered strong resistance because of the Gamma accumulated there.
The Gamma structure marked the limits of the trading range of the SPX the week that ends and will surely have a great influence in the week that begins considering that we will have the MOPEX (Monthly Options Expiration) of May.
Here in this chart we can see the Open Interest profile in the interest strikes. We can see a put wall at 4050 and an even higher one at 4000. There is also a call wall at 4200 and a higher one at 4250. Each of the strikes in this chart will be important support and resistance levels.
The relevant thing about monthly or quarterly expirations is that they carry high amounts of open contracts on certain strikes. These are positions that we call "stubborn" because they are not actively modified, as they are most likely part of institutional strategies. Thanks to these large positions, these expirations are less affected by the activity of options with zero days to expiration, the now notorious 0DTE options.
It is also worth remembering that monthly expiration options are traded until the day before expiration, i.e. Thursday at 4:00pm and are settled according to the opening prices of the SPX components on Friday morning.
You can read the specifications of these contracts at this link:
https://twitter.com/PointBlank_Algo/status/1636914803271671809?s=20
MARKET BREADTH
Among the most bearish factors that we find in the market are the negative divergences between the indices and the market breadth indicators. We have written several times in recent days about this internal weakness that far from being remedied has been accentuated.
Here for example we have the percentage of stocks of the major indices that are above their moving averages. As the indices are relatively close to their recent highs, these percentages should be mostly above 50%, but they are not.
Total Market aggregates all stocks traded on the NYSE, Nasdaq and AMEX. We see there that more than half of all stocks are below their 50DMA and 200DMA. These averages are currently resistance for all these stocks.
Nasdaq has been deteriorating from being all green, to being partially green, but it also has negative divergences with some classic indicators, and also with the Adv/Dec line and Adv/Dec volume.
The divergence we see in the chart is also notable in the weekly market breadth summary compiled by the Wall Street Journal. We see that although Nasdaq closed the week in positive there were many more Decliners than Advancers, also more New Lows than New Highs.
All these divergences with the market still rising reaffirm what everyone already knows: the market has been rising thanks to a handful of companies. Keep an eye on the performance of those companies to see when the market will reverse.
FED CALENDAR
If you want to follow the Fed talks to see how they will affect the market here is the schedule.
EARNINGS
Important earnings announcements this week are Walmart, Target and Home Depot. Walmart and Target in particular will tell us how consumer spending and the economy in general are doing.
GAMMA
The GEX structure will play an important role in market behavior this week. It is difficult to see SPX breaking above 4200 or below 4050 until after the OPEX. As very important Gamma levels we also have 4100 and 4150 which although they do not have a big GEX now will be levels of interest for 0dte-option traders.
OUTLOOK
Base or top?
After the strong market move on Friday the 5th, (bullish move that still stands), SPX has remained in a very small range, we could say it is building a base, but if the negative divergences are not corrected even if the market goes a little higher, it will eventually fail and create a memorable top.
We believe that due to the still good health of the stocks that have been leading this rally (FAANG, QQQ) the market has a chance to keep trying to break out to the upside. This forces us to permanently watch META, AAPL, AMZN, NFLX, GOOG, MSFT, NVDA, TSLA, etc for signs of deterioration.
Another bullish factor is the very well defined Buy the dip mode the market is in. Going from morning dips and afternoon rallies to the opposite would push us more squarely into the bearish team.
Due to negative divergences we went from cautiously bullish to cautiously bearish this week. The problem with divergences is that they can last a long time before materializing and could even be corrected with strong market moves. However, they are not to be ignored, even more so when far from decreasing they have continued to increase.
This means that we will be looking for short-term bearish trading opportunities, without losing sight of the possibility that the market could regain its upward momentum.
In terms of levels, apart from those indicated by Gamma, we will be paying attention to the Fibonacci levels on this chart. They are the retracements of the last big impulsive candle of Friday, May 5th. Within its confines the market has moved since then, so we will be paying close attention to closes above its high at 4147-02 or below its low at 4084.73.
Levels for the week remain mostly the same, the five more important are 4000, 4050, 4100, 4150 and 4200, these are prominent levels in the OPEX Gamma.
Secondary levels that have proven to be important: 4114, 4135, 4120
This is not the time to be bold but to be patient. Waiting for SPX to break out of its range and taking advantage of the explosive move that will continue will be the smart thing to do.
Have a nice and productive week trading the markets.