S&P Trades At “Capitulation Risk” Level

S&P Trades At “Capitulation Risk” Level

The key ‘pivot’ line for the S&P 500 is 4000 – indicating “capitulation risk” – with resistance at 4100, and support showing near 3950, then 3921. Also note 300 in QQQ is a key pivot line.

As SpotGamma writes in their latest note, this coming Friday contains a large options expiration, and therefore we think the options market can exert some driving shifts in markets as the week pushes ahead.

There is some path dependency to this force, and if the S&P500 holds >4000 then that force should be a fairly consistent tailwind for markets due to implied volatility declining (i.e. VIX & the vanna trade) and put decay (i.e. charm). We think this could lead to a fairly substantial rally up >4200 by Friday.

Breaking down the current position, you can see that 400 SPY/4000SPX is still far and away the dominant strike on the board.

These are put-heavy strikes, and so the decay of this position we again see as a tailwind for markets into Fridays.

This is a large expiration as our models show >30% of total S&P gamma expiring, with 10-15% of total deltas. Further, SpotGamma‘s models do not show much resistance up to 4100.

However, we note Patrick Jack’s comments from Goldman’s Sales & Trading desk, who warns dip-buyers and knife-catchers to “watch what people do… not what they say.”

Sentiment is bad, but Fund Flow certainly isn’t…

Additionally, Jack points out that there has been a lot of chat about chasing any market rallies.

“I certainly wouldn’t. We will get technical bounces… it’s inevitable,” he warns.

Below is a long list of historic bear market rallies…

As Jack concludes, “that’s the real crux of my bearish view… we will get technical bounces. Continue to fade them. We are a long way from the “2nd last negative data point” which will tell us it’s time to buy!”

This has very much become a trading environment with week to week risk management needed to the volatility of the market.

So short-term buy-the-dip into OpEx, but don’t marry your position… and watch 3950 for capitulation to 3921.

Tyler Durden
Mon, 05/16/2022 – 10:20

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