Indices performed well Wednesday, and the VIX was crushed well below 17. A contrarian concern becomes the degree to which volatility was crushed without the indices actually recapturing key pivot areas, like SPX 7725, or even 7700. To use an analogy, if the lemon gets squeezed too hard for the first small cup of lemonade, your entrepreneurial kid with the lemonade stand won’t have enough juice to fill a second cup. No analogy is perfect, and sure, maybe the VIX is headed back to 12. But if that’s not the case, we may be looking at danger ahead. SMH diverging negatively and the VIX triggering a buy signal on lower timeframes may support this notion.
SPX Crossover on the 60-Minute Timeframe Suggests Pullback; GEX is Skewed Positively
SPX shows the 1-hour HMA rapidly approaching the upper Keltner, and SPX has crossed below the HMA as of the cash session close, triggering a short signal. This signal is in contrast to the positively skewed GEX picture, with net GEX up to 7850 appearing to be a strong November OpEx target. Reconciliation can be made on account of timeframes: It’s possible we see near-term weakness that resolves higher into November 20. We’ll have to watch how GEX shifts and leads or follows price action in coming days to help us with an informed forward-looking bias.
-Primary scenario: SPX drops toward 7650, possibly 7600, then begins a rebound that touches 7850 by November’s OpEx.
-Alternative scenario: A squeeze unfolds that gives bears no quarter (or dime, or nickel, sorry for the puns) as SPX heads toward 7850 without a meaningful drop.
Key Levels: Bullish above 7700 targeting 7800, then 7850. Bearish below 7700 targeting 7650, then 7600.
QQQ Retests 50-EMA Tuesday Night, but no Cash Session Touch (yet)
QQQ retested the 672.76 50-EMA Tuesday night, rebounding strongly after that tag. It’s unclear whether QQQ will test 672 in the cash session, but GEX is still negative and overnight action is currently taking QQQ back to the low 680s as well. SMH is below 500 after hours, a major red flag for QQQ, which has heavy exposure to semiconductors. 450-475 could be the next support area for SMH, which may bring a QQQ test of the 50-EMA again.
QQQ’s weekly moving averages on my chart are pointing lower, with the HMA currently at 721. QQQ may retest 713-721 before the next big decision is made, though 700 remains the current hurdle to the upside.
-Primary scenario: QQQ retests the 50-EMA during the cash session, then bounces from that 672-675 area.
-Secondary Scenario: QQQ tests 713-721 first, then rejects for a cash session test of the weekly 50 EMA.
Key Levels: Bullish above 700 targeting 713. Bearish below 700 targeting 675.
Lower Timeframes on the VIX Suggest a VOlatility Rebound is due
The daily VIX chart shows the VIX below the trendline of higher lows we’ve seen recently, but lower timeframes (such as my 1-hour chart below) show the VIX crossing over the HMA at the lower Keltner channel, typically a bullish setup for volatility. We see futures lower at the moment, so a VIX spike is not a groundbreaking idea, but the question becomes how high does it go? Do we see the VIX put in a weak lower high before collapsing? Volume was at almost 200k contracts at 17 and at 30, and net option flow was very positive at the 20-strike, so collapse doesn’t immediately seem to be on the table.
-Primary scenario: The VIX rebounds to 18, then we reassess.
-Secondary Scenario: The VIX goes straight toward the 15 strike, creating some divergences.
Key Levels: Bullish above 18 targeting 20, then 25. Bearish below 17 targeting 15-16.
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