Market Drops, VIX Sleeps
To-the-ground Tuesday (instead of Turnaround Tuesday, sorry…) saw fulfillment of the various divergences we’ve highlighted for several days, including observation of the large negative GEX at 7720 we mentioned yesterday. Interestingly, we still see that GEX cluster, which is now higher than the current price. SPX closing near lows of the day and below the key 7700 GEX cluster. QQQ closed below 720, risking a move toward 700 if 715 is lost. The VIX didn’t move much despite the 3 days of weakness, and VIX expiration in the morning may have something to do with that. The VIX needs to get over 15.91 to open the door to a test of 17+, but we’ll look at some reasons that I believe point to a rebound in markets soon.
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Indicators Suggest Possible Rebound, But For How Long?
We’ve been highlighting two initial downside targets since SPX lost 7750: 7700 and 7680. Today’s low was 7688, so we came fairly close to that daily 15 EMA. Let’s separate timeframes to discuss what might come next: The immediate higher probability odds of a bounce, given confluence with several key technical support areas; and the question of whether such a bounce leads to new highs or ends in tears (for the most bullish participants).
GEX has turned negative for SPX, though not convincingly so. Looking at GEX for the next 2 weeks (excluding Tuesday’s 0 DTE GEX), we see a negative shift, with 7500-7800 now appearing to be a wide probable range compared to 7700-7900 prior to today’s “hiccup.” Narrowing the picture down further, 7600 and 7650 stand out as major support areas, and retaking 7700 opens the door to 7750 as the highest odds upside target. Note that 7750 fills the gap left behind from Monday’s close. SPX is getting quite far away from the daily HMA, which can be a good contrarian signal, and retaking 7700 may ignite a squeeze toward 7720-7750.
SPX Net GEX Shifted Negative, Large Positive GEX Clusters Remain
Let’s address the big picture as we look at net GEX across all timeframes except 0 DTE: the largest net GEX clusters are still at positive strikes, despite negative net GEX down to 7200 and lower. We see a larger net GEX cluster at 7900 than we do at 7800. Remember, this is total net GEX, so we’re looking beyond the next two weeks. My initial thought is that the picture looks less certain immediately, but the odds favor resolving toward the positive, barring further significant GEX shifts. Favorable odds of a short-term bounce may end up leading to further short-term weakness, but even the next drop stands to potentially resolve in positive fashion before the year is over.
Key Levels: Bullish above 7700 targeting 7750, then 7800. Bearish below 7650 targeting 7600.
QQQ Either Rebounds From 715 Toward 730 Or Tests 700
QQQ seemed to hold up better than SPX yesterday, but thanks to the semiconductors, today saw a big catch down by QQQ, closing barely above the 15 EMA. Retaking 720 may bring a retest of 730, but the close at 717.59 risks a move to 700 if 715 doesn’t hold. The lack of meaningful GEX below 700 still implies the odds favoring 700 holding, which would fill the gap back to early August and mark a possible reversal from a halfway back drop into new highs.
Key Levels: Bullish above 720 targeting 730 initially. Bearish below 715 targeting 700.
The VIX Is Relatively Low, But The Setup Exists For A Retest Of 14-14.5
It’s amazing to me how approaching monthly VIX options expiration coincides with the most controlled appearance of how the VIX trades. Of course, the VIX is derived from SPX options, so this is also a statement about SPX’s implied volatility: Relatively dramatic gap down for indices (gap up for the VIX), then nothing. And that’s what we saw Tuesday: The VIX gapping up to close just above the exact indicators I have on my chart (the HMA, 9 SMA, 15 EMA), then going nowhere, just standing there waiting for orders from Mr. Griffin. Options activity was positive at 17 and 18, but the VIX is quite far away from the HMA, possibly implying a retest toward 14. The HMA has turned upward, so we’re aware of the risk that the VIX continues higher after a backtest. The VIX only achieving 15.81 with a 1.6% decline in SPX over 3 days is not inspiring. A contrarian view would be that the VIX spiking to 18-20 would be more bullish: An overreaction to modest weakness, giving vol crushers a chance to go to work and propel the next move higher. But instead, the VIX has been suppressed in the face of market weakness, seemingly more akin to holding back the tide as opposed to setting a trap. At least that’s my view.
Key Levels: Bullish (for the VIX) above 15.91 targeting 17, then 20. Bearish below 16 targeting 14-15.
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