Friday felt like a proper gamma squeeze.
This is when too many players get caught short calls and are forced to buy into strength…
Causing a huge momentum shift in the market.
Gamma squeezes can lead to nice moves higher, but they tend to die off quickly and be a function of which options are about to roll off.
The past two week’s action could have been a capitulatory move in multiple assets.
The CPI print and the Fed’s subsequent 75 bps hike seem to have “bookended” this recent selloff. If enough inventory has cleared out into stop losses, they won’t be there to sell into higher prices…
Which can lead to a higher auction to capture new supply.
This is not marked on the chat, but is the closest high volume node (HVN) we have. This could be a place where we see some trapped inventory unloading at breakeven.
This is an internal pivot level from May’s trading range and the swing Anchored Volume Weighted Average Price (AVWAP) from the early May highs.
A bit underneath that will be the June 10 “CPI Crash’s” open, so that’s a reasonable place to expect sellers.
This is a key HVN and pivot resistance from the May range, and it will collect the 50 EMA.
I’m adding this one since it’s the low end of June’s trading range before the market fell apart (again).
If we get there quickly, it’ll line up with the swing AVWAP from the late march highs.
Prior support from the May range lows and the swing AVWAP from the March 2020 lows.
Below this level, the market structure changes quickly. We end up with fewer trapped shorts and more trapped longs.
Volume shelf and resistance from the Tuesday - Thursday trade. The swing AVWAP from the June 17 lows comes into play here.
Tuesday - Thursday lows and a critical low volume node (LVN).
Recent swing lows, although I wouldn’t expect a clean double bottom on this.
Instead, look for the divergence at the next lower level.
Key LVN and the August 2020 pivot highs. If we retest the recent lows, this would be the first area to look for a stop-loss run.
I’m adding a few extra reference points that are developing as the market structure changes.
Trading action may continue to reinforce these levels and may lead to much stronger pivots in the market.
Just like the S&P, there was a nasty gamma squeeze higher on Friday, and we are close to a reset of the crash that happened two weeks ago.
This is a swing AVWAP from the May highs, gap fill, and the start of a value area that could bring in some supply.
The June range lows combined with the 50 EMA and a local LVN.
Large zone here. You could split it up if you want, but I’ve highlighted it with a pink arrow because it’s a weird spot.
That level lines up as an LVN over the past year’s trading action, along with the swing AVWAP from the March highs.
Zooming out and capturing the past two years’ data shows a different structure:
It’s the HVN for this entire range.
And as we know, HVNs can act as magnets.
This is a massive level on multiple timeframes and the prior support from the March swing lows. I expect this level will need to be tested to see what kind of trade we get into it.
This isn’t marked on the chart, but is a good reference point to see if Friday’s rally sticks.
It’s the closest HVN to the downside, and if that holds, you could potentially see a continuation long on a dip buy.
Key LVN, gap fill, and prior resistance from the recent highs. If we tag this level we’ll probably overshoot, thanks to buyers trapped from Friday’s trade.
Swing AVWAP from December 2018 that’ll interact with an LVN and several internal pivot levels.
Close to the rest of the lows, but a little higher because that’s where the market structure sits.
Hopefully, you’re sensing a pattern after seeing my analysis of the prior two indices:
The levels we’re watching are synchronized across multiple assets. When markets run with high volatility, this is to be expected, so don’t be surprised if it sounds like I’m repeating myself…
Because I am.
I pushed this zone a little lower because we’ll collect last Friday’s gap fill, a volume shelf, and the swing AVWAP from the April highs.
Second gap fill, and if we get enough time, it’ll line up with the swing AVWAP from the March highs. It’s also the lower end of the June trading range.
I’m viewing the upper end of this zone as a reference point to see how price trades if we retrace some of Friday’s move.
That’s an internal pivot level from the May swing lows and a local HVN on a longer-term chart.
This is a retest of recent lows.
Next LVN in play. This would be a good place to load up into a “stop run” scenario.
The volatility markets continue to surprise me.
We had a 13% move to the downside in a short time — a very fast crash — and the VIX didn’t budge.
Sure, it came into that 35 reference point…
But it’s still trading at a discount to short-term realized volatility.
If the VIX starts to tank, it’ll drive the markets higher because of the options-related flows, so consider what the market could do if VIX heads to 20 soon.
This will most likely be driven by any big deviations in macro data, or if a Fed member gets on TV and starts trying to talk rates higher to get in front of further adjustments they have to do.
That’s a wrap for this week’s Market Primer. Next:
This market’s sentiment can completely turn on a dime.
Around a year ago, the market was setting up for new highs. Although some momentum stocks were crushed early, we didn’t see serious damage in the markets.
We’re down 30% off all-time highs, and it seems like the entire market is at the whims of Fed policy changes.
But there's been one glimmer of hope this whole time…
Well… it was until the Fed cranked rates another 75 basis points.
Here’s OIH, an oil ETF, to show you what I mean:
I’ll let you in on a dirty little secret about oil stocks and commodity names in general:
Buying strength is a sucker’s game.
It’s so hard to get followthrough in these names because they’re tied to the commodity markets, which don’t tend to run as much.
Consider Occidental Petroleum (OXY).
This name’s been in the news because Warren Buffett is directly involved in the company.
Here’s a chart of OXY:
There was one good breakout that saw followthrough. If you caught that move, you probably earned a handsome return.
But what happened after?
I want to highlight this mechanic — any time this stock had a “clean breakout,” institutional investors used it as a way to sell into liquidity…
Only for the stock to give it all back on a failed breakout setup.
Then, when you get enough panic, those same institutions come in and scoop up shares for cheap.
A lot of folks will tell you that a stock is a stock and that all price patterns will play out the same.
It’s simply not true — sector absolutely matters.
You’ll see much more followthrough on a low-float, high-growth tech stock than on a large-cap, super-liquid oil name.
One way I insulate myself from sector differences is with my Trading Roadmap.
It points out key price levels in any name I look at, helping me time entries and exits like I’m some Wall Street genius.
In fact, I already showed you a component of my Roadmap in this very article.
For more information about my Roadmap…
One thing traders can do during nasty bear markets is look for stocks showing relative strength.
You can measure relative strength in many ways, but the easiest way is to just look at the recent pivot highs and lows.
Let’s look at XLK, the SPDR Technology ETF:
It should be clear this market’s been making new lower lows for the entire year.
Meanwhile, let’s look at a different technology index:
After a nasty move lower in March, this ETF hasn’t seen a retest or break of those lows — all while the broad markets are getting crushed.
So what’s this index… is it energy or commodities?
Nope… it’s Chinese Internet stocks.
Tech stocks have done terribly as the Fed gets aggressive with interest rates — except in this pocket.
Many names in this ETF are setting up for breakouts from longer-term bases.
This could be a “first-in, first-out” mechanic as well.
See, the Chinese Internet space was one of the first places to start a bear market. That happened in Feb 2021 while the rest of the market stayed bid.
Now that this index has built out a new class of stock owners, look for this to start seeing some upside momentum.
If that happens, you’ll want to know where to enter and where to take profits along the way… which is what our Market Roadmap shows us.
Last week, the market had a nasty crash off the CPI print.
And even through all the instability, our Roadmap levels worked out great.
When the market becomes deeply oversold, getting “cute” with the options market can be tempting…
But I’ll prove to you the best strategy to play for a bounce.
The options market is a risk market. That means an option’s price depends on the perceived risk in the market.
When the market’s crashing, option premiums skyrocket.
Here’s a look at the S&P 500’s implied volatility:
Implied volatility measures the premium available in the options market.
See how implied volatility moves higher when the market sells off?
That’s because people are willing to pay up for insurance when they’re scared.
As an options trader, you can take the other side of that and sell the premium to them.
The options market has a lot of players saying you should be a net options seller in environments high in implied volatility.
That’s not always the best bet.
Consider two trades — a put sale and a call buy.
Both are bullish bets but have different payout structures.
This is a put sale:
It has limited upside and a ton of downside. If market volatility is less than what the options price in, you have a profitable trade.
This is a call buy:
Limited downside and a ton of upside. If the market moves more than what the options price in, it’s a profitable trade.
There are many different ways to think about this tradeoff, but for me, it’s about whether you want to own convexity or sell it.
Now think about some of the outcomes…
If the market crashes further, you lose some money on the call buy and get absolutely smoked on the short put.
If the market rips, you get a huge payout on the long call…
And while you make a good chunk of change on the short put, it’s a fixed amount of profit.
If the market goes nowhere, you’ll have a much better outcome on the short put.
Some of my best long trades come in bear markets because volatility works both ways.
Massive moves lower signal that liquidity is trash in the market both higher and lower.
You have much better odds of a ripper of a rally after a deeply oversold market.
When you think about the tradeoffs between options buying and selling, don’t ignore the relative payouts in different market environments.
In this environment, price is not very sticky.
That means we rarely develop tight trading ranges around a current price level.
The “chop” scenario happens when put sales and other option selling strategies work well. In post-crash markets, we rarely see chop.
In fact, you’ll start to see the upside underpriced where call buys provide a much better risk-adjusted advantage relative to the put sales.
In another post, we will talk about the best strike price to buy.
Every trader is focused on the US’s next inflation numbers.
Yes, it’s bad…
But it could be worse. Here’s a chart of dollar futures:
The dollar has rallied 16% year-to-date.
Right now, the dollar is the safe haven against much of the macro risk because inflation is high…
But it’s a lot worse in Europe because they are closer (geographically and otherwise) to the Russia-Ukraine war.
There’s one other source of instability in the dollar right now — how it’s trading against the Yen:
What a move!
The dollar has been a “hockey stick” since breaking out of the multi-year value area.
When you zoom in to the past week’s trading action, you can see a hard move against the trend:
Here’s the macro backdrop behind this, straight from the Bank of Japan:
“The experience so far with the negative interest rate policy, which was introduced in January 2016, shows that a combination of a negative interest rate on financial institutions' current account balances at the Bank and purchases of Japanese government bonds (JGBs) is effective for yield curve control.
In addition, the Bank has adopted the fixed-rate purchase operations and the fixed-rate purchase operations for consecutive days in order to achieve the smooth conduct of yield curve control.”
There’s a lot of nerd-speak here, but here’s the basic idea…
The BoJ wants to maintain a 2% inflation rate. To do that, it has to introduce negative interest rates and peg its 10-year bond at the 2% rate.
Here’s the yield on the Japanese 10-year bond:
Yes, those are negative yields. It’s absolutely bonkers.
Yields have crept up recently, and price was holding above the level they were trying to peg:
I’m not an expert on the mechanics, but the idea is that the BoJ has to print yen to buy these bonds, keeping yields down.
It was working… until last week:
Because the Yen depreciated so much against the dollar, the BoJ is stuck between making Japanese consumers pay higher prices on imported goods or keeping the yield lower.
That’s how the Yen broke hard…
And it’s how Precision Volume Alerts members made a quick double on FXY calls:
Does this mean we are experts in macro stuff?
Nope — it’s because our Market Roadmap found levels on a very long-term USD/JPY chart:
Now that we’ve taken half off at a double, we have a risk-free trade looking for hard reversion.
The Bank of Japan may make significant policy changes since it must respond to the Fed’s aggressiveness.
That makes for a great contrarian case on the yen.
If you want to take advantage of moves like this one in the future… I’d recommend you equip yourself with our Market Roadmap.
Let’s put the last week in perspective.
We had the hot CPI print, signaling inflation was sticking around and would force the Fed to adjust its policy.
The Fed meeting and quad witching expiration happened in that same week.
The S&P moved over 9% from high to low in three days… we can consider that a pretty good crash.
So with all of that going on, how did our Roadmap do?
It nailed every intraday high and low after Monday’s crash.
Remember: The Roadmap called these levels last week. They haven’t been adjusted.
If all you did was trade against those levels, you could’ve done exceptionally well while other market participants was freaking out.
Let’s drill down to the next levels to watch.
Friday’s response was pretty limp, given how oversold we were. We’re close to a local bottom, but we don’t know whether it’s here or another 5% lower.
Friday’s low is still a reasonable level to play. If we gap up on Tuesday and attempt a back and fill, that should be a low-risk long entry point.
Under that, we have 356-358 from a low volume node (LVN), and then another at 352-353. Given the market volatility, we could easily blow through the first one if we have enough downside energy, then collect the one underneath.
The next zone is 346-348, and then 340.
My chart has one level marked right at 338:
Here’s why I’m looking at this:
This is the high volume node (HVN) from the 2020-2021 rally.
We’ve recently seen these HVNs act as strong “magnets”…
So if the market truly loosens and we see crashy movement, this HVN would be the target.
Still, odds are we’ll see an “exhale” before that level is attempted.
To the upside, we have Friday’s high that is still a durable level. Above that is the 337 zone that is now picking up a swing Anchored Volume Weighted Average Price (AVWAP) as resistance.
Above that is Wednesday’s high and a zone we’ve had on our charts for a bit at 384-385.
From there, there’s an area where I don’t know how the market will trade.
If we get a proper bear market rally, I wouldn’t be surprised at a gap fill of last Friday’s close, which will line up with the AVWAP from the late May lows.
We also have a level at 397 that hasn’t been tested recently due to the overnight gaps. That level would coincide with the AVWAP from the May swing highs.
Our S&P levels were super clean, but on the Nasdaq… not so much.
Thursday saw some overshooting. I adjusted some levels to correspond with near-term price action response.
The market made some slight improvements on Friday, but it’s still a broken market.
Downside levels are at 266 and 262 — although if volatility continues to run hot, you can almost view that as a single zone.
I drew a key level on here — a massive volume shelf and price support.
If the Nasdaq loses that, we could see a fast move down to 248 since there was barely any volume traded in between them.
To the upside, we have Wednesday’s high and a gap fill from Monday in play, which will line up with the swing AVWAP from the May lows.
Above that would fill last Thursday’s gap down and the swing AVWAP from the early May highs.
From there, we hit congestion from the swing highs, the AVWAP from the 2020 lows, and the March highs. That would be a crucial test for any bear market rally.
Just underneath IWM’s price are two monster value areas where I expect selling to slow.
The Russell has effectively round-tripped from the 2020 election levels and is filling back into the prior trading range.
A big level’s coming in at 159-160. Underneath that is 156-157, then 152-153.
These are pretty well spaced apart, so they should capture intraday pivots pretty well.
To the upside, we have a retest of the May low at 169-170, then last week’s high comes into play…
Probably collecting the Anchored Volume Weighted Average Price (AVWAP) from the May lows along with the other indices.
Above that is a wide-open space, and there will probably be some congestion — maybe at 177…
But I don’t have a good read on that just yet.
177 is last Friday’s low with a gap fill just above it, and that will pick up the April swing high AVWAP.
I thought we’d see the VIX drop due to event-based risk post-Fed, but it did the opposite.
That clued me in to more potential downside.
We’re now back at the past two years’ range highs, and we’re coming to a crossroads in hedging products.
Is the smart money acting complacent and stupid…
Or will the hedging demand taper to the point where it drives a move in the overall markets?
One theory going around in options trader circles is that there was a ton of stuck short gamma into June options expiration.
Think about it:
Say you sold puts in May, and the market bounced hard. You’re feeling pretty good about this, and you’ll let the exposure expire worthless into June opex.
Then, the CPI comes in hot, and the market crashes.
All of a sudden you’re forced to hedge or blow out of your positioning.
The theory is this:
If all the option flows are attenuated because so many contracts rolled off the books after opex…
You no longer have persistent supply from dealers and other players who were stuck short puts.
If that supply goes away, we could be set up for a squeeze in the markets.
This chart shows how some of the market’s key turning points have been around monthly options expiration, so this has been “forward tested” with real data recently.
That’s this week’s Market Primer. One more thing:
He did it. The madman actually did it.
This week, the Fed hiked 75 basis points.
That’s the first time this has happened since 1994.
I know what they’re trying to do… inflation’s running hot, and they want to cool it down.
But it’s a tough call to make right now. I don’t think much of the inflation risk is on the demand side…
Instead, I think it’s on the supply side.
Doesn’t matter what the Fed funds rate is — if we can’t refine oil or if there’s a hot war between two of the largest wheat producers in the world, prices will go up.
The Fed is playing a game of brinkmanship, thinking they can temper inflationary expectations without absolutely crushing the market.
But let’s consider a possibility here…
What if the Fed manages to reach a 3% rate by the end of the year — which is what we’re pricing in — but the supply chain remains broken?
Massive demand destruction and higher unemployment, while the energy markets are still bid.
That means we could see more people out of work who can’t afford the energy-driven cost of living increases.
That’s how it can get ugly.
Not “Oh no, my stocks are down!” kind of ugly...
More like a major US city falling into anarchy as access to food dries up.
For the past year, I’ve argued that global economic movement looks more like an EKG reading than a normal business cycle:
It’s the speed of it all that’s throwing the global economy in disarray.
I’ve got a solution, of course.
I’m going to armchair quarterback this one. I’m by no means an expert in geopolitics, but my network is…
And I can tell you the “thing that must not be said.”
The West needs to take the L on the current iteration of the Ukraine conflict.
Let’s be real: The State Department got caught with its pants down, and unless we see a massive intervention in force, the Ukrainian government probably won’t gain any ground.
If the current Administration were smart, they’d offer a diplomatic solution as we head into late summer. Cut your losses, lick your wounds, and regroup.
Germany and France are spooked enough to crank up defense spending, and NATO looks like it’s gaining a few extra members.
So you can continue applying pressure to Russia and send in SOF to train Ukrainian insurgents, while Russia will be forced to spend excessive money and attention babysitting the two new “independent” regions.
The West needs to play the long game here because the short game leads to massive economic uncertainty that can destabilize entire regions.
Speaking of the short game, we as investors can play it — and at Precision Volume Alerts, that’s what we’ll use our Market Roadmap for.
Let’s say you were an art student and you had an assignment.
Take a classic painting… and make it bigger. Expand it out to add more details around the original painting.
Quite a challenge, right? You’d need to match the paint style and color scheme, and have the imagination to extrapolate what the exterior would look like.
Here’s an example of what I mean, using the Mona Lisa:
The painting is expanded to show more background.
And here’s another example, with Rembrandt’s “Girl With A Pearl Earring:”
Not bad, right?
Now let me blow your mind:
What if I told you that these were made by a computer?
If you haven’t heard about DALL-E, it’s going crazy in tech circles.
It’s an artificial intelligence that helps to create art.
If you tell it to make “an astronaut, lounging in a tropical resort in space, in a photorealistic style,” this is what you get:
Yes, a computer made this.
I’m having trouble wrapping my head around this, and I know it won’t slow down anytime soon.
The AI play in the markets is just getting started — there will absolutely be plenty of ways to make profits here (assuming the robots don’t take over, of course).
Take a look at the C3.ai Inc (AI):
Not a bad ticker to have when the AI bull market kicks off…
But right now, it’s in a solid bear market and is a stock to avoid.
Yet look for that first push above the most recent Anchored Volume Weighted Average Price (AVWAP).
If the stock takes that out, then that’s a signal that enough shares have changed hands for a potential trend change.
I’ll be hunting for AI plays like this with my Market Roadmap…