Hey There Income Hunter,
The Fed continues to use its army of dealers to massage the markets and calm any storm that erupts.
When J-Pow and Co.want the market to go lower, they send out their No. 1 pawn Goldman Sachs to talk about 8-10 rate hikes this year.
Then when the market goes down for seven straight weeks, they send out the most hawkish Fed president James Bullard to hype up 2023 rate cuts!
We’re left to work through the Fed’s manipulations and wait for the economic reality (which we know is not a pretty picture).
The Fed can say anything it wants, but the reality is energy and food prices will not be coming down substantially – and may actually climb.
Today, we take a look at how high this rally can take us and what stocks to fade as we approach resistance. .
S&P 500 Index (SPX)
The S&P 500 has had an impressive move higher after seven weeks of lower closes. This relief rally feels very much like the one in March, which took the market 11.5% higher in 11 days.
Since then SPX dropped 18% to 3,810.
So, where can this correction take us?
Well, there are two levels that would make sense. For the first target I use the Bollinger bands.
Bollinger bands are a good technical tool that uses a 20-day moving average at the center and sets a lower and higher band at two standard deviations wide of the center.
Historically during bear market rallies, the upper band has provided resistance that turned the market back down for a resumption of the down trend.
Here is an updated chart
The last time we broke above the 20-day was at the beginning of the mid-March bear market rally, where we then tested the upper Bollinger band.
As you can see in the chart above the S&P’s upper Bollinger band is near 4,250.
The Neutral Gamma Strike
The other valuable tool to determine a possible top for this rally is the strike above the market that turns the net option gamma flows neutral.
Gamma is a risk that dealers and market makers must hedge. When net gamma is negative, MMs must sell stock into a down market and buy stock in an up market to rebalance their negative gamma. So negative gamma adds to volatility.
In a bear market, following the increases and decreases of the gamma can give you clues of when to expect a correction.
So, the 4,300 strike in SPX (430 SPY) is the strike where gamma turns neutral to positive.
Positive gamma turns the MM hedging flow to selling rallies and buying dips, which lowers volatility and limits rallies.
Here are the SPY gamma levels showing the 430 strike, with call gamma above the x axis and put gamma below.
Bring It Home
So, the 4,250 to 4,300 area should contain the rally while we wait for the real economic date that will determine what the Fed will actually do.
And I don’t think the Fed knows.
The central bank will wait to see the data and how the market reacts before deciding.
The third influence is the administration.
If recession is confirmed, which is likely, then the narrative will switch more heavily to fighting recession. With midterms ahead, the Dems will not pour salt in the wounds of American consumers who already need help.
We will pick it up next week. I hope you have a wonderful holiday weekend in remembrance to all those who sacrificed their lives fighting for our country
And as always …
Live and Trade With Passion My Friend,
Griff