Hey There Income Hunter,

 

Following recent reporting, the technicals in the market favor a bullish bias and possible S&P 500 rotation as high as 3900.

 

However, all that may be is a sell-the-rip rally that could produce more of the quick and easy profits we have seen consistently during one of the greatest financial asset bear markets in history.

 

SPX hit a low near 3500 so far in 2022, for a 27% drop, while the deeply liquid iShares 20 Plus Year Treasury Bond ETF (Ticker: TLT) has fallen 37% on the year.

 

Just think about those stats for a second …

 

During the worst debt crisis in history (2009), TLT dropped 27%. 

 

Yet we still have the historically toughest months for bonds ahead of us.

 

One other thing to think about is this: The  Bond market is 10x more important for the economy than stocks.

 

Stocks may cause some pain for the wealthiest of Americans, but higher interest rates hurt everyone.

 

This is why the Fed is considering a pull back of the tightening already priced in.

 

Let’s look ahead to this week for what to expect.

 

Gold Comes Back to Life 

 

A WSJ article on Friday got gold off the mat Friday. Later in the day, San Francisco Fed president Mary Daly poured more dovish gasoline on the rally … 

 

• Daly said she wanted to be sure that the Fed did not “over-tighten” and cause an unforced downturn. 
• She then said that interventions to stabilize a dislocated market can be solved even as it hikes rates and rolls off the balance sheet. 

 

The second remark is critical since it is the first post-COVID remark that mentions a potential renewal of QE. 

 

This is in reference to what is really the third and most important mandate of the Fed … to maintain stability in the Bond market.

 

Technical Positioning in Gold

 

Gold did a nice aboutface on Friday, just as it appeared it would make a new low. It also broke above the downtrend line that began when it failed near the 1740 resistance area. 

 

October Gold Trades

 

In late September, when Gold put in its low at 1614, I initiated purchases in the Van Eck Gold miners ETF (GDX), iShares Silver Trust ETF (SLV), Barricks GOLD Corp (GOLD) and Sandstorm Gold (SAND).

 

Then,after the move higher failed near key resistance at 1740, I closed the positions and booked gains of 44%, 33%, 77% and 44%, respectively.

 

I have been waiting patiently for a shot to reset the positions, so on Friday morning I added a GDX call spread to the Power Income portfolio  …  

 

 

We now have a higher low … but confirmation of a bigger move would come on a close above the 50 DMA near 1700 and then a break above 1740 ….

 

Here is the chart set up for GDX

 

I will be adding more bullish strategies to the December expiry once we get the confirmation in Gold I am looking for  … 

 

S&P 500 Index (SPX)

 

CPI day on October 13 was one of the most powerful shifts in flow of the year.

 

Coming into the day the 3500 level provided a strong level of support … 

 

Then a much larger CPI surprise to the upside was reported, but by the end of the day SPX ended up a positive +2.5%. That was the first sign of a change in the ultra-bearish investor sentiment in stocks.

 

Next, we saw a rally on Friday as the market gor a whiff of a possible change in Fed policy to less tightening.

 

So, let’s take a look at Friday’s trade …

 

Notice in the chart below that heavy call buying fueled option dealers that shorted calls to buy stock and delta hedge their short call option positions … 

 

 

Finally, 20-30% of heavy put positions in SPX and SPY expired on Friday, which will force option dealers that were counterparties to the long puts to cover their short stock positions early this week … 

 

So, notice in the chart below that 3700 is now strong support underneath the market. 3700 is the critical gamma pivot level, which means below 3700 option dealers are short gamma, which fuels greater volatility and lower prices …

 

 

This had been the condition driving markets until Friday when heavy call buying fueled a rally above 3700.

 

So, the bias based on the addition of calls above the market is supportive of a continuation of the rally that started on the CPI day.

 

Sell the Rip

 

I am not bullish on stocks. but you have to recognize a possible change in flows …

 

On Friday morning after the WSJ Fed article was published, I closed my bearish plays in banks and high-yield bonds, and purchased bullish strategies on metals and energy.

 

I am cheering on this rally in equities so I can sell at higher levels.

 

One key implication of the Fed going forward is this …

 

Today, the blackout period, which restricts Fed speakers from making public announcements, begins and lasts until after the Nov. 2 meeting.

 

This means the narrative of a pullback in Fed tightening may have a lasting impact … plus weak economic data may have a positive impact on equity prices, as well.

 

Bring It Home

 

To reap more consistent returns, it is important to catch these inflexion points in the markets …

 

You want to be ahead of a turn in the narrative driving prices because that provides the lowest risk/highest reward opportunities …

 

To be buying on the day of CPI because you were prepared to buy against the 3500 level and put your emotions of a market crash aside turned out to be incredibly rewarding.

 

Now, look ahead to a rally that most traders will fight if, indeed, we continue to rally. 3900 is the level above that presents a great opportunity to execute bearish strategies in equities  …

 

It doesn’t matter what gets us there, it is just a matter of executing against that level because your probability for success is elevated.

 

Stay tuned for more insights into the internals this week and as always …

 

Live and Trade With passion My Friend,

Griff