Hey There Income Hunter,

 

The SPDR S&P 500 ETF Trust rotated down to the 405 area yesterday, with the implication that there is support there, thanks to very large open interest in puts and calls at the 400 strike. 

 

Once that area held, SPY climbed back in the last hour of trading to close at 414.48 … Could Monday’s trade put in a short-term low? 

 

Based on option positioning I would say definitely, given the huge open interest in the 400-strike SPY options … 

 

This open interest, which is largely in puts, creates a lot of negative gamma. That means market makers are forced to sell more stock at lower prices and buy at higher prices against their short puts. 

 

However after Wednesday, real money accounts will most likely close their puts and this could fuel a sharp short covering rally similar to what we saw around the March Fed meeting.

 

I closed a Euro Bank ETF (EUFN) put spread yesterday for a 70%+ gain and will be looking to get long off a couple of bullish RSI patterns today. 

 

But first, we’ll look at a crowded bear trade that may be ready for a short-term bull play …

 

The Pain 

 

There has been massive damage done to the tech names … 

 

Almost half the stocks in the Nasdaq-100 are down nearly 50% and nearly a quarter are down 75%.

 

The last two times tech was crushed like this was the 2000 dot-com crash and 2008 housing crisis..

 

The market has had to deal with many deflationary forces at work aside from inflation itself … 

 

• Delta variant wave
• Evergrande default
• China crackdown on tech
• Russian invasion  
• Severe Chinese lockdowns

The Gain

 

China recently announced it will step up infrastructure construction to boost domestic demand and drive economic growth going forward. 

As you can see in the graph below, China tech has outperformed US tech on a relative basis. This could give the global markets a lift …

 

 

There is also news of a slow reopening of the lockdowns, which could unleash strong demand for commodities that have been under tremendous pressure since the lockdown first started. 

 

The other indications for a sharp short-covering rally are the buildup of puts heading into the FOMC meeting. Post-meeting, fund managers will cover much of their bearish positions, triggering a sharp correction higher that may last a few days.

 

Finally, the market is pricing many more rate hikes than I think are possible. 

 

Currently 10 .25% rate hikes are priced in and I only think half of those are possible based on current economic conditions. Once that is apparent to the market, stock and bond prices will spike higher. 

 

I think you can be long banks like JPM, which has a positive RSI/Price reversal pattern after today’s trade …  Copper (CPER) also has a bullish candlestick and is sitting just above good support. And the silver miners (SILJ) snapped back today leaving a bullish reversal pattern.

 

You have to be able to switch quickly from the bear to bull hat in this market … It doesn’t mean it’s a sure bet, but at least you have the odds in your favor. 

 

Live and Trade With Passion My Friend,

Griff