Hey There Income Hunter,
The new year begins with expectations for greater volatility.
That’s due to JPMorgan’s massive 40,000-plus contract 3,835 short call position that expired at Dec. 30 OpEx.
The 3,835 strike had pinned the market in a tight 3,775-3,875 trading range for weeks. Now, with a reset of option positioning, critical economic data and Q4 2022 earnings season heating up, the market is poised to make a move.
Let’s look at the critical data and option positioning that will impact markets this week.
Option Positioning
As we head into the first week of trading, major resistance is at the largest net positive gamma strike (call wall) at 390, with major support at the largest net negative gamma strike (put wall) at 380.
On Friday, after testing just below the 380 put wall, sure enough, SPY rallied and closed right at the 3,835 strike once again.
However, now that the call-heavy Dec. 30 options have expired, the pin is gone, allowing the market to move away from the SPY 380-390 range.
Market Breadth
Around 50% of the S&P 500 constituents are down at least -20% or more from their 52-week highs.
One third of the stocks down at least 20% are down at least 30% – and about 17% are down at least 40% for the year.
The breadth has been improving, which signals a probable test of the SPY 410 level before the negative fundamentals of earnings and economic data kick in.
Key Data This Week
The spreadsheet below shows the key data this week.
The ISM Manufacturing Index and FOMC minutes will be key on Wednesday, followed by initial unemployment claims and then the unemployment report on Friday. Look for this data to fuel volatility this week.
If the data does not provide the fuel for a new trend, favor a positive bias to start the year.
I say that because of the selling that was attributed to taking tax losses to offset gains the past couple of weeks. Buyers may come back in to purchase some names that are down as much as 70%.
Bring It Home
Beyond this week I see major trend changes throughout the year as the Fed rate hikes and QT drains liquidity from the market.
Until then …
Live and Trade With Passion My Friend,
Griff