The S&P 500 “index” held along a flat VWAP (4445 +/-) for most of the Wednesday session until the FED minutes hinted at a “case for raising rates” this year. In addition, a Defense Department briefing on Afghanistan added fuel to the fire. Prior to the FED minutes, and during the LIVE broadcast, we positioned for more weakness if the “flip point” at 4420 level gave way. Price action bounced briefly at this level before giving way into the close ensued.
“Recall that our model sees the Vol Trigger (4419) as the last line of defense, and that appears to be what happened. Initially the SPX bounced on the 4420 line, and along with that came a surge in positive delta options trades. However, those positive deltas stop and the market sinks immediately into the 4400 strike. It appears this late day influx of positive delta traders were primarily from very short dated put spreads. We think its likely this spur of volatility caught many traders short on an expiration day, and forced them to quickly jostle their positions.” – Brent at Spotgamma
This morning futures are pointing to 4350 as support, with the S&P 500 “index” support in the same zone. With hedges in place, what follows is our plan for today.
S&P 500 Index
Fibonacci levels are noted as potential support. In addition, the 50d moving average suggests a modest 3% drawdown from all-time highs, should this level initially see short covering (profit taking).
We would hold onto SPY puts and UVXY hedges until profit taking subsides. We would suggest listening to the LIVE broadcast to assist in understanding “the plan” as it unfolds today.
Basically, any furious bounce would cause us to take partial profits and reassess market strength. Additional weakness would cause us to “add” to positions.
Note the 100% Fibonacci retracement aligns with the (4233.13) pivot low established on July 19. VBP bands on the left side of the chart suggest this is “major support.” This level represents a 5% (+/-) drawdown from all-time highs.
We anticipate oscillators will reset before a solid base is found, therefore watch RSI, MACD and stochastics. If these manage to get oversold, it might align with seasonal strength into year end.
These statistics relate to the quarterly earnings average, where the first half of each quarter reflect analysts meetings with company management teams and subsequent expectations going into earnings. In addition, you can see the second half (six weeks) of each quarter, after earnings reflect a smaller return. The August 16 – September 30 period is noteworthy, as this period usually provides a modest, negative return. Statistics are credited to a stockcharts article written earlier in the year.
Hedges – Insurance
We suggested we would be interested in the following hedges if 4420 broke on Wednesday. UVXY, SPXU, SQQQ, SDOW, and SPY puts are our goto positions. We currently have SPY puts and UVXY. Depending on market termperment, we might add to positions today.
Oscillators are turning from oversold and volume (noted yesterday) is rising. Targets at the 50d morning average and previous pivot highs (38.74) are potential areas for profit taking.
Finally, it bears repeating that Goldman Sachs has a year-end target of 4700 (+/-). This isn’t a pie-in-the-sky prediction, as earnings and guidance, along with an accommodative FED suggest its likely.
As a sidenote, if you are feeling pain at this time, its usually a reflection of money managaement. In other words, you probably have too much risk. Consider reducing exposure as seasonality suggests and hedge when necessary.