How Much Lower Can We Go?
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The good news is that the market can’t drop lower than zero, well, unless we’re talking crude oil. But seriously, we don’t know whether the drop is over or not, but we will continue looking for clues along the way. Our highlighting of the 5835 GEX cluster for today’s expiration in last night’s newsletter proved prescient as SPX made an intraday low of 5829.53. With markets having dropped every day since December 26, we still see risk to the upside in the form of a positive move to some degree, but as we also said yesterday, we may not see that upside until this week has concluded. We discuss this topic and more in our latest YouTube video, including NFLX, SLV, NVDA, SPY, and the VIX. Watch the short 8-minute video by clicking here.
Looking at SPX above, we see that the lower Keltner channel was barely breached today and quickly recovered. The lower Keltner channel is now pointing lower, but the upper channel remains stubbornly elevated, which I still see as a cautionary sign for comfortable bears. That said, as long as we’re below the Hull moving average, the burden of proof rests upon bulls to show a trend shift. Above 5919 and we might be able to sustain a move back toward 6000.
The chart below shows my Keltner channels with weekly chart settings, just in case we need to zoom out further for potential targets in the event that we breach the lower daily Keltner again seem to be going somewhere else not on the daily chart. The weekly gives us the 5750 area as a possible target in that case. Let’s see what gamma (GEX) says.
According to our end-of-day GEX levels chart, the G2 Dealer Cluster zone has moved down, with 5700-5800 serving as the new moving target (moving when GEX moves). 5800 is now the largest GEX cluster, which may be an area where dealers become buyers. The upper Dealer Cluster remains elevated at 6200. Interestingly, even when we last saw GEX at 6200, it was never the largest positive cluster and the zone itself was more concentrated on 6100-6150, so I take mental note of this development.
The largest GEX clusters for tomorrow are negative clusters at 5820 and 5800. Total GEX is continuing to show negative GEX, but it’s not really changing much, floating along at a level we consider to be within a neutral zone at -581M. GEX as it stands right now still lends focus toward the negative side in the short run.
The VIX now shows positive GEX, and the biggest cluster is at 20. We actually reached 19.5 today, but we may still see volatility push higher at some point tomorrow or Monday, potentially making a short term top for the VIX (the bulls hope).
The chart for the VIX has looked quite unclear, with a lot of traffic in the middle, but it continues to rise in what may be an ascending wedge in preparation for a larger spike. The VIX doesn’t always obey Keltner channels on the upward spikes, though such spikes are typically temporary. Somewhere between VIX 20-22 would not be a surprising destination since we keep making higher highs on the VIX and today’s closing level is above the Hull.
Looking at QQQ below, the lower Keltner channel still hasn’t been reached, which currently sits at 500.80. It’s possible that this current drop stops when QQQ visits the lower Keltner, since other indices have but QQQ has not. Such a drop may see other indices overshoot their lower channels further, but QQQ (as the leading index during the move higher) may be the one that marks the reversal. It’s not a certainty, but it’s something I’ll watch as a possibility as we also include other factors such as GEX as the day goes on tomorrow.
In summary, we’ve seen a fair amount of volatility this week, and the drop may not be over. As we look toward next week and positioning around OpEx January 17, we want to be cautiously constructive toward a possible rebound and first positive movement of 2025. Join us in Discord tomorrow. Today we shared a short bias (as indicated by GEX positioning) when SPX was still at 5900, so we’re already off to the races in the new year.
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