Post-VIX Expiration Pullback: Warning Or Opportunity?
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Friday was tricky, presenting an accurately negative picture most of the day, but giving difficult readings pertaining to which gamma exposure (GEX) strikes were likely targets, at least early on. Such uncertainty is why we hedge in our Educational Portfolio, which was actually positive on Friday despite the market drop and the negative impact to our long positions.
Despite Friday’s challenges, the big picture warnings issued earlier in the week took over relative to the smaller timeframe signals, with the VIX coming alive after VIX expiration Wednesday, a possibility we repeatedly discussed. We weren’t certain whether a pullback would materialize in the last 2 days of trading during OpEx week or if we would likely see it the following week, and by Thursday I was leaning toward a drop not happening until the following week, but nonetheless we saw it start Friday. This drop may continue into Monday, though the extreme nature of Friday’s 1-day change likely means a rebound attempt is somewhere around the corner. We discuss what we’re looking for in today’s YouTube video, so check it out by clicking here.
Let’s start off by glancing at SPX’s chart above. The top Keltner is pointing way up despite the huge red candle from Friday. Any big move happening on OpEx is suspect in my view, because the expiring options have an outsized impact on trading for the day. If downside continues, SPX may drop all the way to 5897 or lower, based on the lower Keltner channel, though the 4-hour chart below shows that we may find support earlier at 5970. The 4-hour Keltners have captured SPX’s moves fairly well, though you can see the occasional overshoot or undershoot does happen, at least briefly. So even if the 4-hour Keltners end up being very relevant, we may overshoot to the downside.
SPX’s total net GEX dropped precipitously to -1.2B. Note that much of that -1.2B expired Friday, leaving a largely neutral slate that could go either way tomorrow. Opening up tomorrow’s trading with GEX in neutral territory more easily opens the door to a swing back into positive territoy.
Another observation is that we are almost in the lower Dealer Cluster zone, with 5970 fitting well within that box, and most volume Friday (the light blue horizontal bars) was at higher strikes, which seems bullish. The upper Dealer Cluster zone still holds hope for 6200 into March.
Our favorite (sometimes) leading indicator DIA really took a dive, gapping down lower than other indices and heading straight toward the lower Keltner channel at 431.78. 426-430 is an interesting area due to the large gap left behind. The Keltners are pointing sharply higher.
DIA also showed the highest volume at higher strikes, though DIA shows roughly -1% downside exposure before reaching the top of the green box at the lower Dealer Cluster zone. All in all, major indices corrected so far on Friday that we see the evidence strongly pointing toward a bounce, even if we get another day or so of selling pressure. GEX still looks positive for the late March timeframe but this is a situation where we want to monitor any changes to those higher targets that are weeks away.
AAII survey is also reflecting heavily bearish retail sentiment, something I would definitely consider to be a contrarian indicator. While AAII doesn’t give us an exact timeframe during which we can expect a rebound, I think we can then turn to GEX to narrow down what we’re looking for and in what timeframe. This may be the pullback we were hoping to see before we push higher again. Regardless of the big picture remaining bullish or shifting to a more negative stance, we expect a short-term rebound toward resistance as we consider new data.
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