Negative GEX: Double-Edged Sword
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Another day of markets attempting to bounce, another day of rejection, and this time with a lower low being printed. Tonight’s newsletter will take a look at SPY, QQQ, and the VIX. We also discuss SPY in today’s YouTube video, along with NVDA, WMT, DIA, and AA (the stock, not the meeting). You can watch the YouTube video by clicking here.
SPY and QQQ both finally made it down to the lower Keltner channel on the daily chart, a more solid area for a bounce than anywhere we’ve been over the last 3 days. We’ll look at gamma exposure (GEX) in a minute, which seems to provide backup to this possibility. At best, we see the Keltners flattening out at the top and the middle/lower Keltners turning down, which may represent choppy sideways consolidation, with 585 representing the lower limit. At worst, we may see the beginning of a more concerted downtrend. Regardless, our portfolio management concepts and structure are more dependent upon proper hedging than getting every macro move correct, so we will take it one step at a time. The current step is preparing for a bounce, which is why we removed 1/2 of our hedges today.
SPY’s lower Dealer Cluster zone shifted downward, though we are still at the top of the green box where we expect dealers to potentially become buyers. This zone extends down toward 575, so we can drop more. One thing mentioned in yesterday’s newsletter is that most of SPX’s negative GEX is clustered around tomorrow’s expiration, with more positive clusters concentrated around late March. This is still true, and with the selloff accelerating, I’d love to see a solid low tomorrow, if the sentient being running the machines can make such a provision. The large negative GEX clusters focused on one date implies a higher likelihood of reaching some or all of those strikes by that date. The same can be said of positive strikes clustered around specific dates, such as late March.
An initial rebound target, as mentioned in our YouTube video, may be the 600-605 area, the zero gamma line.
Our GEX Intensity Gauge for SPY shows an extreme -3.5B. Each time we’ve seen a major index get close to -4B over the last year and a half or so, we have seen a powerful bounce, even if only temporarily. The GEX Weighted Volatility Gauge looks at implied volatility, and the current reading shows participants are expecting huge volatility unlike any time over the last 52 weeks. Both gauges are telling us that participants are very bearish right now, so much so that these extreme readings can be good contrarian signals, though timing isn’t necessarily exact. I feel good about the odds of a bounce occurring sometime over the next few days, which is about as far as we can probably go with an educated guess.
We can say a lot of the same things about QQQ that we can say about SPY, but wow, QQQ’s chart looks much worse, in my view. No net gains since July 2024, that’s 7 months of A.I. hype with nothing to show for it. Yikes. On the bright side, QQQ has overshot the lower Keltner channel, which is not a situation likely sustained for very long, and perhaps this general area at the big, round 500 is a good spot for Custer to make a last stand. GEX shows potential to drop to 480-490, so don’t get too excited, just be mindful that the last 5 days have really created some oversold readings. Even March 2020 had some big rallies along the way.
QQQ is also at the doorstep to the lower Dealer Cluster zone, and we see most of the volume in the option market today between 500 and 520, so primarily at higher strikes (sorry my screenshot cuts off some of the light blue volume bars).
QQQ shows very one-sided positioning, with a lot of negative GEX clusters, some of which are even at higher prices (in-the-money). While not as extreme as SPY today, perhaps by Friday’s close we can see a similar contrarian signal from QQQ. We won’t have to wait long before finding out if that’s going to happen.
Lastly, the concern we had about the VIX holding above the Hull moving average proved to be valid, with a big green candle that took the VIX over 21 today. We were looking at 22 due to the upper Keltner channel, but the Keltner is moving higher, now pointing to 22.5+. If tomorrow does end up marking a short-term selling culmination, we may see the VIX spike above the upper Keltner. It’s hard to predict where the VIX may go in a disorderly selloff, so the character of any further downside move will have a big impact on whether or not the VIX stays within the Keltner boundaries or if we see more of a rocket ship move like in December or especially last August.
Remember, in negative GEX environments, dealers don’t necessarily hedge, they may fan the flames of a deeper dive or a large rebound, so we can see a lot of volatility in both directions in coming days. That’s the double-edged sword of negative GEX, but with volatility comes opportunity, as well.
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