Is The Pullback Over?
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GOOGL and AMD released earnings reports after hours today, with the initial reaction being a selloff. Tomorrow is a brand new day, so we’ll see if the drop holds, but for now, indices are reflecting lower prices as well. Even if we see a pullback from here, the gamma (GEX) picture has been constructive since the gap down Monday, and we discuss how this might play out and a few specific leading stocks in today’s YouTube video, which you can watch by clicking here.
I’ll make a few additional observations in this newsletter, including an update on the VIX.
QQQ reached important resistance today, but SPX still has yet to test the Hull moving average, currently at 6080. Will we go straight to that line, or after two days of rallying, is it time for a breather tomorrow? Let’s look at a few other points to narrow down the most likely scenario.
SPX total net GEX has improved markedly, reflecting almost 735M today. While still within our neutral zone, we see increases in GEX at higher strikes that has us leaning bullish as we look ahead.
The GEX Levels chart shows this best. You can see 6100, 6200, and even 6300 are contenders for potential targets down the road. As mentioned in the YouTube video, this may not happen immediately, and I’ll get into a few reasons why. First of all, you can see that we’re at the doorstep of the upper Dealer Cluster zone, a place where dealers may increase selling pressure. Sometimes we overshoot to the upside temporarily, or GEX can shift higher, but for now, 6100 looks like a solid possibility as we enter the box. It’s noteworthy that the lower Dealer Cluster zone is lower than it has been in recent weeks, showing 5700-5800 on the downside, but we need to discuss timing surrounding when/if we might reach that zone.
QQQ also saw total net GEX improve, just barely reaching above the zero line, though the change was big relative to yesterdays 600M+ negative reading.
We mentioned QQQ met important resistance, seemingly a bit earlier than SPX, and of course QQQ will feel the brunt of any potential selling tomorrow in GOOGL and AMD. We also see a slight skew toward the downside in terms of the purple GEX bars, with 500 and 510 really standing out. Otherwise, QQQ is sort of in the middle of the road, we see the upper G1 Dealer Cluster starting at 535 and the lower one at 510. Let’s look further for clues regarding which we may hit first.
Our 3D graph is helpful in this regard, because instead of showing us net total GEX, we can isolate each GEX cluster at each strike and expiration to see where exactly the GEX is concentrated. Friday is still reflecting large relative GEX concentrations at 530 and even larger at 535, suggesting potential for higher prices into the end of the week. Will this be triggered by AMZN Thursday night? That’s a speculative question, but it’s possible, in the event these upside targets remain as we go through the week. It’s noteworthy that a lot of negative GEX is now clustered around February 21, so will we be looking at a rally this week, then another pullback? Time will tell, and hopefully we’ll be able to increase our confidence as we get closer based on the data.
Even with that said, the VIX is at a spot where we might see volatility rebound, so I am wondering if we see a pullback tomorrow before resuming the climb into Friday. The VIX is right back to the important high 16-area, coinciding with the middle Keltner channel as well as the Hull moving average.
We noted the higher volume at lower strikes for the VIX after Monday’s gap down, and sure enough we saw the VIX drop after that spike, but today we are back to a pattern of seeing more volume at higher strikes as the VIX approaches this key area of support. We even see some GEX growing at the 25 and 35 strikes. To this point, attempts to go beyond 20 have been beaten down, and I’ll be surprised if we go beyond 20-22 this week based on the other factors discussed.
For now, it appears we’re in a buy-the-dip environment, so we’ll be looking to make volatility work for us this week as we look for new opportunities.
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