Daily Preview: Friday, July 19
Thursday, July 18 Review:
Well, another red day for markets today as SPX had a big follow-through day to the downside.
The Dow (DIA) has been an exception until today, rallying to recent highs as the “rotation” trade saw Dow names rise in the face of tech names dropping. Will this rotation continue for the next round of the decline? We might see a bounce soon, but the answer is potentially right around the corner.
This morning in Discord, we shared the following chart, noting that “Implied Volatility jumped a ton yesterday, showing a reading 50% higher than all readings over the past year. SPY Total GEX shifted down slightly but there is still large positive concentration at 560 and 565.”
Looking at the SPY chart, there’s at least a logical point to see a bounce at the middle Keltner channel, which held today. The Keltners still look bullish, but that doesn’t guarantee we immediately bounce higher. GEX at 565 gives a shot at nearly retesting highs, if we can make it.
Another counter argument to the recent drop is the GEX Levels chart which shows that SPY is touching a possible Dealer Cluster Zone where we can see a possible reversal. We watch these zones for signs of shifting levels, too, which is based on GEX.
Historical GEX shows us that the -1.9B is very negative for SPY, more negative than any recent time. While not at a 52-week extreme just yet, we’re getting closer.
The VIX made its move to 16, and GEX had been advertising at least 15 as a target. We also pointed out the negative correlations between VVIX (the index measuring future expected volatility of the VIX) and the VIX, which tend to be predictive of upcoming VIX spikes, though not necessarily on an exact timeline.
With the upper Keltner channel being breached, it wouldn’t be surprising to see volatility come back down, though we need to watch what happens at the top of the channel and if the channel starts to rise at a sharp angle, which may imply a larger move for the VIX. We’ve seen 3-5% pullbacks numerous times since November, but nothing bigger, so we’re overdue.
What are we Looking For On Friday, July 19?
Monthly option expiration is notorious for tricky trading, which stems from a number of competing forces, though historically, OpEx week has been bullish. This time around, it seems to be far less predictable, which could be due to extreme one-sided bullishness in prior weeks and too many VIX shorts, to name a couple of themes. VIX expiration was Wednesday, but I guess too many traders were still holding QQQ calls as of today (half joking).
Looking at tomorrow, I don’t see a super clear theme when looking at the GEX chart. We have sizable positive and negative GEX clusters, as seen on the QQQ 3D chart below: Negative strikes from 470-475, but some positive strikes at 480-482, so we may want to wait and see how we open up tomorrow. One possible consideration might be to look at fading whichever side gets visited first, with a keen eye toward risk management, of course.
Let’s look at SMH to isolate the leading component of the Nasdaq this year, thanks to NVDA. SMH tends to lead the way, and it’s showing extreme negative GEX (a contrarian signal) and sky-high GEX-weighted volatility, so premiums are really juiced.
SMH has barely tagged the green Dealer Cluster Zone, so maybe it has a slight overshoot ahead, but that’s not a necessary precondition to seeing a rebound from this point.
All things considered, a speculative view is that one more gap down or move lower may be a good rebound trade, though we certainly see big picture concerning signs that warrant our attention. We haven’t yet breached the really BIG levels that would potentially signal an end to the uptrend (like SPY 535, for instance), but we may have a setup for a bigger decline depending on how any bounce materializes from here. Do we make a lower high? What does the leadership look like? How quickly will various signals show the rebound to be overbought? We’ll keep an eye on the holistic view and we’ll be happy to share our thoughts. We want to hear yours too, so join us!
