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The bulls have struggled to push the S&P 500 higher, and instead, the market has continued to churn as we approach the VIX options expiration on Wednesday and the S&P 500 options expiration on Friday. Generally, these option expirations have kept the market range-bound; currently, support for the S&P 500 is at 4,100 and resistance around the 4,150 level. This week’s focus will be on the bulls’ attempt to surpass the 4,150 mark for the S&P 500, while the bears are eager to bring it below 4,100.
This has proven to be challenging, as the market consistently experiences a surge in activity between 1:30 and 2:00 PM daily. Since Jobs Friday, during this time window, there has been a notable increase in market demand, leading to an afternoon rally. Although various factors could be at play, I don’t believe the market’s resilience is one of them. These rallies occur consistently and demonstrate mechanical movements, indicating a buy-at-any-cost mentality. Options-related flows and hedging activity likely influence this behavior.
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Once the options expiration concludes this week and gamma levels decrease, many of the effects of Vanna and Charm (option Greeks) will likely diminish. I anticipate that the afternoon rallies will end. This effect might fade earlier, especially with Jay Powell’s upcoming speech on Friday during the Fed’s monetary policy event. Implied volatility will probably rise in anticipation of this event. Based on the latest data we have received, it seems unlikely that Powell will adopt a dovish tone in his message. There is no reason for Powell or any Fed official to suggest pausing further rate hikes, especially when there is still a whole month of data to analyze before the next Fed meeting. The April data is one of the main reasons Powell couldn’t use the word “pause” at the May FOMC meeting, and I feel that the upcoming data will further support Powell’s decision to avoid using the word “pause” anytime soon.
S&P 500 (SPX)
Currently, a diamond pattern has formed in the S&P 500, which was completed after Friday’s decline and subsequent afternoon rally. It would break this diamond pattern if the S&P 500 dropped below 4,100. In such a scenario, there would be an opportunity for the S&P 500 to potentially decline to around 3,850, which would mark the completion of the pattern over several weeks.
NASDAQ 100 (QQQ)
Furthermore, the QQQ (NASDAQ-100 ETF) has formed a rising wedge pattern since February. In addition, a bearish divergence is observed on the relative strength index. To break the rising wedge pattern and potentially see an acceleration in decline, the QQQ would need to drop below the $320 level.
The dollar index shows signs of breaking out from a diamond reversal pattern, and the relative strength index (RSI) indicates improving bullish momentum. The dollar’s direction is significant as it can influence the movement of stocks and commodities.
A stronger dollar typically hurts stocks and commodities, causing them to decline.
Bitcoin is experiencing a deflationary phase as it breaks out of its diamond pattern and possibly forms a head and shoulders pattern. If Bitcoin surpasses the 27,000 level, it is anticipated that the decline could be significant, potentially erasing all the gains made since mid-March and driving Bitcoin’s price back to and below 20,000.
The SMH (semiconductor ETF) also displays a similar head and shoulders pattern, a recurring pattern observed in many market sectors. Additionally, a bearish divergence is present on the relative strength index (RSI).
S&P 500 Equal Weight (RSP)
The S&P 500 Equal Weight ETF is exhibiting a similar pattern of a head and shoulders formation, and it, too, shows a bearish divergence on the relative strength index (RSI).
It is tough to look through these technical charts, knowing that the S&P 500 has been stuck below 4,200 for months now, and the deterioration we have seen in earnings growth and the potential for a further decline over the next couple of quarters to be bullish on the market. Additionally, we know that the options market has placed the call wall at 4,200 for some time, and that is the options market’s way of saying it isn’t bullish on the market above 4,200 either.
Based on this, I would conclude that a pretty sizeable pullback is in the making, and it is likely coming before sooner than many would think. The bulls may be about finished, and this week could mark that turn.
Charts used with the permission of Bloomberg Finance L.P. This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.