Liquidity Pressures Continue as Options Support Keeps the S&P 500 Range Intact

It was another active Treasury settlement day, with the S&P 500 finishing lower by 56 bps. That now means the S&P 500 has finished higher in just 12 of the last 35 settlement days. Bitcoin continued its pattern of falling on settlement dates as well. At least today, however, software and technology names caught a break.

That is because staples were hit the hardest, with the XLP falling by about 2%. It appears the double-top pattern was confirmed after the ETF fell below the neckline, and a 100% extension of the pattern would suggest the ETF could decline toward the 50-day moving average.

In terms of the S&P 500, the 6,800 level continues to hold and was tested again today. However, there is a large amount of put gamma at that level, making it a very sticky area. Until it erodes, the market will likely continue to see these failed attempts to break lower.

It does appear that the gamma build may fade, at least for now, by Monday, with the put wall shifting down to the 6,700 level. If that happens, it could open a path for the market to move lower and reduce the likelihood of these end-of-day rallies.

At least based on my own model estimates, the medium-term CTA level appears to be around 6,740. That medium-term flip level has been acting as support beneath futures for the past four trading sessions. This is something new I have been working on and trying to calibrate. If it continues to prove useful, I can share it from time to time.

That’s all I have for today. I’m kind of tired and have had enough of this week already.

Mike

Glossary by ChatGPT

CTA (Commodity Trading Advisor): A systematic trading strategy manager that often uses trend-following models to allocate across futures and other liquid markets.

Double-Top Pattern: A bearish technical chart formation where price tests a resistance level twice before breaking below support, signaling potential downside.

Gamma: An options risk metric measuring how quickly an option’s delta changes relative to movements in the underlying asset.

Neckline: The support level in a double-top or head-and-shoulders pattern that, once broken, confirms the technical formation.

Put Gamma: Options exposure created by put contracts that can influence dealer hedging activity and affect market price stability around certain levels.

Put Wall: A price level where a large concentration of put options exists, often acting as a support or magnet due to hedging flows.

Settlement Day: The date when futures or options contracts are finalized and positions are settled, often creating elevated trading activity and volatility.

100% Extension: A technical projection where the expected price move equals the height of the chart pattern from the breakout point.

50-Day Moving Average: A commonly used technical indicator representing the average closing price of an asset over the past 50 trading days.

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