Market Analysis - Monday, Feb. 23

SPX futures declined to 6855.00 over the weekend, then bounced to 6899.00 this morning before resuming its decline. There were five attempts by options investors on Friday to rise above 6900.00 with the final attempt at the close. This may have been due to monthly options expiring and a very large block of calls at 6900.00. The sell-off in the futures market on Sunday may have been due to dealers matching their underlying assets against the maturing calls.  While the SPX has gone nowhere in the past three months, with the high to low range being only 3.3%, less than half of the normal trading range for the SPX. This has given comfort to traders/speculators who have been trading that range, not realizing that the SPX has slipped beneath two major supports, the Ending Diagonal, currently at 6910.00 and the 52-day Moving Average at 6895.00. In addition, virtually no one realizes that a neckline of a Head & Shoulders formation (shown on the two-hour chart) exists at 6775.00, with its bearish implications. There may be an air pocket down to 6500.00.

Today’s options chain shows Max Pain at 6900.00. Long gamma strengthens above 6950.00, while short gamma rules beneath 6850.00.

The premarket VIX has risen to 20.64 this morning. While SPX remains flat, the VIX continues to rise, suggesting not all is well under the hood. The rise above the trendline tells us that investors are beginning to hedge the SPX. Dealers often take the opposite side of the options they sell. However, when a breakout occurs, they must also short the SPX to monetize the options. In the case of the VIX, a breakout may force dealers to join the speculators who are buying the VIX/selling the SPX.