Gold Plunges As Gamma Squeeze Unwinds And Equities Stall
The S&P 500 finished the day flat, with not much happening. It was actually a fairly uneventful trading session, as most of the action took place in the precious metals market, where gold plunged.
When looking at the intraday structure of the S&P 500, the index has consistently struggled to break above the 6,750 level, which has served as resistance since October 3. It will likely take a gap higher to overcome that barrier. Otherwise, the more probable outcome is a retracement to refill the gap near 6,660. The recent straight-line rally has formed what appears to be a diamond reversal pattern, suggesting the index may not only revisit 6,660 but could eventually decline toward 6,600.
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Gold prices fell by 5.5% today. What’s most interesting about this move is that not only did the price drop, but implied volatility for gold — measured by the GVZ — also declined. It’s notable, and likely not coincidental, that gold had been rising alongside implied volatility. That combination has all the hallmarks of a classic gamma squeeze.
It may also be no coincidence that gold started to weaken right after options expiration on Friday, the 17th. The fact that both price and implied volatility are now falling suggests the recent rally may have been largely speculative. Typically, after a gamma squeeze plays out, we see a sharp and painful unwind, which implies that gold could retrace and give back much of its recent gains.
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Additionally, the HYG high-yield ETF was weaker on the day. While it has largely recovered from its sharp sell-off on October 10, it continues to face resistance around the $81 — an area that has proven sticky. From an intraday perspective, the chart shows what appears to be a potential rising wedge pattern forming, which typically signals a bearish setup. This suggests the HYG could give back its recent gains and potentially fall back below $80.
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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. ...
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