Click here for Signal Trades spreadsheet. Updates 2:00 AM EST - Tuesday 12/7/21 Trader Hedging: Put/Call Ratio The P/C ratio reflects how fearful traders are feeling, and how much they are willing to buy protection. All the put buying is what spiked up implied volatility ($VIX $VXN $RVX). We need to see P/C ratio chart forms a topping pattern, similar to the one formed from late September into October (green arrows in chart below). Currently P/C ratio is still forming higher high. So bulls need to be patient. Dealer Hedging: Gamma Trap Please re-read yesterday's post for explanations about gamma trap. Right now, the key level to watch is $SPX 4500. If $SPX drops below this, a gamma trap is likely to be triggered, which means dealers will be selling even more into weakness and buying into strength. This will result in very sharp price swings, up and down. But keep in mind that even if a gamma trap kicks in, all of these puts expire on 12/17. Dealers are likely to find themselves short too many futures, and need to cover those shorts quickly. As they cover their shorts, the gamma trap is released and the market will likely rally hard. Volatility: $VVIX $VIX $VXN $RVX $VVIX is the volatility of $VIX. While we track all volatility charts, we find this indicator to be most insightful in projecting volatility moves. Similar to P/C ratio chart, $VVIX hourly chart below shows that higher high spikes are still forming. This means volatility is not quite ready to drop yet, because traders are still buying more puts. The key dates for volatility reversal is likely to be around OPEX 12/17, as discussed above. Market Breadth: Advance-Decline Net Issues As discussed yesterday, the daily charts of A/D net issues for NYSE, Nasdaq and S&P small caps are starting to show signs of life. Below is the daily chart for A/D net issues for S&P Small Caps. This is the cumulative chart. Observe the possible W bottoms that is forming. Similar bottoms are forming for NYSE and Nasdaq. This is a bullish divergence. Other Early Bullish Signs
Short-term Key Levels TNA has been updated, but all other remain the same in the table below. $SPX $NDX IWM There are some important dates next week that can really move the market: FOMC, $VIX expiration, OPEX (Quad Witch). So now is not the time to scale into big bullish positions, hoping to get in ahead of a potential rally. Now is also not the time to bet big on bearish positions expecting to hold it for several days. Futures (ES NQ RTY) are all heading up as we write this. But still be prepared for the scenario where $SPX $NDX IWM gap up at open, then possibly drop down to retest the lows of last week. See updated trade plan in spreadsheet. To Read We urge you to read this article about risk management and position sizing. 1% Risk Rule If you are new to trading 3x leveraged ETFs like TQQQ TNA SOXL FNGU, read: Why 3x ETFs like TQQQ lose money over the long term If you are new to trading inverse ETFs like SQQQ TZA SOXS FNGD, read: The risks of investing in inverse ETFs Disclaimer The information presented here is our own personal opinion. Consider it as food for thought. We are not offering financial advice. We are not promoting any financial products. We are not registered financial advisers or licensed brokers. We make no guarantee that anything will unfold according to our projections. You are proceeding at your own risk if you follow our suggestions.
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