Do you see what I see?
With the quad-witch opex Friday, a great mass of financial insurance just came off the table. The market bounced off resistance mid-session, and sold hard into the close.
The $SPY made new crash lows in after-hours trading.
Here is the problem. With a sustained sky-high $VIX, hedge funds and other players are no longer able to hedge long positions in the markets. Say you are a fund with 1 million shares of $SPY, optimistic for the long-term growth and progress of the America, but worried about the risks posed by an uncertain event, like Brexit or a "trade deal" negotiation.
With volatility at normal levels, with $VIX below 20, you can always buy put options to insure the value of your holdings against an unexpected drop in prices. If you're clever enough, you might even cash out your puts green, rolling them into buying the dip on the indexes to make even greater returns, because the market, after all, she only goes up.
The $VIX is now pegged above 60, spreads are blown out, and put options as portfolio insurance are no longer possible -- with any duration, they are outrageously expensive. The existing risk models and approaches no longer work.
March options have now expired. You cannot insure your positions. But you can sell them.
The S&P 500 closed at 2304.92 Friday. If the /ES futures are limit down Sunday night, then we have the following circuit-breaker bands for Monday:
- 7% - 2143 SPX, 15-minute pause
- 13% - 2005 SPX, 15-minute pause
- 20% - 1843 SPX, all markets closed for the day
A rare level 3 circuit-breaker crash is very much on the table for Monday.
The nearest clear technical support would be 1810 on the S&P, reached at the open on Tuesday. This is a no-brainer for all players, which will rally us back to channel resistance -- now under the topping megaphone -- into the end of the month. I believe that algorithmic trading systems will buy an 1810 low.
A final drop into early April returns us back to the area of the 2007 (year) highs, recognized as critical and truly ominous by everyone.
|S&P 500 hourly zig-zag crash to 520|
A sharp relief rally on the lunar cycle can then take us back to overhead resistance from the original move and base channel off the top. We may see a slowing of the Chinese virus throughout the world, a leveling off of new cases and casualties, maybe even the welcome news of effective treatments for it. These are good things, yes, but this pause and rally is just the eye of the storm.
We then meet the C-wave of the decline, as the economic impact of the virus arrives, like the second half of a hurricane beyond the eye-wall. Now we get the mass-layoffs, destroyed earnings, collateral damage (on actual collateral) in real estate, commercial and residential, as well as all of the consequences from that.
The long-long term channel support for the markets is at about 520 on the S&P 500, which we could see as early as the June FOMC meeting. This level also is the trendline between the 2002 and 2009 market lows. The Fed will go full Bernanke helicopter-money on this one, maybe they can print up $50K or even $100K per American household. The Federal quarantine shutdown bonus coming soon is a trial run of this mechanism.
|long-long-term S&P 500 chart|
We should know on Sunday night. Good luck to friendlies.
If we get a dump tomorrow that is comparable to the dive to 2854 in wave 1, then maybe we visit 1940 on the S&P 500 tomorrow. Congress is bickering about fiscal stimulus package details, so the equity markets may help them resolve their differences. This would trigger 2 halts tomorrow.
|capitulation selling to end each leg down|