April 2022 | Archimedes Methodologies

Founder's Trading Journal

Repricing a Market Priced for Zero

Apr 30, 2022 AF Thornton 0 Comment

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Founder's Trading Journal

Morning Notes – 4/29/2022

Apr 29, 2022 AF Thornton 0 Comment

Good Morning:

Today is the last trading day of the month and weekly options expiration. I don’t typically trade these days as the price action can be tricky.
Not much has changed in terms of volatility. I would expect roughly plus or minus 50 points from the open.
Price should find support at 4210 (SPY 420 equivalent) to 4200 SPX. Resistance shows at 4285 (the Gamma flip line), then 4300. Expect resistance around 330 in the QQQ.
Our proprietary algorithms rendered another gorgeous buy signal at 4220 on the futures with the exit signal coming at 4290 for a gain of 70 points ($3500) per contract.
Nevertheless, it was a short-covering rally once again. The market has to follow-through to convince us that a reliable trough has formed.
I am not expecting much direction until the Fed announcement next Wednesday. Otherwise, price is merely playing ping pong.

It has been a rough week for me working through a lot of technical pain to set up our new Trading Room and features – but all for the future good.
I will have some exciting announcements over the weekend so stay tuned.

A.F. Thornton

Founder's Trading Journal

Morning Notes – 4/28/2022

Apr 28, 2022 AF Thornton 0 Comment

Good Morning:

Let’s keep it simple this morning.
The potential trade I mentioned in the morning note yesterday manifested. The Founders Group scalped about 60 points per contract in the S&P 500 futures (4185 to 4225).
But the big picture remains negative, and the algorithms are still in sell mode (see the 2-hour S&P 500 Index Chart above).
The WEM low is still holding the market in place around 4140 (futures) and should hold through tomorrow’s close.
Resistance is at 4250 and then 4300.
Support is at 4210 to 4200.
Price exploration below 4200 will accelerate the downside unless the WEM low holds.
Below that, and it is Katy bar the door to 4050, the least likely scenario on the table for today – but I cannot completely exclude it.

I propose the bear case behind door number one in the chart above. War and Deglobalization are bad for the economy.
With the first quarter GDP reported as negative this morning (two quarters in a row is an official recession), there will be a cloud over the Fed’s ability to raise rates.

But it wouldn’t be a market without the other side of the coin.
And behind door number two, War and Deglobalization are good for the economy.
GDP is currently negative, and inflation will take care of itself without the Fed.
This supports the old axiom that the cure for higher prices are higher prices.

But it wouldn’t be a market without the other side of the coin.
Behind door number two, War and Deglobalization are good for the economy. GDP is currently negative, and inflation will take care of itself without the Fed.
This supports the old axiom that the cure for higher prices are higher prices.

Behind door number three, the positives and negatives are uncertain enough that the market establishes a trading range, as it did with the stagflation a la the 1970s.
Markets spend most of their time in trading ranges.
Arguably, the S&P 500 and many other indexes have been in trading ranges since last November.

Let’s see what the day brings.

A.F. Thornton

Founder's Trading Journal

Sometimes it seems like you take one step forward and sent two steps back. We have been experiencing website problems since last Friday that we have traced back to our host, so we are migrating to a new host over the next 24 hours. Frustration does not even begin to describe the experience. We are adding so many new features to the site, from charting to the new trading room, that we need to upgrade our host and capacity. This is my only brief window to communicate.

Had I been able to publish over the weekend, I would bottom line my view as the selling was overdone with the put/call ratio over 1.1 at Friday’s close. And the price was coming into the right shoulder tip of the Head and Shoulders Reversal pattern, also a test of the lows earlier this year and the primary trendline from the March 2020 covid lows. At the very least, I expected a bounce. Also as discussed recently, the market could establish the bottom of a trading range from 4200.

And it appears that we got the bounce on very good volume. So the price action was encouraging, though the market is not out of the woods quite yet.

As soon as capable, I will publish the rest of the data – hopefully later tonight.

A.F. Thornton

Founder's Trading Journal

Morning Notes – 4/22/2022

Apr 22, 2022 AF Thornton 0 Comment

Plain English Summary

Our Navigator Swing Trader™ algorithm tells us to be out of the stock market right now. We use the S&P 500 Index as our proxy for the stock market – so when we discuss the “stock market” or the “market,” we mean that index. The algorithm has protected us all year. And each time we have entered the market and exited, the round trips have been profitable. It has been an excellent year for the Founders Group thus far.

When we are in cash like this, and the market is still downtrending, the algorithm (together with other factors we are monitoring) tells us when it is safe to go back in the proverbial water. And it is not safe quite yet.

Yesterday was another rough day, but a pattern developing in the market might lead to a short-term reversal of the downtrend. Patterns only work about half of the time, so I view them as a sign to pay attention to – rather than a certainty that they will predict anything. In the next few sessions, we will monitor whether the pattern unfolds positively or negatively as the negative sentiments about war, inflation, and higher interest rates reach a fever pitch in stock market news and narratives.

The most important event for markets is the upcoming Federal Reserve meeting starting May 3rd, where the Board of Governors will decide how much to raise short-term interest rates. We expect the stock market to begin solidifying its direction as we approach that date. In the meantime, the market could still go lower until the meeting and announcements are complete. Our Subscribers will receive alerts right on their smartphones when it is time to repurchase the index.

As always, swing traders/investors often follow the lead of our Founders Group. We tell them what we are doing, when, and how much. If you prefer to keep it simple, subscribe and follow our lead. And skip the rest of this discussion – best suited for our fellow technical geeks.

A.F. Thornton's Morning Notes

Good Morning:

I don’t want to be paranoid this morning, but what is up with a dozen major food processing plants in the U.S. sabotaged or burned to the ground since the beginning of the year?
Do you know how to conquer a country without nuking it? Cut off food and water.
With several hundred thousand people a month illegally entering this country, how do we know whether Chinese, Russian, Iranian, or other terrorists are already laying the groundwork for sabotaging our food and water supplies as retaliation for Ukraine and other grievances?
We have already been in World War III for some time, considering information/cyber and economic warfare with China and Russia. Perhaps Ukraine is the first kinetic outbreak.
These unfolding events keep me up at night.
Volatility remains high today, and negative Gamma will be higher today than yesterday. About 25% of the outstanding Gamma will expire with weekly OPEX at today’s close. I am expecting a 55-point range in either direction from the Open. Yesterday, we exceeded the estimate.
SPX 4400 (SPY 440) is the last strike with any green call Gamma, below is nothing but put Gamma, more volatility, and adverse market bias.
Resistance is at 4400-4420 (SPY440), then 4450. Support shows at 4335, then 4300.
U.S. Treasury Secretary Janet Yellen will speak later this morning which should be interesting, and some manufacturing reports are also coming out. We should also get some updated figures on oil rig counts. Otherwise, it will be a quiet day ahead.
The market is opening near last week’s SPX low around 4381. The close today will determine whether this week is another red candle one-time-framing lower to finish three in a row, a rare occurrence on the weekly chart. We typically see only two red candles in normal pullbacks. Three or more signify serious corrections.
Mostly, I am watching the Head and Shoulders Reversal Pattern on the daily chart to see if it will take. The odds of a successful reversal and meaningful move higher are 50/50.
Investor sentiment is negative enough to contemplate a rally from the tip of the right shoulder – but it is likely to be short-lived,
I will expand these concepts in the Navigator Oracle™ Weekly Letter on Sunday.

Have a Great Weekend!

A.F. Thornton

Founder's Trading Journal

Afternoon Notes – 4/21/2022

Apr 21, 2022 AF Thornton 0 Comment

Summary for the Non-Technical Readers

In plain English and for our less technical subscribers, the stock market is tenuous as interest rates rise from abnormally low levels brought on by the Pandemic and return to normal levels. Financial assets (like stocks) rise with lower interest rates and fall when rates rise.

Higher rates alone would be enough to cause the stock market to fall or go sideways in a trading range to catch its breath. Governments, companies, and the general economy need time to adjust to the higher rates, adding to market uncertainty and volatility. Investors are unsure what to do, and the stock market reflects indecisiveness with higher fluctuations.

But the situation is even more complicated in this cycle because abnormally high inflation arose from all the government debt and money printing undertaken during the Pandemic. Higher prices also resulted from global supply disruptions as various countries depending on each other locked down and got behind in their production and shipping. The resulting shortages caused abnormal price inflation, requiring more aggressive rate hikes than usual.

Green Energy/Anti-Fossil Fuel executive orders by the new administration starting in early 2020 also caused the price of oil to skyrocket, contributing to inflation. Oil prices impact almost every economic sector not only related to inflation, but higher energy prices tend to slow economic growth, sometimes causing a recession.

When Russia invaded Ukraine, countries worldwide started taking sides (e.g., China) and the supply of goods and food became even more disrupted than during the Pandemic. That has led to even more inflation, and the conflict further emphasizes the need to bring the production of many of the goods and services currently made and performed overseas back home. We are calling this “deglobalization.” It is the reverse of the process we have experienced over the past 25 years.

No matter how you view it, both the transition to deglobalization and the result of higher production costs here at home lead to higher prices for many of the goods and services we consume and enjoy. The process and transition are inflationary until the new paradigm stabilizes. On a separate note, the world will be less stable as the East and West go their different ways again, similar to the period we experienced before the Soviet Union failed. Global instability, like inflation, negatively impacts the stock market too.

That’s it – we are in a transition. The Federal Reserve is aggressively raising interest rates and taking other measures to dampen consumer demand and fight inflation. But there is only so much they can do. The stock market is trying to adjust to all of this uncertainty. On a positive note, there will be many opportunities to identify new earnings growth leaders in the transition and outcome of this deglobalization theme.

I share my thoughts in these pages because our families in the Founders Group contend with all the same problems with our money as you do. Right now, we move in and out of the market when the opportunity presents itself during the turbulence using fundamentals, technical, and quantitative analysis. Not being so young, the Founders Group does not buy and hold at this time because declines in this environment can be swift and severe. We do not have enough runway to recover from a steep drop at our ages.

Today, the stock market had another unhelpful day unless you were in cash like us. The market is at an inflection point that will decide whether it can rally a bit further or still explore lower prices.

If you are not technical, you can ignore the rest of this discussion. Please keep it simple. You can follow our lead in the Navigator Swing Strategy™ with all or part of your funds. We are unequivocal in immediately alerting our community about what we specifically buy and sell, at what price, and when. We are damn good at it too. Now on to the granular picture.

A.F. Thornton’s Afternoon Notes

Good Afternoon:

I am half Irish and married to a Greek, which can be interesting.
The Irish are superstitious, and my full Irish mother is no different. The Greeks are superstitious, too, focusing on the “Evil Eye.” So, I always expect a Leprechaun to come around the corner when things are seemingly going well. I am rarely disappointed.
I am even thinking of signing these outlooks as The Doomscroller – the nickname my wife gave me.
Anything can still happen – and the SPX/ES reversal pattern discussed in the AM and yesterday’s PM Notes is still valid, but it is on thin ice.
I refer you to both previous discussions, as I had a feeling the reversal pattern might be too obvious. We shall see. The Leprechaun is always waiting to steal your gold.
Today, after gapping higher, the market rolled over to complete the Head and Shoulders Top pattern identified a few sessions ago and as yet unfinished on the hourly chart.
But that leaves no room for error tomorrow – the market needs to go nearly straight up from the open to keep the reversal pattern intact in the daily time frame.
The pattern wasn’t the only culprit this morning, as the market also rejected the 200-day line and the top of the Daily and Weekly Expected Moves, intersecting around 4490.
Price then slid back, slicing and dicing through the other key, moving averages like a hot knife through butter.
From an options perspective, the price also encountered the highest Gamma strike and Hedge Wall just below 4500. It is no wonder the market ran into a brick wall.
If you are reading these morning and afternoon notes regularly, you should have anticipated the 4500ish resistance.
Sure, the market could have blasted through the level this morning, but the probabilities were low.
When the price went immediately back into the opening gap and filled it, you had the first clue that sentiment might turn south. That is why we have Gap Rules.
The selling was relentless from the Open until the close.
More Fed jawboning was unhelpful today, as was the 10-year Treasury Note rate popping over 3%.
Do you remember several months ago when I predicted the 3% target from another long-term pattern that the 10-year yield broke?
Well, here we are.
What comes next?
Tune in for the Morning Notes tomorrow and more Leprechauns.

A.F. Thornton (a.k.a. the Doomscroller™)

Founder's Trading Journal

Morning Notes – 4/21/2022

Apr 21, 2022 AF Thornton 0 Comment

Good Morning:

The Navigator Swing Trader™ strategy remains 100% cash both for leveraged and non-leveraged accounts. Meanwhile, the Founders Group is day trading with the Navigator Day Trader™ subscribers to pass the time
The S&P 500 Index has that Head and Shoulders Reversal pattern look in the daily chart above.
And you have to admire the volume pattern confirming it – classic…
The measured move (from the tip of the head to the neckline, then projected from the neckline), is roughly 5000 on the S&P 500 Index. Wouldn’t that catch a few people off guard?
It’s just that it looks too obvious and too easy – too good to be true?
And there is yet another problem. We are already at the top of the WEM expected move for the week, as priced into weekly options set to expire at the close tomorrow. It usually does not pay to bet against the dealers and market makers who will need to defend 4480 on the futures today and tomorrow.
And there are a few moving average cousins to fight with here. The 21, 89, and 200-day lines will fight price alongside the expected move. The 50-day line has seemingly morphed into support. And we are slated to gap open at the primary downtrend line from the May 29th peak on the RTH chart.
And doesn’t the price action look like a rising wedge on the daily and hourly charts?
There were a lot of S&P expirations yesterday, which is unusual for mid-week. Still, perhaps VIX expiration had something to do with that or maybe it follows from last week’s shortened holiday trading week. But negative Gamma increased with all the S&P 500 expirations.

And doesn’t volatility look a bit complacent here? Protection is cheap, considering all that surrounds us, but I suppose the VIX already baked the lousy news in – at least the known. But there is always the unknown.
I am also mindful that the Yen’s near-collapse could leave some bodies buried that may float to the surface in the next few weeks.
And Putin was showing off his new toy missile yesterday, bragging that he now has the nuclear edge over everyone.
Maybe true, but these guys used blown-up plastic dummy missiles and other weapons in their military parades for years. At least this one flies.
And China reaffirmed its commitment to deeper ties with Russia yesterday – so there are plenty of geopolitical risks as multiple countries gang up against us and the U.S. Dollar’s hegemony.
Our opinion matters little anyway; we will follow the price action where it leads us.
And if the S&P 500 is looking north to 5000, it will be because deglobalization (bringing all that manufacturing and production back home from China) is damn good for our country and workers.
What if we are on the verge of an economic boom? Think about it. Look at our energy sales now to Europe? We produce a lot of the world’s food and weapons. What about all the construction and jobs associated with rebuilding our industrial base? What about all the new jobs working at these new factories and plants?
None of that sounds terrible for our economy. Isn’t this what we wanted – to bring our jobs back home?
I will pay some inflation (and we need to help those who can’t) if it means restoring our industrial base, transitioning our nation back to making products at home, and providing services that help America restore our national security and sovereignty.
It is, indeed, sad that we have a bumbling U.S. Government. I am not playing favorites – both Rs and Ds are responsible. Remember when we used to care about the Trade Deficit? How about the Budget Deficit?
Doesn’t this government know how to capitalize on the deglobalization opportunity immediately and help businesses transition? China would know what to do if the situation was reversed.
Deglobalization should mean no recession.
Aren’t we drowning in debt, Mr. President? Deglobalization is your way out – not war.
How about sending someone to Russia to see if we can end this damn Ukraine problem. I hear everything but solutions – who is trying to end this from our side?
Yes, Putin is a bad guy, so stipulated. I am tired of hearing the mind numbing narrative.
Now could you do your job, Mr. President, and send some intelligent people to end this. Kissinger used to be a personal adviser to Putin; could he possibly give Putin a call?
I don’t want to end the world over Ukraine or Taiwan. We have better things to do.
And if Russia truly has nuclear superiority, what happened to all those trillions? The money can’t all be in the Clinton Foundation. I thought you guys were working on flying saucers over at Area 51 – this would be a good time to do a fly-by at the Kremlin.
Support today is at 4450 then 4420, resistance is 4500, then 4520. I am looking for a 1.2% move from the open (roughly plus or minus 50 points in each direction) when I adjust volatility for the negative gamma added from yesterday’s OPEX.
If the market does try to rally, expect the 4580 Weekly Expected Move to act as a magnet to draw it back prior to tomorrow’s options expiration. This market may leave the reversal pattern hanging over the weekend – it loves a cliffhanger. Don’t we all?
Price will gap higher in a True Gap at the open, so Gap Rules apply this morning. Use the fill/no-fill as your first sentiment indicator today. Observe the WEM magnet as this may be a false breakout above the current range until proven otherwise.
Subscriber charts are posted.

A.F. Thornton

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Founder's Trading Journal

Afternoon Notes – 4/20/2022

Apr 21, 2022 AF Thornton 0 Comment

Good Afternoon:

The S&P 500 attempted a move up from the tip of the right shoulder of the reversal pattern we discussed in the last few writings but stalled.
Netflix (NFLX) (having joined the ranks of wokesters – Facebook (FB), Twitter (TWTR), and Disney (DIS)) – became the latest company to be punished by consumers for its woke policies. Go woke – go broke, as they say.
Netflix’s pre-market announcement put the stock in a free fall today.
Users and subscribers abandoned ship in droves for the first time in the company’s history, preferring normal rather than woke programming.
As a result, the NASDAQ 100 struggled, which muted the S&P 500’s effort to launch. It was back to that capitalization thing.
So we were left hanging at the inflection point again, with nothing resolved and traders/investors bracing for more impact from earnings and positioning for the early May Fed meeting.
I remain about 50.1% bullish for a swing higher and 49.9% in doubt. If anything, the pattern looks too good to be true. Our brains constantly look for patterns, and this one has the hallmarks of a successful turn.
But patterns don’t always complete, and every once in a while, the Leprachauns show up.
If you cover the left side of the pattern, this consolidation could be a bear flag to go lower. Always keep an open mind.
The Founders Group did not trade today, and the swing buy signal has yet to manifest. Sometimes, the Algo comes right to the edge in a bear flag before the market rolls over and fails. I call it a buy tease – not a buy signal.
There would not be a market if the winner of the current debate were clear. The market needs to clear this balance range and move up with everyone on board (e.g., the NASDAQ 100).
I worry about the Japanese Yen crash and the parabolic turn-in rates.
Remember when the commodities first spiked a few months back, and I said it would take a few weeks for the bodies to float to the surface. They surely did.
I have similar thoughts now relating to the Yen and interest rates.
Something will get broken in the system again; it is only a matter of time.

Stay Tuned.

A.F Thornton

Founder's Trading Journal

Morning Notes – 4/20/2022

Apr 20, 2022 AF Thornton 0 Comment

Good Morning:

Call buying yesterday nudged the short-term bullish case and led to a pivot higher. But, the primary downtrend line from the 3/29 peak; the 89 (cyan), 200 (magenta), and 21-day (green) EMAs; and the WEM high at SPX 4480 could cap the rest of the week’s price action somewhere between 4480 and the new Key Gamma Strike at SPX 4500, making it tough to go long here for anything but a brief hold and gain. The Navigator Algorithm swing trigger (white) line sits at SPX 4485 and triggers a buy if we get a close comfortably above the level.

The bolstering of the bullish case is consistent with the idea that 10-year treasury rates may be peaking for now at around 3% on bullish fear sentiment before the Fed meeting in early May. Also, the tip of the right shoulder on a potential SPX Head and Shoulders Reversal pattern likely coincides with the Nominal 40-Day Hurst cycle trough. And perhaps it is early enough in the week that the market can move above the WEM high at SPX 4480 and into the Hedge Wall and Key Gamma Strike at SPX 4500, but the technical resistance is formidable in this zone. Nevertheless, moving higher would confirm follow-through of the pivot from the right shoulder and break the market out of the five-day trading range locked between 4400 and 4462. As always, watch for the Leprechauns to set a trap. The pattern seems too obvious, and it is not a reversal pattern until it is.

Look for support at SPX 4445, then SPX 4415 today. Resistance is at 4580, then 4500. Volatility estimates are still high, ranging from plus or minus 30 points from yesterday’s close at SPX 4662 (deduct about 6 points from any SPX number to approximate the nearby futures contract) to a total plus or minus 50 points from today’s regular session open when adjusted for Gamma. Volatility got somewhat crushed at the close yesterday as there are some distortions around VIX expiration today.

Many VIX and SPX options expire today as an aberration to typical mid-week expiration. This likely results from last week’s shortened holiday trading. I would cap the expected range at 4500 regardless and expect the WEM high at 4480 to act as a magnet for the rest of the week if we are fortunate enough to maintain current levels.

Following up on yesterday’s Afternoon Notes, we saw interesting changes in the options market after the CME published the data overnight. Yes, the data is always a day behind, but we have a live feed.
I know what you are thinking. First, your author is married to a Greek. Second, he spends half of his time in Greece on some remote Greek Island. Now, all he does is hit the Blog with Greeks – Delta, Gamma, Theta, etc. And to add insult to injury, the government is naming China Virus strains after the Greek alphabet under the Woke Powers Act of 2020. When will it stop?
It stops when you realize that if you understand this stuff, you have an incredible edge over the rest of the crowd.
But you don’t even need to understand it. Subscribe, and I will spoon-feed it to you.

So let’s score one for the bulls. Traders are finally adding some call volume after getting through the monthly expiration last week, a bullish development.
While the Volatility Trigger (the threshold between positive and negative Gamma) stays about the same at 4450, the largest Gamma strike is now 4500 rather than 4400.
Volatility is still slated to be high at plus or minus 50 points from the Open, but that volatility could benefit a follow-through rally today.
The WEM high and other technicals between 4480 and 4500 will be a challenge to overcome.
We incorporate all of this information into our morning roadmap chart for subscribers.
Price could rise above the WEM in the next few sessions only to return to the level by Friday’s close. It is a tough call.
And don’t forget that if traders meaningfully conquer the 4480 WEM high, Dealers will have to buy futures in droves to hedge their positions, giving any rally ( say above 4500) tailwinds.
Perhaps the 4480-4500 region acts as resistance until next week, but my leanings remain bullish even if so. Again, it is a close call.
At this writing, the market appears to be opening at the top of yesterday’s range in an orthodox gap but could morph into a True Gap by the Open and Gap Rules would then be applicable.
This morning’s observations are consistent with yesterday’s comments about “peak fear” in 10-year rates, which have a momentum divergence at the top of a thin rising wedge.

Call buying yesterday nudged the short-term bullish case and led to a pivot higher. But, the primary downtrend line from the 3/29 peak; the 89 (cyan), 200 (magenta), and 21-day (green) EMAs; and the WEM high at SPX 4480 could cap the rest of the week’s price action somewhere between SPX 4480 and the new Key Gamma Strike at 4500, making it tough to go long here for anything but a brief hold and gain. The Navigator Algorithm swing trigger (white) line sits at SPX 4485 and triggers a buy if we get a close comfortably above the level.

Even for a brief SPX run, follow-through may result from a short-term peak in the 10-year treasury rate and a reprieve in the collapse of the Japanese Yen – a subject for another day.

A.F. Thornton

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Afternoon Notes – 4/19/2022

Apr 19, 2022 AF Thornton 0 Comment

Good Afternoon:

Bear with me this afternoon; I will try to simplify a few complicated concepts so you can understand where this market finds itself at this moment. The stock market has stalled with most of the bad news baked in. It is trying to pivot from the right shoulder of a Head and Shoulders Reversal pattern on the daily chart and made good progress today. But we are not out of the woods.

The market stopped at the 21-day line and our “Volatility Trigger.” Absent a new catalyst, the options market may influence direction here. I want to take the opportunity to explain the Volatility Trigger, Delta, and Gamma so that you understand how they will control the next move. I will show you the similarities to the 2008 market peak towards the end.

So let’s begin:

The stock market is in a state of equilibrium. The bad news – and there is no lack of it – seems “fully priced” for now, after the recent CPI print gave a glimmer of hope that peak inflation is behind us.
The Fed getting to “neutral” is a yawn now. It would take the Fed jawboning a “restrictive” policy to rattle the market further.
At this point, traders have had the opportunity to price in fiscal/monetary and geopolitical risks and sell accordingly.
But it’s also clear that tail risk remains elevated, which keeps the VIX elevated. After all, we are on the brink of World War III, and I am being serious.
From my “Quant” chair, the issue for markets here is that Dealer shorting will likely increase incrementally into a doom loop if it slides lower. The market is not hedged like it was earlier in the year.
I have focused on the market holding the 4400-4450 area as important in the Morning Notes.
Let me digress. In understanding the stock market, I divide the process into three segments; (i) fundamentals (e.g., P/E ratios, interest rates), (ii) technicals (e.g., trendlines, support/resistance, moving averages), and (iii) quantitative (options market influence).
Let’s focus on (iii) above, the Quant side of the market. In the last five years, the options market has grown so much that it has become the proverbial tail that wags the dog.
Shortly, S&P 500 index options (SPX) will be trading every day, exerting even more influence over equity markets.
Every option bought or sold in the market generally has a Dealer on the other side. They earn the premium you pay for taking the other side of your transaction.
These professionals hedge premium risk by buying or selling the underlying securities. So if you buy a put, the Dealer has to short the underlying securities to keep their portfolio neutral.
Delta measures how much Dealers have to buy or sell to hedge. If a SPY option has a Delta of 50, the Dealer has to buy or sell 50% of the underlying security to hedge. Sounds simple, right? It is, but only for the first few seconds.
Delta changes as price and other factors change, including how close the underlying is to the strike price and expiration.
Volatility also impacts Delta.
After that first hedge, Dealers (with their computers) constantly buy or sell underlying securities to stay even as Delta changes (e.g., 50-55 or 50-45).
The Dealer finds itself (and its computers) tracking how the Delta changes to keep abreast of what has to be bought or sold to stay neutral and bank the premium.
Gamma measures how much the Delta changes after the Dealer’s first hedge and guides them in how much the Dealer needs to buy or sell hour to hour and day to day to stay neutral.
Gamma flows are non-discretionary, as the Dealer has no choice but to buy or sell to stay even. In recent years, Gamma flows have become one of the most critical flows in the marketplace.
There are two other terms you will hear from time to time – Vanna and Charm. Vanna measures how much volatility affects the Delta, and Charm measures how the time to expiration affects the Delta.
Bottom-Line: Dealers use Delta for their first hedge and Gamma to know how much needs to be bought or sold to maintain it. The goal is to stay neutral and keep the premium. That is how Dealers make money – and it is a very profitable business.
SPX options alone account for about 16% of the SPX market cap. There are many billions in gross Gamma outstanding. Say the number is $10 billion. That would mean that the Dealers need to trade approximately $10 billion worth of SPX for a 1% move in the index.
Depending on how Dealers position, Gamma can exacerbate market moves (“short Gamma”) or dampen them (“long Gamma”).
A quick rule of thumb – you are long Gamma when you buy options and short Gamma when you sell.
Wouldn’t it be great to know if the street is long or short, Gamma? How about where the line is between long and short Gamma? What if we could understand how Gamma is changing throughout the day to estimate the flows and how they might impact our trading?
That, precisely, is what I do every day and throughout the day. Every morning (on the Navigator Day Trader subscriber charts), I highlight the Volatility Trigger ( the negative/positive Gamma flip line). I also draw the Absolute Gamma (the strike price with the most concentrated Gamma influence) and Zero Gamma, where the Gamma is neutral and stops influencing price.
And the Gamma hedging flow impact is only going to worsen because of the enormous popularity of short-dated options. Over 50% of total SPX Options Volume is now between 0-five days to expiration, with over 30% at 0 to one day.
And for the index ETF (SPY)—aka “retail” size—it’s even worse: 0-five day to expiration options are over 70% of total volume, and 0-one day is 50%.
If you review the last two days of Morning Notes, 4400 (slightly adjusted to 4396 on the futures) has been the line in the sand in terms of where I saw the largest Gamma concentration, just below the 4444 flip line (Volatility Trigger) between negative and positive gamma flows.

Now, look at today’s chart above. Today, we forecast a 1.117% range from the open. That is roughly 52 points. The Open was 4386.75. Add and subtract 52 points and that is the expected range for today. It appears on the chart from the top of the red shaded area to the bottom of the green shaded area.
Also marked is the Volatility Trigger or “flip line” between negative and positive Gamma (4450 adjusted to 4444 on the futures). The largest strike with the most Gamma right now is 4400 (4394 on the Futures).
Knowing where the Volatility Trigger and highest concentration of Gamma are, we can forecast that the street is short Gamma below 4440 and long above it. But the price will encounter the most Gamma at 4400 in the short-term.
What that portends is what we saw happen today. The market has wider swings (as it did yesterday). It has a negative bias below 4400 and a positive bias above it. But the market will encounter support/resistance at 4400 and 4444 depending on the direction price is coming from.
Since we traded above 4400 most of the day, 4400 acted as support. But the Volatility Trigger was strong resistance because the price came from below it.

Above is yesterday’s chart with a few notes to help you put this in perspective. You will see that with few calls above 4400, and a comparatively large number of puts below, the behavior will change if the market stays under 4450 and 4400, adjusted slightly by subtracting six points for futures.

The Chart above is how the Founders Group saw the market this morning, combining Gamma and the dominant put options. That chart is red because puts dominate calls. It would be green if calls dominated puts or would turn green where call Gamma dominated put Gamma. Note how the Gamma influence drops off as the price rises.
So now, let’s get back to the market, which is trying to put in a swing low at this writing.
Today, the Founders Group took an excellent day trade from the neckline of a small Head and Shoulders Reversal pattern up to the Volatility Trigger right above the Absolute Gamma line for $1,750 per contract.
Knowing that the large Gamma at 4400 provided support right out of the gate, we could target the Volatility Trigger at 4444, and we did.
The market also encountered the 21-day line located near the Volatility Trigger.
All in all, the market was bullish today. It managed to close above the five and 50-day lines with broad participation.
The market needs to stay above the Volatility Trigger and conquer the 21-day line for the index to continue higher.
Also, 10-year Treasury Rates appear to be exhausting at just under 3%, which would give a boost to stocks.

But, lest we get too comfortable, the analogy between the 2008 peak and where we are today is like one of those “separated at birth” memes. The chart above lays the 2022 price over the 2008 price.
Lightning rarely strikes in the same place twice, but I will continue to have the 2008 chart imprinted in my mind.
And that takes me back to the core forecast.
Everything seems priced in at this point. We have a reversal pattern on the daily chart trying to grab hold of its right shoulder on the S&P 500 and NASDAQ 100.
Perhaps we need a new catalyst or the Fed meeting behind us to break out of the expanding triangle on the daily chart, a breakout pattern in and of itself.
I am still leaning towards a rally at least up to the neckline before the Fed meeting, and perhaps higher, then we roll over again, much like 2008.

In summary, I tried to simplify a few complicated concepts so you could understand where this market finds itself. The stock market has stalled with most of the bad news baked in. It is trying to pivot from the right shoulder of a Head and Shoulders Reversal pattern on the daily chart and made good progress today. But we are not out of the woods, and being aware of how the options market might influence price action in the days ahead s essential.

Below the Volatility Trigger, Dealers have to sell index futures if traders start adding to their puts, creating negative feedback or “doom” loops. The situation now is different from February/March, where traders had already established the put positions incrementally between November and February.

Instead, let’s hope the market stays above the Volatility Trigger and creates a positive Gamma spiral from the tip of the left shoulder reversal pattern still forming on the daily chart. Either way, we will know what to do and how to capitalize on the turn.

As always, stay tuned.

A.F. Thornton

P.S. – Whew, that was longer than intended and even wore me out…

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Archives April 2022

Repricing a Market Priced for Zero

Morning Notes – 4/29/2022

Morning Notes – 4/28/2022

AM / PM Notes – 4/25/2022

Morning Notes – 4/22/2022

Plain English Summary

A.F. Thornton's Morning Notes

Afternoon Notes – 4/21/2022

Summary for the Non-Technical Readers

A.F. Thornton’s Afternoon Notes

Morning Notes – 4/21/2022

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Afternoon Notes – 4/20/2022

Morning Notes – 4/20/2022

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Afternoon Notes – 4/19/2022

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