Morning Notes – 6/6/2022

Good Morning:

• The overwhelming consensus is that we are in a bear market rally, and the market will roll over again soon.
• Accompanying that opinion are some of the most bearish sentiment readings I have seen in my career – which usually means that sellers are exhausted.
• On the first point, there is little doubt that the recent rally started with short-covering. But all rallies start that way after lengthy corrections.
• On the second point, market lows generally align with the negative sentiment we are experiencing rather than another roll down.
• I almost loathe having an opinion that aligns with consensus – and being bearish now seems antithetical.
• These are unprecedented times, and the crowd could be right for once, but it would be the first time in my 35 years of trading and investing.
• The market will open around 4150, about halfway back to the top of last week’s trading range between 4100 and 4200.
• Whichever way the market breaks from the range leads to another 100-point move.
• Because of the negative sentiment and the lopsided consensus, I believe that the market is likely to go higher rather than lower.
• The Fed Meeting and Quarterly Options expiration next week are the draws to keep the market turbulent until it establishes a clear direction.
• More than $3.2 trillion in options/futures will expire on 6/17, a staggering figure.
• For now, The most crucial indicator of where the market is going is the price action.
• I use the 21-day line as my bull/bear threshold until the trading/balance range breaks.
• Use Balance Rules as your guide in handling the 4100-4200 range.
• Volume continues to increase on down days and decrease on up days, which is slightly negative.
• Naturally, we would expect total volume to decrease as summer gets underway in earnest.
• The twin dynamics of declining implied volatility and put-decay (vanna/charm) make it challenging to forecast the outcome of next week’s Fed meeting and options expiration.
• If the market rallies into the Fed meeting, particularly toward the 4300 line, Dealer hedging likely pulled the fuel from put expiration (via dealer short hedge unwind) forward. The hedging removes energy for a post-meeting rally.
• If the market is weak into the meeting and the quarterly expiration a few days later (<4100), then we’d look for a rally after the 6/17 quarterly (quadruple witching) expiration.
• So any directional edge isn’t likely to emerge until we get closer to the 6/15 Fed meeting.
• For now, I expect either a test of 4300 or the large open interest strike at 4000 into month-end. 
• 4100-4200 remains critical for the rest of this week.
• This week’s SPX WEM is roughly 185 points, between 4015 and 4200. The expected move for today is approximately 110 points, using Friday’s SPX close at 4108.54 as the center point. The move is likely capped by the WEM high at 4200 with 4190 as the lower boundary.
• Since the market will open with an orthodox gap (not a True Gap), you can draw a range plus or minus 44 points from the open (an 88-point range). I base this range on recent implied volatility (VIX) readings, but since realized volatility has been deviating from implied volatility, the estimates have been less accurate over the past week.
• I always draw the expected move from the open and the previous day’s close on my day trading charts. I view this as my sandbox and look for any key indicators or levels I am likely to encounter. I prefer to go long in the lower quartile of the projected range and short in the upper quartile, all else being equal. I coordinate these daily levels with the WEM levels to have a clear windshield of all I will encounter that day and for that week. Nothing is a mystery for me as the week wears on.
• I post charts with all of these critical levels pre-market for subscribers pre-market.

Have a great day and a fabulous trading week.

A.F. Thornton