Morning Notes – 8/1/2022

Good Morning:

• It is hard to believe that it is already August.
• Last night’s live program video covers the week ahead in detail – it is worth your time to review it.
• The Weekly Expected Move sandbox this week is 4050-4215, with today’s Expected Move forecast between 4098 and 4170.
• 4180 is the major high-volume node to conquer this week and hence. The 4200ish level is the real test.
• We ended Friday on an emotional spike. Accordingly, Spike Rules apply this morning, and it looks negative, at least for the Open. I would place the Spike base at 4123.50.
• Overnight inventory is net short. Again, if there is no profit-taking/inventory correction (buying) at the Open, that might be a slight negative.
• Watch roundies and half-roundies for support and resistance, as usual. It is good to remind ourselves, as it is easy to forget these most basic levels in the heat of battle.
• Overnight trading brought us just below Friday’s halfback at 4111, where the price has hovered all night.
• In addition to applying Spike Rules, the market will open with an orthodox Gap lower, and it does not hurt to use Gap Rules loosely, though the gap is not a True Gap.
• Of significant interest is the 100-week line, which often caps a bear market rally, as does the 50% retracement. These levels hover between 4125 and 4185. And there are additional “X Marks the Spot” resistance lines nearby (top of the bear channel, 89-week line, etc.).
• Data from the OCC confirms that the major option flows from last week were long index calls, along with a general pickup in equity puts/calls. A pickup in calls is a welcome sign as call positions practically became extinct in June and July.
• Index call buying Friday (and last week generally) was some of the largest shown by the OCC since March ’20.
• The Call Wall moves up to 4200 (420/4200 in SPX), now the top end of the trading range.
• But the buying last week was clearly emotional, volume was somewhat summer-like and lackluster, and it left poor structure under the market all the way down to 4000, the new Put Wall.
• Our volatility estimate does not see the Call Wall level(s) in play for today’s session – but keep an eye out for a swift liquidation break. Stops are critical.
• There will be resistance at 4150-4160(SPY415). Support lies at 4100, then 4079.
• Opening this far into Friday’s range likely leads to chop for the first few hours so keep that in mind.

• The Call Wall moving from 4100 Friday to 4200 this morning was impressive.

• While markets may now consolidate some of last week’s 4% gains, the build in call positions should help dampen volatility.

• In other words, larger call positions (while the price stays above the Volatility Trigger at 3995) suggest the market is more likely to consolidate than crash.

• Generally, the market will now tend toward mean-reversion rather than breakout volatility as long as the price stays positive above the 4000 Put Wall. And given that July was an inside candle, it suggests a more balanced environment as we consolidate gains.

• The bottom line – I expect the market to try to test resistance around the 4200 level sometime later this week. If the price cannot move through that area, representing the June highs and the 50% retracement of the entire bear market from the January highs, then the bear market could resume after the market consolidates into mid-August.
• The last seven bear markets could not overcome the equivalent 50% level at this analogous time, so 4200ish is extremely important for the bulls to conquer.
• There is enough FOMO and sideline cash to take the level easily. It all depends on the conviction and quantity of sellers, if any, waiting to pounce. They had not shown up as of last Friday.
• And the bulls are fighting the Fed with a lot of wishful thinking. In my view, the Fed will not take kindly to a new bull market. 
• I will maintain a slightly bullish short-term bias, as long as the market stays above the Volatility Trigger and Put Wall at 3995-4000. Otherwise, when in doubt the intermediate trend favors the bears.
• And then there is Pelosi visiting Taiwan…

A.F. Thornton