If there is a single positive to note today, the Weekly Expected Move low is 4200. This critical lower boundary for Friday’s weekly options expiration has consistently caught the market in scary times, though nothing is perfect. Even when the market dips below the level, it acts as a magnet to draw in the price.
In times of extreme volatility and material violations, dealers and market makers may hedge (sell futures) on a return to the level. In such instances, the level may act as resistance and may become irrelevant by the end of the week. Irrelevance is rare, but it does happen from time to time.
Towards the beginning of the week, dealers and market-makers have the potential to lose billions if the market closes below that level on Friday. Even on the 2/24 swing low, the market came back above the WEM low after the scary spike down intraday.
Mentally, you have to put yourself in their shoes and use the WEM as an essential but not exclusive datapoint.
If it appears that the WEM low won’t hold, the decline will accelerate as dealers and market makers sell futures to neutralize their deltas.
The shaded areas above divide the day into quartiles based on the expected move for today calculated from the open. In my trading, I always try to establish longs in the first quartile and shorts in the last quartile.
I am using the broader expected move ranges today calculated from yesterday’s close to allow extra volatility.
Historically, the price stays within the broader boundaries 90% of the time (Daily Expected Move Upper and Lower 2). It stays within the narrower boundaries (Daily Expected Move Lower and Upper 1) 68% of the time.
Good luck today. Always remember, you don’t have to trade. If the market is haphazard or confusing to you, step aside. There will always be another train leaving the station.
Also, be careful in relying on patterns (such as wedges) and momentum indicators. Gamma spirals can be slow and methodical and will trigger false momentum diverges. That is why we call it “controlled demolition.” The same problems occurred on the upside. Use trendlines instead.
In many ways, we are experiencing the mirror image of the buoyant markets last year. Remember when the market would just lock into a tight, rising Gamma spiral? The current behavior is the other side of the coin.
A.F. Thornton