Morning Notes - 5/27/2022 | Archimedes Methodologies

Good Morning:

Last week, the S&P 500 Index traded 80 points below the WEM low Friday morning, and I thought there would be no way that the market could crawl back above it before the close. I was sure that the market was ready to hand the Dealers a massive loss.
But the market staged a last-minute short-covering rally, and the Dealers escaped financial death by a thousand cuts.
Today, we are at the other end of the spectrum. The market is roughly 60 points above the WEM high this morning. Will the market sell 60 points of yesterday’s gains into the close, saving the Dealers once again? With the street as short as it is right now, we could be in the midst of that short squeeze and Dealers stand to have a challenging day ahead it so.
Nevertheless, I am always amazed at how powerful the WEM high and low are each week. The potential to reconnect with the WEM high could complicate day-trading today into the close.
Also, the options market continues to misprice volatility – with realized volatility differing significantly from implied volatility. This makes setting targets less reliable.
The Founder’s Group enjoyed nearly a 100-point profit on its SPY calls yesterday, but the market continued rising, indicating that we sold a bit early.
But a profit is a nice reward, even if we left some money on the table. Profits are why we do this – FOMO is not a strategy.
We want to reenter on a pullback, but we are mindful that we are going into a three-day weekend, and cash typically allows the weekend to be more restful.
Yesterday’s price action still looks mostly like short-covering. The move lacked confirming volume, so the jury is still out.
Nevertheless, we predicted the rally, and the following chart from Daneric’s Elliott waves is a good depiction of the current market structure and targets.

Futures are holding near yesterday’s close of 4070. With the push higher, volatility estimates are slightly lower, not that they have been accurate lately. Resistance is in the 4100 – 4115 (SPY 410 equivalent) area. Support shows at 4065 (the updated Volatility Trigger), then the 4000-4015 (SPY 400) WEM high area.
All eyes will be on the 8:30 AM ET Personal Consumption Expenditures (PCE) data. The environment remains somewhat illiquid, exacerbated by the upcoming holiday weekend (Monday, US equity markets are closed for Memorial Day). Thus prices may be excessively volatile in either direction.
Once again, we saw a pickup in call positioning at strikes overhead yesterday. We have not seen this in some time. As those calls fill in (and the index rises), volatility should also contract. The call buying is a bullish signal, but I remain alert that this could be a false breakout spurred by short-covering and the lack of liquidity.
Today’s expiration is not particularly large, but about 20% of S&P 500 Index Gamma expires, concentrated in the 4000-4100 range (SPY 400-410). We look for a test of one of those strikes today from the Personal Consumption Expenditures (PCE) release, the Fed’s favorite inflation measure. Perhaps the PCE will be the catalyst to save the Dealers in a drive down to the WEM high.
Another complication is two Fed governors speaking today, including mega-hawk Fed Governor Bullard. Their strategy has been to talk the stock market down when it has rallied lately. The plan is part of their demand destruction goals, and talk is cheaper than higher interest rates, which could undo the economy.
But never forget, inflation is good for the government, seeing record income tax receipts, almost a 25% increase. Do you see how that works? Isn’t it a coincidence that government receipts are closer to the “real” inflation rate?
Gap Rules may be in play today, depending on the PCE Report. They worked beautifully yesterday, so follow them today if the market opens with a True Gap higher.

As always, stay tuned and enjoy the holiday weekend. I know I need a break after a couple of difficult weeks for me personally. But at least we booked some significant profits. There will be plenty more in the volatility that lies ahead.

A.F. Thornton

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Morning Notes – 5/27/2022

Morning Notes – 5/27/2022

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AF Thornton

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Morning Notes – 5/27/2022

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