by Danny Riley

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A Two-Way Street: Trading Strategies Amid Post-Fed Chaos

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Our View

While I am a bull market guy, it is really important to read between the lines and my weakness is not recognizing when things have gone too far and saying to sell it. None of my calls about watching out for something big to happen had anything to do with the PitBull, Rich at @HandelStats, or my good pal Jeff Hersch. It was plain and simple, the markets had gone too far, almost every inflation gauge was showing inflation going up, yet 11 out of 12 Fed voting members chose to lower rates. There have been a lot of dumb moves by the Fed over the years, but none have been as stupid as this. So what happened in the index markets the day after the big drop? After being up most of the day, the ES and NQ closed down 0.1% while the YM closed up less than 0.1%, not exactly a screaming buy signal.

They say the Fed wants to keep rates stable because the economy continues to improve. You know what I say about that? The Fed needs to remain data-dependent and not be so fast to lower. The yield on the 10-yr note rose to 4.569. The bond market doesn’t lie.

Our Lean

Powell may want to keep his job but I’ll bet after his hawkish comments and Bitcoin falling to 9600 in 24 hours, Trump must be shaking his head. I get it, Bitcoin has also gone too far without any correction but it’s kind of a doubleheader for Powell. If you have not already had enough fun this week, today we have two Fed speakers, the PCE number, and $6.5 trillion in options expiring. https://finance.yahoo.com/news/wall-street-next-test-fed-190145704.html

In most cases, a lot of buying and selling is paired off on and just after the open but based on the week thus far, it could be a volatile day. My S&P desk was usually busy for the first and last hour. Our lean, Santa may come but not today. Look for a two-way street, if the ES is down on the open and the yield on the 10-yr is down, I want to buy the early weaknesses and sell the rallies. I don’t think we have seen any real bounce from the Fed-day sell off and the crowd is short, don’t be surprised.

MiM and Daily Recap

The ES traded mostly sideways during the Globex session until the European open, and had a strong run-up ahead of our pre-market open. The overnight session low was 5922.50, which remained untested, while the overnight session high was 5992.75, achieved just before the open.

After the regular session open at 5988.75, the ES briefly rallied to an early high of 6005.25 before quickly reversing. Over the next hour, the index dropped roughly 50 points, hitting 5951.75 at 10:34 a.m. A 25-minute bounce provided temporary relief, but downside momentum resumed, leading to another test of the low at 5951.50 around 11:06 a.m. This low held, allowing the ES to climb back up to nearly match the opening price by 11:34 a.m., peaking at 5987.50. However, the rally faltered again, and the ES reversed, retesting and breaking lower multiple times before finding support at 5945.50 at 1:02 p.m.

From there, the ES staged another rally, climbing back near the opening price but once again it could not find buyers, at 5986.50 at 1:58 p.m. The measured move lower from here brought the ES back down to print a new regular session low at 5938.75 at 3:34 p.m. Here buyers stepped in again pushing the ES up to 5965.25 by 3:42 p.m. but dropping back to 5950.50 for the 3:50 pm MiM which revealed an imbalance of -3.4 billion to sell. This led to another quick drop to new lows of the regular trading session printing 5933.50.

The cash close came in at 5935.25, and post-market trading saw the ES dip slightly lower to 5931.25 before recovering to settle at 5941.25, essentially flat on the day with a modest gain of 1.75 points. The NQ settled at 21,408.25, down 51.25 points. Trading volume was robust, with the ES handling 2.289 million contracts, while the NQ traded 735,000 contracts.

In the end, it’s fair to ask if the Fed is out of bullets. In terms of the ES’s overall tone, it did what it’s done a lot lately: it rallied early, started to fade, and then got whacked late in the day. In terms of the ES’s overall trade, volume remained high with 2.289 million contracts traded.

What happened yesterday that we see quite often? It should be easy to answer. Once again, the market sold off after 3:00 p.m. The ES rallied to 3938 earlier in the day, only to drop sharply and print a late-session low of 5933.50 after 4:00 p.m. What do we call that? A classic “dead cat bounce!”

How to read the MIM

Technical Edge

Fair Values for December 20, 2024

SP: 68.29
NQ: 271.59
Dow: 453.7

Daily Breadth Data 📊

NYSE Breadth: 40% Upside Volume
Nasdaq Breadth: 47% Upside Volume
Total Breadth: 46% Upside Volume
NYSE Advance/Decline: 33% Advances
Nasdaq Advance/Decline: 42% Advances
Total Advance/Decline: 39% Advances
NYSE New Highs/New Lows: 14 / 259
Nasdaq New Highs/New Lows: 53 / 347
NYSE TRIN: 0.77
Nasdaq TRIN: 0.86

Weekly Breadth Data 📈

NYSE Breadth: 40% Upside Volume
Nasdaq Breadth: 52% Upside Volume
Total Breadth: 46% Upside Volume
NYSE Advance/Decline: 27% Advances
Nasdaq Advance/Decline: 33% Advances
Total Advance/Decline: 30% Advances
NYSE New Highs/New Lows: 237 / 141
Nasdaq New Highs/New Lows: 497 / 359
NYSE TRIN: 1.02
Nasdaq TRIN: 0.84

Guest Posts:

SpotGamma – Founder’s Notes

What’s Happening in the Market

Futures are down 80 (ES) – 130 (NQ) bps ahead of today’s massive expiration.

Resistance: 5,850, 5,900
Support: 5800 (Put Wall), 5,700

TLDR: We are looking for ways to express upside into year end. This is due to oversold conditions (i.e. very elevated IV’s) and the removal of large put positions with today’s OPEX.

For SPX, this AM’s OPEX serves to remove positive gamma, which clears the way for further volatility. You can see this in the color changes from pre & post 9:30AM ET OPEX.

For single stocks, SPX PM, and all ETF’s, the 4PM OPEX is very large. 2 days ago there was a tremendous skew towards call values vs puts expiring of +10:1 (delta notional terms). As of last night that figure was 2:1 (below), and based on some pre-market levels, that is likely closer to 50/50.

While its clear that the major downside trigger was macro/rates (ZB, US Bond Futs, below), we believe that options positioning has exacerbated equity volatility. The options market had very low index vol, and select single stocks were extremely frothy. Further, there was massive call delta’s built up (likely the largest size ever) into Wednesday’s FOMC, and those have all now burned.

The biggest options names are the Mag 7’s and nearly every one of those had very high call skews (+90% rank), suggesting traders were long calls & dealers short. If dealers were short calls, they may have had long stock on as a hedge, and so as the market tumbled they likely had stock to sell.

Add to this a traders having to go from covering short volatility at lows and entering into into long vol positions which likely exacerbated stock movement.

At this point, vols have gotten rich. This is a deterrent to buying puts which should help to relieve some pressure. That being said, we aren’t at extremes. Just consider today’s 1-month SPX skew (teal) vs the skew from the close of August 5th (gray). To get to extremes we’d argue that you need some type of liquidation trigger, a la the yen carry trade margin call.

Additionally, there is a 1/2 session on Tuesday & Wed close for Christmas, then New Years is closed next week. So the Holiday Decay is thick which means if you are long short dated puts you need some big movement, and soon, to maintain put values in the face of holiday momentum-stalling.

Finally, per the US Govt shutdown:

From Barrons:
During the last shutdown under Trump–the longest in U.S. history between Dec.21, 2018 and Jan. 25, 2019–the S&P 500 jumped 10.3%, according to Dow Jones Market Data. In fact, the index has climbed throughout the last four shutdowns going back to 1995 under President Bill Clinton.

Check out SpotGamma’s Products

Trading Room News:

Polaris Trading Group Summary: Thursday, December 19, 2024

The trading day in the PTG room, led by David Dube (PTGDavid), unfolded with precision and adherence to the group’s established strategies and methodologies. Below is a recap of the key events and lessons learned:

Morning Session:

Opening Analysis:
- The day began with a reflection on the impact of the prior day’s FOMC-induced selloff. David anticipated MATD rhythms to guide price action into a zone of balance.
- Key Levels:
  - Daily Pivot: 5998
  - Overnight high: 5992
- Price remained well below Cycle Day 1 low, indicating significant resistance at 6114.24, with only a 7.25% chance of recovery, based on historical data.
Initial Range:
- The opening sandbox was defined between 5980 and 6000. Traders focused on managing risks within this range.
- Early long trades, like Calvin’s quick 10-point gain, highlighted the importance of being nimble in volatile conditions.
Interactive Discussion:
- A technical discussion on AVWAP application emphasized its flexibility across timeframes, though traders were reminded of its subjectivity.
- The ATR10 short setup was noted as a LAP short, showcasing the power of combining indicators for high-confidence trades.
Key Lesson: Traders were reminded of the importance of balancing rhythm recognition and using historical levels, such as prominent FOMC bars or significant pivots, for technical anchoring.

Midday:

Market Dynamics:
- The market showed MATD balancing rhythms as anticipated, oscillating within defined levels with no clear trend breakout.
- Discussions on trading setups (A10 and A4) reinforced the importance of alignment and independent triggers for trade execution.
Community Interaction:
- Traders shared their trading setups and experiences, ranging from minimalist laptop configurations to elaborate multi-monitor systems. This fostered camaraderie and inspired creative workspace ideas, like trading with scenic views.
Key Lesson: Maintaining a disciplined approach to configuration and alignment of setups (like A10 and A4) is crucial for consistent execution.

Afternoon Session:

“Shake and Bake” Move:
- At 2 PM, a buy program initiated, adding momentum to the session. However, overall market action remained muted with consolidation dominating the day’s tone.
- Blibby71 noted the possibility of a trend breakout later in the session, but the market continued its rotation within established levels.
Closing Insights:
- David highlighted a Market-on-Close (MOC) sell imbalance of $3.8 billion, signaling bearish sentiment going into the next day.
- The session closed near the lows, reinforcing bearish implications for the following trading day.

Key Takeaways and Lessons:

Adherence to Strategy:
- The day adhered to MATD balancing patterns, validating David’s opening analysis. Recognizing rhythm and balance zones is key for profitable trades in a consolidating market.
Preparedness for Continuation:
- Traders were primed for a potential continuation lower in the next session, given the bearish close and statistical data from a Failed 3-Day Cycle.
Interactive Learning:
- The room discussions emphasized collaborative learning and the importance of diverse setups and strategies tailored to individual preferences.

Overall Performance:

The day was marked by disciplined execution and alignment with expectations, with positive trades highlighted in the early session. Lessons on setup configuration, rhythm recognition, and market dynamics were key takeaways. The bearish close sets the stage for a continuation day on December 20, 2024.

DTG Room Preview – December 20, 2024

Equity Markets: The Dow Jones snapped its 10-day losing streak, while the S&P 500 and Nasdaq 100 dipped slightly (-0.1%). The 10-year Treasury yield climbed to 4.57%, its highest since May, following the Fed’s revision to fewer rate cuts in 2025.
Economic Data:
- Q3 GDP growth was revised upward to 3.1% (previously 2.8%).
- Weekly jobless claims fell to 220K from 242K, signaling labor market resilience.
Corporate Highlights:
- Nike (NKE): Shares rose 2% on strong performance under new CEO Elliot Hill, though the brand remains down 36% YoY amid heightened competition from On Holding (ONON), Skechers (SKX), and Hoka (DECK).
- FedEx (FDX): Shares surged 8% after hours as the company announced the spinoff of its freight division to boost competitiveness.
Trade Tensions: President-elect Trump threatened tariffs on the EU, emphasizing increased U.S. oil and gas purchases. European refiners, driven by price and efficiency, already purchase U.S. oil when economically viable.
Economic Calendar:
- Core PCE, Personal Income & Spending (8:30 AM ET)
- UoM Consumer Sentiment & Inflation Expectations (10:00 AM ET)
- Fed commentary: San Francisco Fed President Mary Daly speaks on Bloomberg TV (7:30 AM ET).
Market Volatility: Rising volatility is expected to remain elevated with the Core PCE report but could taper into the holiday season.
Technical Levels (ES Futures):
- Bears broke below the intermediate-term uptrend channel overnight, continuing the short-term downtrend.
- Key resistance levels: 6127/22s, 6224/29s.
- Support levels: 5930/33s.
- Bullish divergence bias noted heading into Core PCE data at 8:30 AM ET.

ES – Week over Week

The breakdown continues as we fight to keep to the government funded. Could be a decent bounce if news breaks in session today. Not much lower for support, that area between 5800 and 5881 has been explored several times earlier. We remain in a bearish trend although we have not had a bounce to test that. For a bounce to the upside, we like 5915 and 5933 as target areas. A move above 6087 would reverse our bear trend.

NQ – Week over Week

NQ is in a bearish trend. That will not reverse for us today unless we hit 22,331. We like the hold here at the 21,100 area. If we do bounce, the bulls would like to hold above 21,235. A move above 21,400 could move fast and recover into the 21,726 area. The downside hold for the next move down is 20,773.