by Danny Riley

This post goes out as an email to our subscribers every day and is posted for free here around 2 PM ET. To get your real-time copy, sign up for the free or premium version here: Opening Print Subscribe.

Market Insights Amid Inflation Concerns and Geopolitical Risks

Follow @MrTopStep on Twitter and please share if you find our work valuable!

Our View

The Fed does not seem concerned about the PPI revision. Inflation is going back up, eggs are back above $4.00, and grocery prices jumped last month, an uncomfortable reminder for consumers that food costs remain a big drag on household budgets. Beef prices, for instance, leapt 3.1% from October to November and are now up 5% compared to a year ago.

Though inflation has come way down from its peak of 9.1% in June 2022, average prices are still about 20% higher than they were three years ago. I’ve always said I’m not an economist, but I don’t think you need to be one to see the bigger picture: higher inflation, declining rates, and extremely overvalued stocks that refuse to correct.

Our Lean

In most cases, it’s a good strategy to buy the weak closes when they fall on the Thursday low before the Friday November options expiration. While I can’t say you shouldn’t sell into a rip, I added one more long at 6068.50 on Globex.

I’ll leave you with a final thought. After Trump takes office and begins “draining the swamp” and raising tariffs, I believe the markets will correct. If a war were to break out in Taiwan, the Chinese military would likely target every U.S. base in the South China Sea and could potentially devastate Guam.

A few weeks ago, I received an email from someone I used to consider a friend in China. While we once shared mutual respect, his tone has shifted. He now claims that the Chinese military has enough hardware to attack all U.S. allied bases and would not run low on munitions. This individual, Kun, was educated in Canada and visited me a few years ago. At that time, he spoke highly of the U.S., but now he blames the U.S. government for global tensions. He also mentioned that China has been preparing for a potential conflict for the past decade.

Let’s hope for the best.

MiM and Daily Recap

The ES traded in a tight 10-point range during the Globex session, moving between 6077.25 and 6088.25. The PPI numbers were generally in line with expectations, but slightly hotter revisions dampened the market’s momentum throughout the day. After some early selling that brought the ES down to 6071, the regular session opened at 6082.25. However, the ES remained below the opening price, eventually printing a new low of 6067.50 by 10:08 a.m.

A recapture of the previous low led to a move back through the open, followed by a retest of the day’s high at 6087.75 by 11:12 a.m. A couple of tests of this high led to some rollover and a print back down to 6073.50 by noon. Another buying reaction pushed the ES back to 6085 by 12:16 p.m., establishing the range for the next two hours.

With a false breakout of the range’s high of 6085.50 at 1:24 p.m., we had the last of our buying for the day. From there, the ES moved lower, extending to a new low of 6064 by 2:22 p.m. Quiet, sideways trade for the next 90 minutes brought us to the 3:50 p.m. MIM which showed $230 million to sell but grew to $1.9 billion by the 3:55 p.m. update, driving the ES from 6069.25 (the high of the previous range) down to the cash close low of 6060.25.

A final round of selling brought the day’s low to 6055.50, with the ES ultimately settling at 6058.75, down 34 points (-0.56%). The NQ closed at 21,630.25, down 163.25 points (-0.75%). The ES increased its volume to 1.486 million contracts, the highest in over two months, while the NQ saw slightly lower volume at 501,000 contracts.

While the PPI was generally as expected, the upward revisions to previous figures, along with weakness in the 30-year bond (rising yields) and continued relative weakness in the Russell and Dow, seemed to eventually drag down both the ES and NQ.

I have been warning about the seasonal weakness but have also said to buy the pullbacks. There have been some rallies but with the YM down six days in a row, all the indexes have gone for the ride. In terms of the ES’s and NQ’s tones, it’s never a positive for stocks when yields rise.

How to read the MIM

Technical Edge

Fair Values for December 13, 2024

SP: 7.24
NQ: 27.77
Dow: 51.85

VIX:

Daily Breadth Data 📊

NYSE Breadth: 27% Upside Volume
Nasdaq Breadth: 49% Upside Volume
Total Breadth: 46% Upside Volume
NYSE Advance/Decline: 25% Advances
Nasdaq Advance/Decline: 27% Advances
Total Advance/Decline: 26% Advances
NYSE New Highs/New Lows: 68 / 66
Nasdaq New Highs/New Lows: 121 / 168
NYSE TRIN: 1.00
Nasdaq TRIN: 0.40

Weekly Breadth Data 📈

NYSE Breadth: 45% Upside Volume
Nasdaq Breadth: 61% Upside Volume
Total Breadth: 55% Upside Volume
NYSE Advance/Decline: 37% Advances
Nasdaq Advance/Decline: 46% Advances
Total Advance/Decline: 43% Advances
NYSE New Highs/New Lows: 339 / 96
Nasdaq New Highs/New Lows: 604 / 285
NYSE TRIN: 0.71
Nasdaq TRIN: 0.58

Guest Posts:

SpotGamma – Founder’s Notes

What’s Happening in the Market

Founder’s Note:

What’s Happening in the Market

Futures are higher: ES 36bps, NQ +75bps after big AVGO ER’s last night +15% to 212.

For the S&P500, that means we bounce of of yesterday’s big 6,050 support an into a (relatively) small resistance node at 6,075, with much larger resistance stacked at 6,100 & 6,110 (SPY 610) above. In regards to 610 SPY, it was, 2 days ago an incredible $800mm in call gamma. It has shrunk to $500mm, which still leaves it as the largest call gamma strike in the S&P500 (bigger than any SPX strike).

This massive gamma all makes for what we think is another ~40bps (i.e. 6,075-6,110) of upside left in the SPX before 12/18 FOMC/ 12/20 OPEX.

As we had made mention of in yesterday’s note: “The Nasdaq does seem to have more available upside, with resistance at 530 & 535 ( Call Wall) for QQQ.” That is NOT to say we called for blowout AVGO earnings – but it was an expressed that NQ has/had more room volatility. With Q’s at 531 pre-market, we can see the Q Call Wall at 535 – that is our current upside resistance line (~1%).

Further, AVGO’s results may provide a critical shot-in-the-arm for the semi complex (SMH, candles) which has been nonexistent during the recent rally (SPY, red). We suspect the sector will see some further strength today, but then likely pins into next weeks key events.

We covered AVGO in yesterday’s Q&A, and flagged 200 as an upper bound (+9%) for the stock, based on the size of call positions (orange) and implied move. The implied move was 5%, and now the stock is up +15% to 212, so clearly there are some short-vol traders force to cover this AM.

212 places the stock in “overbought” territory, which is this zone wherein call gamma fades. You can see this in via the orange curve flattening >210 (black box). This signals to us that there is no call gamma >210, and so dealer-induced momentum should wane.

Great time to Join the SpotGamma team and get on the right side of flow for 2024

Check out SpotGamma’s Products

Trading Room News:

Polaris Trading Group Summary: Thursday, December 6, 2024

The trading day in the Polaris Trading Group (PTG) room, led by PTGDavid, followed a well-structured and disciplined approach with key strategies and insights highlighted throughout. Here’s an overview:

Morning Session Highlights:

Pre-Market Analysis:
- Lower target zones were identified early:
  - NQ: 21725 – 21695 (fulfilled pre-RTH).
  - ES: 6070 – 6065 (fulfilled during RTH).
- Bearish scenarios were mapped out clearly, emphasizing price sustenance below critical levels to reach target zones.
Key Achievements:
- The Cycle Day 1 (CD1) average decline zone of 6067 – 6070 was met, providing validation for the Daily Trade Strategy (DTS).
- A Buy Response was noted from the Average Decline Target Zone, demonstrating an effective strategy execution.
Engagement and Learning:
- Active Q&A sessions with room participants, including clarifications on chart setups (e.g., A4 and A10 charts).
- A future Review and Q&A session was scheduled for December 17, focusing on further learning and trading strategy refinement.

Midday to Afternoon:

Trade Opportunities:
- CL (Crude Oil): Open range short targets 1 & 2 were filled, with stop trails adjusted to entry, reflecting disciplined trade management.
- Focused discussions on the Peek-a-Boo setup, adding tactical depth for members.
Market Observations:
- Afternoon trading saw slower, grindy movements typical of a quieter session.
- PTGDavid emphasized staying disciplined even in less volatile periods.

Final Hour and Closing Notes:

Market-on-Close (MOC):
- Initial MOC sell imbalance of $270M flipped dramatically to a $1.8 billion sell imbalance, signaling potential carryover bearish momentum into the next session.
- PTGDavid humorously remarked on the lack of market action with phrases like “Where’s the Beef?” and a rallying call to “Make Volatility Great Again.”
Day Summary:
- The day concluded as a normal Cycle Day 1 with targets achieved at the predicted decline zone of 6070 – 6067.
- Closing near the day’s lows hinted at potential bearish spillover for the next trading day.

Lessons and Takeaways:

Preparation Pays Off:
- Early identification of target zones and market scenarios allowed members to anticipate moves effectively.
Adaptability:
- The room showcased adaptability through dynamic adjustments in strategies (e.g., trail stops and market reactions).
Community Engagement:
- Active participation in Q&A, future scheduling for educational sessions, and humor created a supportive learning environment.
Patience and Discipline:
- Members were reminded of the importance of patience during grindy sessions and the value of trading only high-probability setups.

DTG Room Preview – December 13, 2024

Morning Market Summary
1. Economic Data: November Producer Price Index (PPI) rose 0.4% month-over-month, surpassing expectations of 0.2%. Despite the surprise, a Fed rate cut next week remains likely. January rate cut odds have climbed to 76.7%, according to FedWatch.
2. Market Performance:
  - Indices: S&P 500 dropped 0.5%, Nasdaq 100 fell 0.6%.
  - Stocks: Apple (AAPL) defied the broader decline, closing at a record high.
  - Adobe (ADBE) slid nearly 14% amid AI struggles, while Broadcom (AVGO) surged 14% in extended hours on robust AI chip demand forecasts.
3. Corporate News:
  - Costco (COST) outperformed, reporting a 7.2% growth in same-store sales for the quarter, with slight market gains despite the broader sell-off.
  - No significant corporate earnings scheduled for today.
4. Regulatory Developments: Andrew Ferguson, Trump’s FTC pick, voiced strong opposition to heavy AI regulation, emphasizing its potential to hinder innovation and drive talent offshore.
5. Market Dynamics:
  - Volatility edged up, with the 5-day ES average daily range at ~42 points.
  - ES futures remain within uptrend channels, offering opportunities for both bulls and bears.
  - Key technical levels to watch:
    - Resistance: 6145/48, 6163/66.
    - Support: 6024/27, 5891/96.
6. Economic Calendar: Import Prices data releases at 8:30 AM ET.
7. Trading Sentiment: Light overnight large-trader volume indicates a divergent short bias into the US session open.
Stay informed and trade wisely!

ES – Week over Week

ES is trapped in the descending triangle. Could see a breakout either way. Developing a bullish gap up, use caution today as we head into an OPEX close. Upside if it explodes upwards is 6168 but 6106 needs to be crossed and held first. The downside breakout is in the 6045 area with 6017 offering stiffer support.

NQ – Week over Week

New contract highs overnight, If this opens stays, there will be some shorts that will be squeezed on the open. Today’s OPEX should pin prices at various times of the day. 21860 remains an upside target with 21,737 and 21,631 offering support levels today.