Powell’s Selloff And the FRY-day Options Gamma Squeeze

Can we get an early week bounce going?

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All week we talked about how things would get dicey after Nvidia’s earnings and Fed Chair Powell’s speech — and they did.

The ES traded up to 4576.25 on Wednesday evening after Nvidia reported earnings — up almost 30 handles from its 4:00 closing price — then fell 91 points on Thursday and a big increase in volatility came on Friday. The ES rallied into Powell’s morning speech, climbing almost 50 handles from the Globex low, tumbled more than 60 points from the morning high of 4427.75 at 10:15, then regained those losses by the close, ultimately trading 4429 at the session high. Eventually the imbalance pushed sellers into the close.

However, Powell’s warning was simple.

After pushing interest rates up to a 22-year high earlier this summer, he said the hikes have not done enough to slow the economy and that sustained growth may require further interest rate hikes to squash inflation. The odds of another rate hike have not exploded higher, but have crept higher since his speech.

There was a comment that said the NYSE volume was low because of summer volume and people being on vacation. That’s as only 850 million shares traded, but that wasn’t the case for the S&P futures, as 1.8 million contracts traded.

I just want to note that 96% of the NYSE volume comes from algorithmic and high-frequency trading…it’s not really individual names always pushing the markets around, but program trading. These flows have totally taken over the index markets and in turn, have had an enormous effect on the options markets — with 0DTE options adding to the mix — and with Fridays seemingly receiving a constant uptick in volatility.

I told the PitBull to forget the first part of the week and just make all your bets on Thursday and roll the dice for FRY-days options expirations.

MiM and Daily Recap

The ES traded up to 4406 on Globex and opened Friday’s regular session 4402.50. After the open, the ES rallied up to 4410.50, back-and-filled above the VWAP from the 4409 level to the 4400.75 level until Powell started talking at 10:02. From there, it dropped down to the VWAP at 4398.25, traded up to 4415.50 at 10:04, sold off down to 4392.50 at 10:08 and then exploded up to 4427.75 at 10:17 — the morning high. After the high, the ES sold off to 4365.25 at 11:02 and then rallied up to 4389.25 at 11:12. The amount of up and down points in the first 90 minutes is almost uncountable.

The ES dipped back down to the 4375 level at 11:19, rallied back up to 4403.25 at 11:40 and then traded down to 4382.25 at 11:58. After the drop, the ES slowly crept up to the 4395.50 level at 12:16, sold off down to 4388 and made a high at 4406.50 at 12:15 before selling off down to 4389 at 1:47. I posted this level in the MTS chat room saying it had been holding and I noticed as the ES was selling off the NQ was rallying, and the ES traded all the way up to 4424.50 at 2:28. From there, it pulled back to the 4413 level and then rallied up to 4429 at 3:01 — the session high — sold off down to 4418.75 and then rallied back up to 4428.25 at 3:28 as the early imbalances showed $594 million to sell.

The ES traded down to 4418 and then traded 4417 as the 3:50 cash imbalance showed $1.93 billion to sell, trading down to 4410.75 and traded 4415 on the 4:00 cash close. After 4:00, the ES drifted lower and settled at 4413.25 on the 5:00 futures close, up 27.25 points or 0.62% on the day.

In the end, I am convinced that the algorithmic and high-frequency bots know exactly when the crowd/retail gets too long or too short. Like Thursday’s close, everyone was too short and the S&P reacted in kind and rallied on Globex. With 96% of the NYSE volume being program trading, these BOTs don’t care which way they go as long as they can catch the public when it’s offside.

In the end, the ES’s overall tone was weak, but filled with two-way price action. In terms of the ES’s overall trade, Globex volume was low at 214k contracts, but day-session volume was high at 1.598 million for a total of 1.805 million contracts traded.

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Disclaimer: Charts and analysis are for discussion and education purposes only. I am not a financial advisor, do not give financial advice and am not recommending the buying or selling of any security.

Remember: Not all setups will trigger. Not all setups will be profitable. Not all setups should be taken. These are simply the setups that I have put together for years on my own and what I watch as part of my own “game plan” coming into each day. Good luck!