Don here...
The S&P 500 just closed at 6,850. That puts it right on the bottom of a range it has traded inside for months.
October, November, December, January, and now mid-February. A nearly $7,000 product stuck inside a 100-point band.
The longer it stays compressed, the more gamma risk accumulates. Open interest in the SPX option chain keeps building like a snowball. And we just hit the lower edge heading into a holiday weekend.
The center of trade over the past several months has been right at 6,900. That creates what I call downside convexity. Upside from here maxes out around 7,100 to 7,200. Downside could rip to 6,100.
The advance/decline line confirms the problem. Stocks are still rotating into "safety" names like Caterpillar, Costco, and Starbucks instead of selling off together. That means the real selling has not begun.
When everything drops in unison, that signals a bottom. We are nowhere near that.
The safety trade in consumer staples (XLP) is full. There is no more room. Capital is now rotating into bonds, with TLT making a two standard deviation move this week. That is pure fear.
Meanwhile, big tech is breaking apart. Amazon is hitting new lows. Microsoft looks hideous. Apple just posted its worst back-to-back down days since the tariff selloff last April. Even Google started cracking this week.
Here is what I walked through in tonight's video:
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The VVIX is trading within 2% of its all-time high, sustained at elevated levels unlike anything we have seen in years
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Volatility futures are approaching backwardation, which signals the market is in the throes of heavier risk
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Next week is a four-day trading week with a $142 expected move, up from $120 this past week
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I hit a 1300% SPX butterfly trade this week, buying a $20 wide spread for $0.35 and closing the majority at $5.05
Put on your helmet. Even if we get a bounce early next week, there are going to be some nasty sessions to the downside.
Click here to watch me break down the full range, gamma risk, and volatility setup heading into next week
To your success,
Don Kaufman
Chief Market Strategist, TheoTRADE
P.S. TheoTRADE turned 10. Celebrate by doubling your credit. $1,000 becomes $2,000. First 100 only. Don't be 101 →
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