Greetings faithful readers, welcome to another fun and exciting Options Expirations Week, where things get weird, nobody knows what's happening and traders whine a lot.
Sounds fun, doesn't it?!
Joking aside, it's time again to dig into some charts and plan for the week ahead.
My Plan for the Week: Not much.
I'm going to go out on a limb and say, despite it being our first OpEx Week of the new year, I don't think a whole lot is going to happen. I could be wrong and I'd be okay with that as a day trader, but I'd be surprised if we get too far away from SPX 4000 before Friday. Take a look at the Open Interest on SPX 4000 Puts/Calls:
That is...um...A LOT of interest on both sides at the key 4000 strike (screenshot from EOD Friday). That's not something you see every expiration, it's indeed a tad unusual and likely to act as a magnet this week.
With that said, my plan is to trade ES 3960-4015 as a range, with 3990 as my Weekly Pivot. While everyone on FinTwit seems to be either calling for an extreme melt-up or the end of the world, I'm leaning towards this week being sort of a dud, with the market likely to drift around SPX 4000.
What do I mean by "trade 3960-4015 as a range"? Let me show you:
The 1hr ES Chart above shows the Balance Areas where the market consolidates. I strongly prefer to play the breakouts from range to range, that's what I'm best at; however, it's entirely possible for ES to simply stay in this 3960-4015 range this week, chopping back and forth, dropping the theta hammer on retail traders. Now, I can't ignore my Breakout Trader instincts, so I will still be inclined to play breakout longs over 4015 towards 4095 and shorts below 3960 towards 3900, but I think if we reach either of those extremes (4095 or 3900) the Risk/Reward would then make sense to play back towards ES 4015 or roughly SPX 4000. I will say, I am less interested in the short-side this week, giving the edge to the buyers because from a TA perspective momentum currently favors the bulls. Let's look at some examples:
ES has broken above the Ichimoku Cloud, and the top of the Cloud now rests at 3960, which should provide some support for buyers. RSI is now over 60, which is historically favorable for buyers as well.
The nextSignals Momentum Model flipped bullish recently and Implied Volatility was squashed after CPI...maybe squashed too much? We'll see.
The VIX vs SPX Chart (Daily) above also shows us that Relative Volatility has a little more breathing room to the upside before I'd get concerned. Again, another momentum-based indicator currently in favor of the bulls.
Even Bitcoin, which hasn't done anything in months is catching a bid. I have no idea if it'll last, I'm simply showing examples of the "Bull Case" right now and evidence outside of the S&P500.
Before the bulls start to smile too wide, let's examine the Bear Case. To be fair, not all of these charts are inherently bearish but rather they point to the market being at a critical crossroads, in my opinion. I believe this is 100% true and the charts reflect it well.
With its arrival to 4000, SPX has reached some serious confluence between that downward sloping trendline (that is on everyone's charts) and the 200DMA. For market technicians, you can't find a better example of a "crossroads" for price. Any higher and the odds of a mini-meltup to 4300 strongly increase...and lower and the Bear Market marches on.
ES also kissed the 200DMA on Friday afternoon, rejecting (barely) like it did back in November when price finally returned after months of volatility. Even though I'm supposed to be examining the Bear Case now, it's worth pointing out that the critical 50DMA is now trending up, and there's still a ton of supportive confluence between 3880-3950 with the 20, 50, and 100DMAs clustered there. I personally think it'll take something serious for the S&P500 to lose that area, especially with the recent Risk-On behavior we're seeing...but don't tell the permabears I said that.
So, "crossroads" is my theme for the week and hopefully you're starting to see why. It's not just the S&P500 either, take a look at everyone's least favorite index The Russell 2000:
If you enjoy anxiety and bad decisions, I think 1900 is a key pivot level for RTY this week, favoring longs above and shorts below. I am admittedly surprised how far & fast RTY has moved recently, and will admit to taking a couple losses attempting to short it in the 1850s, but I'm also reminded that melt-ups can melt up even harder and the party might not be over for small caps if we see a break above 1900 on high volume. Keep this dog on your radar.
With bank earnings top-of-mind, it's probably also worth noting XLF is also at a rather significant technical crossroads. Buyers have been knocking on the door of $36 since April of 2022. Again, probably worth adding XLF to your watchlist this week if you're a breakout/momentum trader.
Finally, I think the most concerning thing for S&P500 bulls is the DXY. Let's take a look:
In my opinion, the divergence between RSI and price on DXY has reached a point where some caution is warranted. The US Dollar had a wildly strong year in 2022, but I'm not sure the upside is over and if the Dollar starts to rise again it'll put significant pressure on the equity indices. However, since the negative correlation with ES has weakened, I'm actually more interested in expressing a DXY trade in Gold:
We can see a similar RSI/Price divergence in Gold Futures on a daily timeline. If there's one thing gold loves to do, it's break Goldbugs' hearts. All eyes on GC for me this week...
In conclusion, let me go back to ES and discuss my Weekly Pivot at 3990...why that level?
Looking at last week's Volume Profile, we can see a Bearish Volume Shelf below 3990 (Note: That's not an official term, it's just how I view this volume formation). When that shelf is broken, price tends to accelerate quickly yet briefly to the downside, often popping back up to retest the breakout area (3990 in this case). If the buyers can't hold the bottom of the trading range at 3960, I'm looking at 3947 for a rebid off a notable Low Volume Node.
The chart above shows Delta by Price for all of 2023 so far...a mixed bag of buying and selling plus one moron at the bottom. We can see there's iceberg interest at 3990, the largest so far this year. Yet another reason to use this level as a pivot for the week.
Other Key Levels/Extensions for the Week Ahead:
4223.50: +2 Fib Extension from Last Week's Range
4157: +1.5 Fib Extension from Last Week's Range
4090.75: +1 Fib Extension from Last Week's Range + Near Bottom of Previous Range
4057.50: +0.75 Fib Extension from Last Week's Range + Notable Resting Liquidity at 4050
3991: +0.25 Fib Extension from Last Week's Range & My Weekly Pivot
3958: Last Week's Mid
3925: -0.25 Fib Extension from Last Week's Range
3858.25: -0.75 Fib Extension from Last Week's Range
It'll be an interesting 1st OpEx Week of the year, and I'll be curiously watching to see if SPX can drift meaningfully away from 4000. There are strong signs of Risk-On behavior and momentum currently favors the dip buyers. Whatever you do, enjoy the extra day off and stay safe!
Happy Trading,
Horse