Futures are down (relatively) hard ahead of today's open with Small Caps leading the charge to the downside...
Notably, SpotGamma points out that we start the session in a negative gamma position.
The official gamma flip points are coming in at 4335 but we suggest using 4300 as the key “risk off” level. This is due to fairly large open interest at that strike, which also makes it first resistance this morning. Key levels today are 4300, 4335 (gamma flip) to the upside, with 4240 downside support.
We certainly see the setup for weakness today... and another call to The PPT imminent...
Monitoring implied volatility[IV] (ie VIX) today will be critical. Any drop in IV, particularly with a break back above 4300 could lead to a very sharp rally which takes us right back to all time highs over the next few sessions. Because of this elevated volatility this is a market that likely cannot remain “flat”. If price action pauses that likely leads to a drop in IV and a short cover rally.
Conversely a spike in IV suggests traders are adding short protection which should lead to strong selling. We do see 4240 as the limit for downside today, with a large air pocket beneath that to 4150.
As shown below the current gamma models suggests that we don’t see much positive gamma unless we return to 4400, and therefore volatility should remain high until/unless we revisit that price level.
VIX expiration is on Wednesday AM which could play in as a catalyst this week. We also have the “retail short put position” that we flagged this weekend.
Our bottom line is this: a close above 4300 give bulls control. Beneath that level leaves markets in a “risk off” stance.