If We Lose 4,300 Gamma Turns Negative; If We Lose 4,250 It's A "Void" Lower

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by Tyler Durden
Thursday, Jul 08, 2021 - 09:18 AM

It's already been a harrowing session for bulls who have forgotten what the color red looks like after 8 all time highs in the past 9 trading sessions, but it could get a whole lot worse because with spoos down 1.3% just under 4,300 as they rebounded from 4,280...

... as the VIX surges above 20...

And with the cash index set to open just  over the critical 4300 line, SpotGamma notes that this means that gamma levels will start near zero, which implies a larger 1% max move for today. But it is under 4300 where the gamma flip line rests (below 4300 a drop move become self-reinforcing), and so SpotGamma looks for a spike in volatility if that level is broken. To the upside 4330 remains major resistance, although it's unlikely we will get there today. .

The bottom line: "markets hold a bullish stance over 4300 but risk is "off" under 4300."

That said, SpotGamma is not too worried and does not see today's manifesting into a major drawdown, looking for some support near 4270 if the S&P breaks 4300. But if the S&P drops below 4250, "a void exists and we’d have large concerns for markets with the next support showing near 4150."

In terms of “why” markets are weak today, there are several explanations - the selling coincided with fears that China will cut rates confirming its economy is slowing sharply (as we first warned 6 weeks ago), and coincident drops in the 10 year yields. The reason SpotGamma notes this is that if credit markets start shaking then equities will respond in kind.