Having recently established that in a market as illiquid and as centrally-controlled as this one, whereas the prevailing direction of stocks correlates exclusively with the (rising) size of the Fed's balance sheet for obvious reasons, day-to-day gyrations and volatility in a time of record option activity...
... can be largely explained by the market's option-driven flow and specifically delta, gamma, vanna and other "Greek" technicals.
With that in mind, and since today's main event is the upcoming FOMC meeting, we were curious what is the technical positioning ahead of today's 2pm FOMC announcement. For that we checked in with our friends at Spot Gamma, who write that their general view of FOMC days is that we head into the meeting with a lot of implied volatility “event premium” that is almost always deflated after the meeting. Some more details: the VIX is holding at 19, and the SPX options for today are pricing in a ~1.3% move, and according to SG proprietary model, the gamma implied max move is 1.4% – so these are all roughly in line.
Looking ahead, Spot Gamma notes that between China and the FOMC "it's clear there is a volatility premium baked into markets and this should fuel a break away from 4400 over the next few days." What’s notable is that even though the IV is high, the vanna models do not pick up left skew in SPX.
This, SG explains, implies that there are not many puts at or near current levels, and so any upside would be “drift” toward 4450. QQQ on the other hand is more neutral, and so this means less resistance on a move higher.
What if the Fed disappoints rising dovish expectations and surprises hawkishly, leading to a selloff? Here, Spotgamma notes that to the downside it sees a large inflection point at 4330, which is 1.4% lower - or in line with today's SG implied move - from current SPX levels. In other words, should Powell really upset traders, this is a solid downside target for today.