Capped Upside Ahead For SPX
Indices look bullish as we look ahead later this summer, but they may be getting to a point in the short run where upside is likely to be capped, at least that’s what GEX suggests at the moment. The VIX is also oversold with multiple timeframes suggesting a VIX spike could be near, even if short-lived. We view the situation for indices as “buy the dip” until further evidence presents itself.
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SPX Stretching For 7600
In last night’s newsletter, we noted that 7500 was the largest expiring GEX cluster for Monday, though we saw GEX shift higher with the gap up well above 7500. We also noted that 7580 (just above the weekly HMA at the time) might be the next place to look, and sure enough, today’s high was 7577.82. I think it’s noteworthy that we did not see GEX grow significantly above 7600 today, so 7600 remains as the largest likely target for the week. The HMA and 9 SMA are over 150 points below the closing price and they’re still declining on the daily chart, as well as being below weekly HMA resistance on the weekly, so the rally places SPX in danger of a short-term pullback. Downside risk this week first rests at 7500, then potentially 7400.
Key Levels: Bullish over 7550 targeting 7600. Bearish below 7550 targeting 7500, then 7400 if 7500 is lost.
QQQ: Approaching The UPper Weekly Keltner
QQQ could potentially stretch as high as 755, the location of the upper weekly Keltner channel, which marked the top during the last pullback. GEX suggests we’re more likely to see a struggle around 750, and I notice QQQ closed below the weekly HMA at 746.63. QQQ exhibits the same extended condition above the daily HMA, which usually involves mean reversion in the short run. However, consolidating at current prices or continuing to move higher is possible, which would drag the HMA higher as well, so we need to be aware of risk in both directions. GEX is our extra layer of data that suggests further upside is likely limited to the 750-755 area.
Key Levels: Bullish above 740 targeting 750. Bearish below 740 targeting 720, then 714 if 720 doesn’t hold.
IWM Still Appears Likely To Hit 300
IWM gapped up, reaching 298 premarket before selling off virtually the entire cash session. I view the shift as a potential red flag for other indices in the short run, but we can still see 300 touched this week. The GEX picture shows 290 as a key GEX area to hold to keep the 300 target alive. A slight drop below 290 targeting 288 would also appear constructive in our view, though anything below 288 starts to look more bearish.
Key levels: Bullish above 290 targeting 300. Bearish below 288 targeting 285, then 277.
The VIX Tests The Weekly HMA
Upon the VIX initially crossing over the HMA 2 weeks ago, we noted the heightened risk of a spike, and we got one. The weekly HMA continued declining, only subtly shifting toward the early signs of a potential turn. The drop in the VIX today is very close to testing the weekly HMA, and there’s very little GEX below 16 to consider as downside targets. A tag of 15.55-15.75 is certainly possible, but the odds of sitting at 15 or lower look slim at the moment. Any reversal in the VIX may result in limited upside though, with a breach of 17 being necessary to trigger a move toward 18-20.
Lower Timeframes On The VIX Suggest A Bounce
We already see the 1-hour and 2-hour timeframes suggesting the VIX can spike any moment, so the 4-hour chart is the last one I’m waiting on before buckling up for some sort of VIX spike. From the looks of the chart, the VIX will cross over the 4-hour HMA along the rising lower Keltner channel early tomorrow morning, perhaps when you received this email in your inbox. Note that the two VIX spikes we saw after the first week of June turned the Keltners higher, suggesting a shift in trend, and now we see the VIX at the bottom of the channel with %b indicator oversold. I wouldn’t want to be short volatility with this backdrop. Do we see a short-term spike to 18-20 that gets crushed, or will the next one take us to the awaited 25 target? Maybe Kevin Warsh’s comments Wednesday (after the monthly VIX options expire) can help push us along in one direction or another.
Key Levels: The VIX is once again pressed to an area of limited downside: Below 15.5 targets 15, an imminent spike can happen from 15.5-16 targeting 18-20.
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