Option Analysis Setups: $SPY Vulnerable As Asia Opens in the Red
In a rare moment, last week, SPY’s and QQQ’s closed down, yet IWM’s closed up. Needless to say, this glimmer of hope is not enough for the markets, which closed down and ended up in negative gamma mode (again).
Remember, when the markets are in negative gamma, two things hit front and center:
Dealers sell into declines and buy into rallies
Which leads to the second feature of increased volatility
SPY’s has had a total of 2 (yes, count it) days in positive gamma mode this year.
This is not common, and I’m guessing any long term analysis of the first 40 days of trading over the last 20 years likely only produces maybe 2-3 years of having 40+ days of trading to start the year and only 2 in positive gamma mode.
This suggests SPY’s along with the markets are weak. This is partially a combination of bad breadth with the majority of stocks (over 60% in the Nasdaq) below their 200 SMA. In SPY’s its probably a bit less, but there are lesser and lesser stocks holding the markets up.
Less stocks holding up the markets = more weakness and fragility. This plus the lack of real money buying (institutional traders/investors committing to calls higher up and/or buying SPY shares on declines) means markets can’t hold the positive gamma for long.
With a running board of negative gamma, news matters more because dealers don’t buy on declines, they sell.