November 22nd, 2021 by Richard

Looks like the zone will be crucial as we kick-off the mighty Dec expiry.

 

Nb. Our comment from the 11/15/21 (Not published)

Nb. Our comment on 11/22/21

 

Welcome to the big one, the cumulation of everything done so far this year.

Although easily the biggest of the year, by a huge margin over the intermediaries but, even over the previous three triples, it is ahead by a very decent amount.

Therefore, by this very nature, it is more cumbersome and unwieldly which should be borne in mind. As should the fact that because it is so massive there is normally a significant uptick in the derivative related equity business, which more often than not gets misdiagnosed, but also means they get emboldened to take on higher ratio levels than they normally would.

However, just looking at the table above and the main issue is going to be the zone.

It is currently 6950-7050, which is actually lower than it was in the Nov expiry, but it could very easily move to 7050-7150 and there is even an outside chance of it getting to 7250-7350 further down the line during this expiry.

This means, to us at least, that where the zone is will play a crucial role for this trip so we will keep you posted as best we can.

Otherwise, the other critical levels to watch are R3 at 7350, as although R3 should not be particularly troublesome in the mighty Dec expiry it does have history and proved to be an important level in Nov. Then 7450 is a far more robust resistance level, and DR ratio amount of dynamic delta there is enough for even this expiry to sit up and take notice.

On the support side, well this will really be down to the bottom boundary of the zone. So, currently at 6950, but also keep a wary eye on 7050.

Otherwise, just enjoy the ride and surf along on the volume spike.

 

Range:            7150  to  7350       

Activity:          Poor

Type:              Neutral

 

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November 14th, 2021 by Richard

As Nov ends and the mighty Dec expiry begins will both be about the zone?

 

Nb. Our comment from the 11/08/21

Well, we certainly didn’t get the retreat back to its zone but, there is definitely no doubt now that wants to go better. It’s just a question of will the ratios let it.

This time last week, Monday 1st, saw the intraday high of 7303.39 giving us the first definite test of R3 at 7300.

We then had to wait until the Thursday 4th before the market ventured back there again, this time with the intraday high of 7292.96.

The next test would be strike 3 and anyway we are 99% certain that by Friday 7300 had dropped to R2. Don’t forget the last time we saw R2 it was at 7250, the level that had such an influence on this market in the second week of this expiry, so it is no pushover in itself.

This is probably why the market hovered around 7300 for most of that Friday but, R2 is obviously a lot less of a hurdle than R3.

And if there was any doubt as to how much activity there must have been to bring about such a change, then all you need to see is that B1 has now gone.

The problem for the FTSE is that it hasn’t really got rid of its R3 problem, it has just pushed it back to 7350 now.

It does mean though that everyone is hitting new all-time-highs, with the FTSE managing a rise of 0.91% on the week. However, with the ratios holding it back this a very poor comparison to the DAX, CAC and SPX which managed 2.33%, 3.07% and 2.00% respectively.

There is still two weeks to go in this expiry but towards the end of this week the rollover and expiry will start to play a more important role, and this is across all markets. On top of this, next up is the mighty Dec expiry, the biggest of the big, so it’s no bad thing the markets are getting used to dealing with higher levels of ratio but, at the end of the day, one or the other will have to give way.

 

Range:            7300  to  7350       

Activity:          Moderate

Type:              Bearish

 

Nb. Our comment on 11/15/21

 

Well, you can’t fault the bulls for giving it everything they have got, and Wednesday and Thursday last week were the really important days.

Monday basically saw it camp out at 7300, then Tuesday finished at 7274.04 so we thought “job done” but, Wednesday was important because the market reclaimed R2 at 7300, ending at 7340.15.

Thursday was important because (and we checked it still was) the market got above R3 at 7350, although it was plain to see it really did struggle with that amount of dynamic delta.

But credit where credit is due, and they did manage to close above it but, this only made Friday hugely significant, and the fact the market closed at 7347.97 says it all really.

This week the FTSE now faces the rollover on Wednesday and the expiry on Friday.

Throughout the zone hasn’t changed, and the upper boundary remains 200-points to the south, which is going to hurt should the market want to get there for the final reckoning. In the meantime, obviously 7350 remains significant, but now 7300 takes on a whole new importance. As below that it is now just Y2 ratio, which will seem like an absolute dawdle having mixed it with R3.

We have no doubt that there will still be a few more twists and turns in this expiry yet but, as it draws to a close it will become far far harder for equities to ignore derivatives. But it is great they have given it a go, as with the mighty Dec expiry up next, they will certainly welcome the step up in activity.

And having mentioned the Dec expiry, which is already three times the size of this one although, which you may find surprising, this is somewhat disappointing, the zone is actually currently below where November’s is currently, but we fully expect it to match it by the time it becomes the front month. Still sobering though.

 

Range:            7300  to  7350       

Activity:          Moderate

Type:              Bearish

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November 9th, 2021 by Richard

R1 Hedge Ratio takes a battering from the SPX

 

Nb. Our comment from the 11/03/21

 

Exactly as we said at this time last week, how the market would react to Y2, then at 4505, would tell us all we need to know.

Apologies for being a day later than normal, but we think we covered the pertinent points last time and, quite frankly, not a lot has changed since then.

The zone has moved up to 4495-4505 as expected.

The market has stayed above Y2, so remaining in its Y2 ratio bandwidth.

R1 has continued to retreat, allowing the market to creep forward.

The only aspect limiting this index is now its sensitivity to what we call “step-up” levels. These are essentially the old higher level of ratio that have fallen, but for a day or so after can remain just below the threshold of the level they once were, so can still represent a hurdle to the market.

This can be evidenced by last Friday, when the market struggled at 4605, the old R1 level.

Then it was 4630, which was what it was all about yesterday, despite the fact that on the 2nd the official R1 level was 4665 and, although today it hasn’t changed, by the time we next publish we would be surprised if it wasn’t 4680 by then (or before).

Either way, it is still exemplary that this market now feels so comfortable taking on Y2 ratio, as it certainly hasn’t prior to this. This actually bodes well for the mighty Dec expiry just round the corner as well.

But, back in the Nov trip, the rollover and expiry are now just a couple of weeks away, and the Y1 and overall Y ratio bandwidths have actually increased, to 235 and 395-points respectively, so the risk is still very much there.

One last point is that although activity started this expiry off like a steam train, the last five days have been rather dire, but then again it is mid-expiry, so it may be a concern for now but we know it won’t last.

 

Range:            4505  to  4665           

Activity:          Very poor

Type:              Bullish

 

 

 

Nb. Our comment for 11/09/21

 

Eventually the SPX traversed the Y2 ratio bandwidth and started mixing it with R1.

As we are sure you know by now, making new all-time highs all the way.

Rather fortuitously we published last Wednesday 3rd, when R1 was at 4665, as the intraday high that very day came in at 4663.46.

The next day R1 moved to 4680, and we saw an intraday high of 4683.00, but importantly a close at 4680.06.

Basically, this market evidently didn’t like the dynamic delta that comes with R1 hedge ratio, but was far from scared of it.

Friday saw R1 move to 4705, where it is today, and although both Friday and Monday saw the close below this level, on both occasions the market got as high as 4718.50 and 4714.92 respectively.

It has been a very long time indeed since we have seen this index being so aggressive, so we are a bit unsure how to take it. Is it a new level of conviction? Or is it just holiday season gone a bit mad? As it stands and without any corroborating data, we have to side with this being an out-of-character seasonal twitch.

Albeit a very persuasive one, as after two days knocking on the R1 ratio door at 4705 not only is it on strike 3 but R1 at 4705 is now only just above the threshold and, the next level with a decent amount of meat on the bone, is 4730.

Meanwhile, both Y ratio bandwidths expand, the big one to a knee-trembling 9.8%, so the risk element is still very much there.

We will try to give you an early “head’s-up” for the Dec expiry, as this will be bringing its dreadnought-like influence to bear soon, as this expiry heads into the rollover and finish next week.

 

Range:            4505  to  4705 / (4730)           

Activity:          Moderate

Type:              On balance bearish

 

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November 8th, 2021 by Richard

The FTSE's R3 Hedge Ratio problem not gone, just moved.

 

Nb. Our comment from the 11/01/21

Well, if the first week was all about R1 holding the line at 7200, the second week was all about the other end of the bandwidth.

This meant we did get our test of R2 at 7250, in fact it was the very day we published, being Monday 25th October with the intraday high of 7247.53 before closing 25-points below. Actually, there were two tests that day, several hours apart which made for a very plain chart highlighting the effects of the dynamic delta there.

As one can see in the table above, R2 above the zone has gone, now being part of the R1 ratio bandwidth. The question is when? As on the Tuesday and Wednesday last week the intraday highs were 7281.17 and 7280.45 respectively, both being tantalisingly close to the next level, R3 at 7300. Therefore, we suspect that this change happened then, if not on the Tuesday, then the breach that day probably precipitated the change by the Wednesday.

Either way, hitting R3 is a very serious number of futures selling as our grading of the hedge ratios depicting the dynamic delta are exponential, so going from R1 to R3 is not just a linear experience, but more like a doubling.

This is a shame, as it is plain to see that the FTSE wants to go better, it just can’t seem to get past all those futures coming out onto the market.

Making this all seem so much worse, is the fact the other indices, especially the SPX, are also happily making significant new all-time-highs as they are just fighting the Y ratios, while the FTSE languishes.

In fact, the opening price of the FTSE on the first day of this expiry was 7234.03, meaning in the two intervening weeks the market has only moved 3-points.

In conclusion, our view hasn’t changed as we still see this index eventually beat a retreat back to its zone, the only question is when.

If similar to the last expiry, soon would be best, then it can spend two weeks excitably pinging around in there, before cutting loose for the final week.

 

Range:            (7150) 7200  to  7250       

Activity:          Poor

Type:              Bullish

 

Nb. Our comment on 11/01/21

 

Well, we certainly didn’t get the retreat back to its zone but, there is definitely no doubt now that wants to go better. It’s just a question of will the ratios let it.

This time last week, Monday 1st, saw the intraday high of 7303.39 giving us the first definite test of R3 at 7300.

We then had to wait until the Thursday 4th before the market ventured back there again, this time with the intraday high of 7292.96.

The next test would be strike 3 and anyway we are 99% certain that by Friday 7300 had dropped to R2. Don’t forget the last time we saw R2 it was at 7250, the level that had such an influence on this market in the second week of this expiry, so it is no pushover in itself.

This is probably why the market hovered around 7300 for most of that Friday but, R2 is obviously a lot less of a hurdle than R3.

And if there was any doubt as to how much activity there must have been to bring about such a change, then all you need to see is that B1 has now gone.

The problem for the FTSE is that it hasn’t really got rid of its R3 problem, it has just pushed it back to 7350 now.

It does mean though that everyone is hitting new all-time-highs, with the FTSE managing a rise of 0.91% on the week. However, with the ratios holding it back this a very poor comparison to the DAX, CAC and SPX which managed 2.33%, 3.07% and 2.00% respectively.

There is still two weeks to go in this expiry but towards the end of this week the rollover and expiry will start to play a more important role, and this is across all markets. On top of this, next up is the mighty Dec expiry, the biggest of the big, so it’s no bad thing the markets are getting used to dealing with higher levels of ratio but, at the end of the day, one or the other will have to give way.

 

Range:            7300  to  7350       

Activity:          Moderate

Type:              Bearish

 

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November 3rd, 2021 by Richard

As the ratios still slip the SPX continues to creep up behind.

 

Nb. Our comment from the 10/26/21

 

Exactly as we said at this time last week, how the market would react to Y2, then at 4505, would tell us all we need to know.

Last Tuesday the market opened at 4497.34, and then hardly blinked at Y2 as it went past. Well perhaps it held them up for 15 or 20 minutes, but that was all.

Y2 then quickly retreated to where it was at the very start of this expiry, namely 4530, but the market was already way past this point and had new all-time-highs in its sights. As you can see it has now slipped even further.

This expiry is always a strange one, as the US markets do love to hit new all-time highs just before Thanksgiving, and that is still a month away.

Can the market maintain this level of aggressiveness for that long? Unlikely, and anyway, this trip expires on the 19th November, so there is that battle it has to face as well.

However, we have no doubt the zone will move up, and already there is the distinct possibility it will move to 4495-4505, but if it follows the recent game plans then this will always be a catch-up exercise.

Overall, the Y1 ratio bandwidth is actually slightly wider, and although the overall Y ratio bandwidth has come in to “just” 365-points it is still far wider than previously.

Admittedly, at least the Y ratios are moving up below and receding above, both bullish, but if the distance between them doesn’t change any zone move is more by default than design.

Therefore, we are back to the old mantra, that it is like an automatic car in neutral, designed to creep forward, but that even though it is just contending with the minimal Y2 ratio, and very possibly even attack R1, this is not a risk-free market, as that is an 8% bandwidth it is sitting at the top of. Great trading though.

 

Range:            4445  to  4610           

Activity:          Moderate

Type:              Neutral

 

   

Nb. Our comment for 11/03/21

 

Exactly as we said at this time last week, how the market would react to Y2, then at 4505, would tell us all we need to know.

Apologies for being a day later than normal, but we think we covered the pertinent points last time and, quite frankly, not a lot has changed since then.

The zone has moved up to 4495-4505 as expected.

The market has stayed above Y2, so remaining in its Y2 ratio bandwidth.

R1 has continued to retreat, allowing the market to creep forward.

The only aspect limiting this index is now its sensitivity to what we call “step-up” levels. These are essentially the old higher level of ratio that have fallen, but for a day or so after can remain just below the threshold of the level they once were, so can still represent a hurdle to the market.

This can be evidenced by last Friday, when the market struggled at 4605, the old R1 level.

Then it was 4630, which was what it was all about yesterday, despite the fact that on the 2nd the official R1 level was 4665 and, although today it hasn’t changed, by the time we next publish we would be surprised if it wasn’t 4680 by then (or before).

Either way, it is still exemplary that this market now feels so comfortable taking on Y2 ratio, as it certainly hasn’t prior to this. This actually bodes well for the mighty Dec expiry just round the corner as well.

But, back in the Nov trip, the rollover and expiry are now just a couple of weeks away, and the Y1 and overall Y ratio bandwidths have actually increased, to 235 and 395-points respectively, so the risk is still very much there.

One last point is that although activity started this expiry off like a steam train, the last five days have been rather dire, but then again it is mid-expiry, so it may be a concern for now but we know it won’t last.

 

Range:            4505  to  4665           

Activity:          Very poor

Type:              Bullish

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October 26th, 2021 by Richard

The bulls are definitely back in the SPX, but for how long?

 

Nb. Our comment from the 10/19/21

 

Although we are now in the November expiry, we just can’t not mention the end of October’s, as in our last comment the market had just closed at 4361.19 and our zone was stubbornly still at 4445-4455, and come the expiry the settlement price was 4463.66, which is definitely a bit hit in our books.

Nevertheless, this is still very pertinent for this expiry, as markets still being slaves to misdiagnosing the derivative influence, means that there is more than likely a bit of latent momentum remaining.

Which is essentially what we subscribe yesterday’s move to.

However today, there are more than likely to encounter Y2 at 4505 above the zone, and it is this reaction which will tell us what we need to know.

Namely being whether the recent rally was indeed all down to the expiry, or that the bulls are back in town, committed and in control.

Obviously, you know what we think, but best to spell it out.

Don’t forget this is still an intermediary expiry, and it is a five-week one, which may go some way to explaining why it is developing so slowly.

For the record the Y1 ratio bandwidth is 210-points and the overall Y ratio bandwidth 410-points, so actually wider (worse?) than last trip.

It has been a long time since this market faced dynamic delta of the variety that means futures selling, in fact it never got past just testing its zones upper boundary in the first week of the last expiry, so how the market reacts if/when it tests Y2 will define the rest of this week and very probably the next we suspect.

Whatever the outcome, it is definitely a good way to start a new expiry as at the very least it gets people engaged.

 

Range:            4445  to  4505           

Activity:          Average

Type:              On balance only just bearish

 

   

Nb. Our comment for 10/26/21

 

Exactly as we said at this time last week, how the market would react to Y2, then at 4505, would tell us all we need to know.

Last Tuesday the market opened at 4497.34, and then hardly blinked at Y2 as it went past. Well perhaps it held them up for 15 or 20 minutes, but that was all.

Y2 then quickly retreated to where it was at the very start of this expiry, namely 4530, but the market was already way past this point and had new all-time-highs in its sights. As you can see it has now slipped even further.

This expiry is always a strange one, as the US markets do love to hit new all-time highs just before Thanksgiving, and that is still a month away.

Can the market maintain this level of aggressiveness for that long? Unlikely, and anyway, this trip expires on the 19th November, so there is that battle it has to face as well.

However, we have no doubt the zone will move up, and already there is the distinct possibility it will move to 4495-4505, but if it follows the recent game plans then this will always be a catch-up exercise.

Overall, the Y1 ratio bandwidth is actually slightly wider, and although the overall Y ratio bandwidth has come in to “just” 365-points it is still far wider than previously.

Admittedly, at least the Y ratios are moving up below and receding above, both bullish, but if the distance between them doesn’t change any zone move is more by default than design.

Therefore, we are back to the old mantra, that it is like an automatic car in neutral, designed to creep forward, but that even though it is just contending with the minimal Y2 ratio, and very possibly even attack R1, this is not a risk-free market, as that is an 8% bandwidth it is sitting at the top of. Great trading though.

 

Range:            4445  to  4610           

Activity:          Moderate

Type:              Neutral

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October 25th, 2021 by Richard

The FTSE still in an arm-wrestle with R1 ratio.

 

Nb. Our comment from the 10/18/21

 

And October certainly did “boil over” but as the market had been zone-bound for so long they certainly had the meat out of the sandwich.

And anyway, the EDSP of roughly where it closed was still in the Y ratios, and but 80-points above the top of its zone.

But at least it eventually made full use of all that Y ratio as it made a new all-time-high on Friday, but boy does it not like to make a meal out of it all.

Sadly, this door has now been firmly slammed shut in its face, as all but a little bit of Y ratio has disappeared above the zone.

Below it, it has gone altogether, which is a win for the bulls at least.

However, as a quick glance at the above table will tell you, the market is going to start the 5-week long November expiry already in R1 ratio, which no doubt will be a somewhat rude awakening.

But R2 is directly ahead, and then just 50-points above that R3 is lurking in ambush.

These are not impossible levels of hedge ratio, but when one considers that the market has been used to only seeing the level of futures selling generated by the minimal Y ratios, R2 and R3 are going to take some getting used to.

Also, please don’t forget that this is still an intermediary expiry, so sensitivity should also be heightened, although overall activity is very good considering.

The market might still be emboldened by Octobers bounce off R1, and the SPX may have some input here, but, for the moment at least, we can only see London skulking back to its zone.

 

Range:            7200  to  7250       

Activity:          Outstanding

Type:              On balance only just bearish

 

 

Nb. Our comment on 10/25/21

 

We appreciate it must have been “a rude awakening” starting the Nov expiry off in R1 ratio, but we honestly didn’t think it would be that torpid.

Although we do apologise for not mentioning that this is a five-week expiry, and quite often the first “extra” week can be as dull as dishwater for this very reason.

However, there were two surprises last week, the first being that every day the market broke down below 7200, the bottom of our trading range, but recovered.

In fact, on Thursday it actually closed below it, so we though job done, but Friday had other ideas, and the market got dragged right back into the R1 arm-wrestle.

The second surprise, was with 7200 proving so resilient, the market didn’t once test R2 at 7250, which would be our expectation.

But we feel very confident that this won’t last, as activity has continued to be high, and overall is already almost double what we were seeing at this stage last trip.

Obviously, this is still nowhere near what we would see in a triple, but at least Nov will hold its head up in comparison to any other intermediary now, and still four-weeks to go.

The only change in the ratio table despite all this, is the introduction of R2 below the zone at 6950.

Looking ahead, we see no reason to change our view, being that the market should be looking at a return to its zone. And after five tests, we don’t think 7200 should provide much more support at all. Therefore, the only real question, for us at least, is whether or not we are going to see the market test R2 or even R3 first?

 

Range:            (7150) 7200  to  7250       

Activity:          Good

Type:              Neutral

 

The faction account of the Big Bang, The Great Storm and the market crash of 1987, available in eBook and paperback here, a must read if you don’t believe in history repeating itself.

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