In my analysis and conversations with Reading The Markets, the S&P 500’s inability to break through the 4,200 level has been a recurring theme. This has been a crucial element in gauging the probable trajectory of the market.
Roughly one month ago, I initially noted that the bulls were stuck with no room to move, when the S&P500 was hovering near 4,150. Even though it recently touched the 4,200 level, the index has been unable to make a sustained push higher.
The main obstacle preventing the S&P500 from surpassing 4,200 is the reluctance of the options market to provide the necessary authorization for further gains. As long as this opposition to higher prices remains, the index will be unable to advance, and the bulls will remain cornered. The more this resistance lingers, the more probable it is that the bulls will become drained.
For quite a while, the call gamma has been centered at the 4,200 level and had a major part in pushing the market higher in the last days of the May options expiration last week. Now that the monthly options expiration date is done, we notice the same kind of day-by-day action in zero-day-to-expiration options trades. The chart shown below shows the highest concentration of call gamma for the May 23 expiration at the 4,200 level.
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It appears that market makers are attempting to take profits by selling off the S&P 500 at the 4,200 level. This is due to call gamma values being concentrated in this area and traders adjusting their options positions. This situation has been ongoing, and it is likely that the S&P 500 will keep facing resistance at this level unless the options market begins to show a bullish sentiment and higher price expectations.
The bulls may exhaust their time if the current conditions don’t alter significantly. Interest rates have escalated and the economy is still resilient, which has prompted the market to ponder further rate hikes from the Federal Reserve. Ever since Federal Open Market Committee Chairman Jay Powell’s address on the 19th of May, the market has moved away from rate cuts and is now raising the possibility of extra rate hikes either in June or July.
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The US dollar is increasing in strength and the real yields are on the rise, which has a signficant effect on the capital markets. If the dollar continues to appreciate and rates keep climbing, it could result in more stringent financial conditions, which will have a negative impact on stocks.
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The bulls have to be prompt if they wish to drive the market up and also depend on the options market to grant them the authorization to do it. They are quickly running out of chances and time.