Pretty rough day out there—S&P 500 down about 1.8%, Nasdaq down around 2.2%, and small caps hit even harder, dropping 2.7%. However, the S&P 500 is approaching a crucial level at 5,800, not just from a technical standpoint but also from an options perspective.
If 5,800 breaks, then 5,700 becomes the next major support level from both a gamma and technical perspective. Right now, we’re in a negative gamma trading range, meaning market makers’ hedging flows are moving with the market. If the 5,800 breaks then it is likely to result in a move down to 5,700 and more importantly, a break of the current trading range that has been in place since the election.
(OPTIONCHARTS.IO)
The VIX rose yesterday to 22.7, and using the rule of 16 suggests an expected move of about 1.4% in the S&P 500, yet yesterday, we moved 1.8%. This implies the VIX could be even higher and may not drop immediately. We have a few days of these large 1–2% daily swings. This supports the idea that the VIX should remain elevated around 20 or higher, and we may not get a big implied volatility crush, which helps to drive stock prices higher.
The Nasdaq is in a similar situation. Yesterday, it nearly filled the post-election gap from November 5, a key support region between 19,900 and 20,200. This area is significant not only because of the gap but also as a prior resistance level back in August. If this level breaks, it could signal a double top, implying further downside. In that case, we could see a move back to levels last seen in September.
Looking at other indicators, high-yield credit spreads are widening. The CDX high-yield spread rose to 319 yesterday. While they’re creeping higher, they remain historically low. That means they could widen significantly from here. When credit spreads start expanding, we typically see multiple contraction in stock indices. Right now, they aren’t flashing red, but momentum is building.
(LSEG)
Another key market signal is the 10-year yield, which has dropped back to 4.16%, the level from December 9. However, it’s getting oversold—RSI is at 27.5, and it’s below the lower Bollinger Band, suggesting it may be due for a bounce.
If rates break below 4.16%, we could see a move toward 4.00% or lower, though I’d be surprised by that given the current economic backdrop. The dollar also sold off yesterday, signaling market concerns about future growth.
At this point, we may be at the beginning of something bigger, but we need to see key levels break before drawing stronger conclusions. For now, support levels are holding, but they’re getting tested.