Hey trader,
XLU crossed my screen twice today, from two directions that have nothing to do with each other.
The first was a relative strength read I’ve been running since July.
The second was a block print that landed in the Console this morning.
Both pointed at the same ticker. Both pointed the same way.
Utilities are where money parks when it wants to feel safe. That’s what makes 3,000 contracts of puts at the 41 strike worth stopping on.
XLU trades at $41 right now. The strike they bought sits at $41.
So what happens when the print and the level land on the same number?
The ratio put XLU on my list back in July. The print this morning told me where the move starts.
The Ratio Put XLU On My List In July
I run SPY against XLU as a pairs ratio, then read it off a four-week rate of change. It’s a binary choice.
You own one or you own the other.
On July 20 that line told me to sell XLU and buy SPY.
SPY has gained 2.73% since then. XLU has dropped 11% over the same stretch, which puts you ahead by 13.5% taking both sides together.
One indicator did all of that work. Essentially, the ratio measures which of the two is gaining ground on the other, and the four-week change tells me when the lead has flipped.
This is one of the most studied relationships in technical analysis. There’s a whole paper behind it that won the Dow Award.
It doesn’t have to work every time. It has worked since July, and XLU has sat on the losing side of it for two months.
Why $41 Decides The Next Move
Now to what showed up today. I clicked into block trades in the Console and found 3,000 contracts bought at the XLU 41 strike for next week’s expiration.
XLU bounced for two days before this. It’s rolling over now, and I want it closing below that recent high.
Then I pulled XLU up on the Switchboard, which displays gamma by strike price.
$41 is the big bar. It’s negative gamma, meaning the puts at that strike outweigh the calls.
Negative gamma tells me what the dealer has to do next. He buys into strength, then sells into weakness.
His hedging pushes a move along instead of absorbing it.
Break $41 and that hedging becomes a downside accelerant. Those 3,000 contracts just made the bar bigger.
Price sits right on the strike. The print and the level arrived on the same number the same morning.
The Spread I’m Working Behind It
Here’s how I’m structuring it. The near-dated version costs almost nothing.
The longer one buys room for the level to do its work.
- Setup: XLU at $41, rolling over after a two-day bounce, with 3,000 puts bought at the 41 strike for next week’s expiration
- Trigger: A break of $41
- Target: $40, with $39 live if the break comes fast
- Edge: $41 is the biggest negative gamma bar on the board. Dealer hedging accelerates the move once price leaves it
I like the idea of a vertical put spread here.
A put vertical means buying one strike and selling a lower one against it.
That sale caps my payout. It also cuts what I pay to get in.
The near-dated spread maxes out at a dollar. I’m shooting for 75 cents rather than squeezing the last nickel out of it.
The 28-day version is where I’d rather be if I want the level to have time. Reaching $40 inside those 28 days puts me at a 70% gain or better, and I could likely close it around a buck.
What Decides This Next Week
Where SPY opens Monday sets the tone for everything. I’m looking at roughly a $20 range next week, skewed $5 to the upside and $15 to the downside.
765 becomes the new call wall on SPY once today’s expiration clears. The structure flips from negative gamma to positive somewhere between 762 and 763, and we’re negative the whole way down below that.
XLU is the piece I want working through it. The ratio has had it on the losing side since July 20.
The print this morning handed me a strike and a week to use it in.
I found both of those in the Console before either one showed up on a chart. That’s the whole job.
Brandon Chapman, CMT
Creator of Ghost Prints
