Hey trader,
Two Mondays ago I shorted a setup that looked exactly like the ones I’ve been shorting profitably for years.
And I lost money on it.
The chart wasn’t the problem. What I missed was the cushion sitting underneath the market.
Which meant nothing down there was going to force a dealer to sell into weakness…
So the selling pressure I was counting on was never going to show up in the first place.
Today handed me the same structure on the same day of the week.
And this time I called it out loud before the open instead of working it out afterward.
I want to show you what a cushion is…
How to see one in about 90 seconds…
And what it told me to do this morning.
The thing that isn’t on your chart
Start with the mechanics, because the mechanics come first and the opinion comes second.
Negative gamma means the dealers buy strength and sell weakness, and they’re doing that to hedge rather than because they have a view. When price drops they’re selling into the drop, which makes the drop worse.
Positive gamma runs the other way, with dealers buying the dips and selling the rips, so they end up absorbing a move instead of carrying it along.
So before I have any opinion at all, I want to know where the negative gamma actually sits. On the SPY this morning it didn’t flip negative until 743, and we were trading all the way up at 755. That distance between the price and the forced selling is the cushion.
Where’s the downside where the dealers have to sell into weakness? It’s just not there.
Two Mondays ago I never measured that distance, and it cost me.
The two steps, and they run in this order
Step one is the regime, and nothing else happens until that question gets answered. Are we in a positive or a negative gamma regime?
Step two is the walls, meaning where the call walls and the put walls sit once you already know which regime you’re standing in.
On SPY this morning step one gave me positive gamma with a cushion running all the way down to 743, and step two put the call wall at 755 with another one up at 760. That combination is what produced the trade.
This is probably not a day to go short, but it’s definitely a day to look to go long, understanding where the limits are to the movement. Give it 15 minutes after the open, get long, and target 755.
The biggest and easiest trade of the day was really off the bat this morning.
Where I’d have been wrong
Break 750 and my read changes, because that’s where negative gamma starts to enter and where the price begins pulling toward 745. That 745 level is our put wall for the week, and it carries the most open interest of anything on the board.
So I’m working with 745 to 760 as the range this week, which is about $20 wide.
On the upside, taking out 756 opens up what I call a volatility up trigger that can carry us toward 760 in a hurry. Once you break through the wall, the vol up trigger is above the call wall.
This isn’t a SPY trick
I ran the identical two steps on TLT this morning, regime first and walls second, and 83 came out as the level that matters. Break 83 and you’ve got a shot at 84.50, with 86 sitting above that.
Then I did the same thing on SNAP, which is a $5 stock with about 8.3% of its float sold short. There’s a call wall sitting right on top of the price at $5, and the structure thins out fast once you get above it.
We’re taking what we did on SPY and we’re applying it to TLT, and then we’re doing it again on SNAP. That’s what formulaic actually buys you, because once you can read what the dealer is obligated to do, the name on the chart stops carrying much weight.
Two Mondays ago the chart was telling me to short while the structure underneath it was telling me something completely different, and I hadn’t learned to listen to the second one yet.
Brandon Chapman, CMT
Creator of Ghost Prints
