Hey trader,
The S&P 500 gapped hard higher to open the week after the Iran deal was signed on Sunday. The screen makes it look like the bottom is in.
The instinct is to chase it. Look first at who actually did the buying.
The buyers were not new bulls stepping in with conviction. They were dealers, unwinding hedges they no longer needed.
I called two things last week that had to happen before I would trust a bottom. This gap delivered one of them. It skipped the other.
I read that split in the gamma structure before the candle confirmed it. The whole week now turns on one level, and I am going to walk you right to it.
Why The Gap Forced Dealers To Buy
Over the weekend the market priced in the Iran deal and gapped above 750. That level matters because it flipped the market out of negative gamma and into positive gamma.
Negative gamma is where the firms hedging those options amplify a move. Positive gamma does the opposite.
In a positive gamma regime, the firms on the other side sell into rallies and buy into dips. That steadies the tape.
Here is the engine behind today’s lift. Going into the gap, the market was stacked with put options below price, and dealers had sold those puts, which left them short stock as a hedge.
When price jumped above 750, those puts slid out of the money fast. Their pull on price collapsed toward zero.
The dealers no longer needed the short stock they held against them. They had to buy it back to stay balanced, and that buying is what lifted the market.
So the rally was real in price. The fuel behind it was mechanical, not a wave of fresh money.
The Two Conditions And The One That Failed
Last week, I laid out two things the market had to do before I would call a bottom. The first was to spill into a positive gamma regime, which meant clearing 750. The market did that today.
The second was a heavily lopsided put-to-call ratio. I wanted to see calls overwhelm puts, the sign that traders were leaning into the upside with real size.
That did not happen. The ratio sat right around even, near 0.97 to 1.02, with calls and puts trading in roughly equal number.
That balance is the tell. A bottom I can trust shows a wave of call buying, and this bounce showed dealers covering shorts and little else.
The market met one condition and left the other unmet. That is why I am not treating this as the all-clear, no matter how green the screen looks.
Where The Rally Lives And Where It Dies
The structure gives me a clean map for the week. 750 is the floor I need the market to hold, because above it the dealer buying I described keeps dips supported.
The first target off the open was 755. Price pushed through it.
The next stop higher is 760, the biggest node on the board, with around 25,000 contracts sitting there. That stack is the ceiling, and 763 and 765 layer more contracts on top of it.
Getting much past 760 by the end of the week will be hard work. The downside is simpler to read.
Lose 750, and negative gamma starts to rebuild beneath the market. Lose 745, and we are right back in last week’s regime, where the selling feeds on itself toward 740 and 735.
Here is how I am framing the long side. This is a framework, not a fixed call, so I would size it defined-risk and confirm price at entry.
- Setup: the S&P 500 holding above 750 in positive gamma after the gap
- Trigger: a higher low above the level, staying long into strength
- Target: 760, the next major node where the heavy call stack sits
- Invalidation: a break back below 745, which flips the market into negative gamma
- Edge: above 750 the dealers keep covering put hedges and dips get bought, while 760 and the strikes above it cap the upside
What I’m Carrying Into The Week
A lot of the easy money was made overnight on the gap. From here the work gets harder for the bulls.
The Fed meets this week, with the statement and the dot plot on deck. I am not sticking my neck out for a big directional bet into that.
The honest read is that today looks more bullish than it is. There are still too many puts trading, and one real break below the floor lets negative gamma take hold again.
I am watching 750 to hold and 760 to cap. Until calls truly overwhelm the puts, I treat this as half a bottom, not a whole one.
Brandon Chapman, CMT
Creator of Ghost Prints
