Tuesday's trade was for the most part an "inside day". The ES does appear to have possibly completed minute wave 3 of Minor wave 3. If this is the case a minute wave 4 bounce is now due and likely underway. AT the moment the Fibonacci retracements suggest a move to 3888 is likely with additional upside targets also possible. However, as the decline progresses the hourly 20 MA has been showing up as stronger resistance and basically containing rally attempts.
For tomorrow, it is FED Day — the announcement comes at 2 PM EDT with the press conference at 2:30 PM EDT. Along with the FED meeting there remains a major very large Quadruple Futures/Options expiration. The markets are already feeling the "gamma explosion" that is occurring from the strong downside pressure on the markets. I don't suspect that will decrease between now and Friday or for that matter within the next several weeks.
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Could this be i of 3 of 3
Yes, it could be — I mention that in the update — but don’t focus on it because the reality of it being so would suggest a more serious and destructive decline is still out there to come.
Hey thanks for your input! I have a question: assuming we hit 340 or around there and complete wave 3, how big would wave 4 be?
@Tahmid Hassan – That is where Fibonacci retracements come in — to measure the potential for a 4th wave correction — you use Fibonacci retracements and connect the starting point of wave 3 to the completion point of wave 3 — the most common level is a .382% retracement of wave 3 —
Thanks so much for the update. I appreciate all the work. So, when you look at the quadruple expiration, you think that there will be a bounce? I wasn’t sure if the going neutral would involve selling positions, or if it would involve something that would contribute to a buying? Or, if you were saying that you expect a bounce but that the expirations will delay such a bounce? ….seems like the puts itm and calls otm are outnumbering the vice versa, does that mean more selling occurs to get net neutral, or buying? Confused about the process and where we are in it…,? Sorry for long question, I’ll also try to look it up.
@Tim Chernikoff Music – thinking that there will be a bounce is not necessarily attached to quadruple expiration. It can be attached to any expiration. The getting neutral part can involve selling or buying — and again not necessarily the position. When trading options there are “greeks” and that is what is involved. The greeks are used as a way to measure risk. – An option’s “Greeks” describes its various risk parameters.
For instance, delta is a measure of the change in an option’s price or premium resulting from a change in the underlying asset, while theta measures its price decay as time passes.
Gamma measures delta’s rate of change over time, as well as the rate of change in the underlying asset. Gamma helps forecast price moves in the underlying asset.
Vega measures the risk of changes in implied volatility or the forward-looking expected volatility of the underlying asset price.
When the markets make larger moves and begin to slide up or down through strike prices it can cause a very quick change in a positions delta, gamma and vega — and the closer to an expiration the greater the change as prices of the underlying move up or down through several strike prices.
The quick change in price creates a situation where the gamma can seem to explode against the position — so a trade can go from being being delta neutral to very long or very short — to get back to “neutral” would involve buying or selling the underlying — and when the market is moving strongly in a direction the buying or selling will get amplified by the “gamma explosion” in options positions —
I hope it helps — and doesn’t make it more confusing
@Michael Filighera thanks for the explanation. This situation is confusing given the fact that there is a bounce occurring off of fed news; and then there are expirations…. It seems like the bounce would lower the volatility and this make the gamma ramp to the downside less severe…. Perhaps that means the purchase towards neutralization would not end up being as intense? (I’m assuming that MM’s would have to buy stocks to get to neutral at the end, to push the price back up. But, I think I need to study it better.)
Also, out of curiosity, would you consider the May move on fed rate raise as a sub-minute wave? At the time, it seemed like you didn’t consider it as part of a wave because it was so quick, and the trend was down. Just curious as I am trying to gauge the length of the upcoming wave. Seems as if it could also get pretty prickly to the upside…
Thank you for your great work! Very helpful information! Is it possible that we are now completing a major wave 5 down from what started in January? I could be completely wrong, but it seems like a possibility. Thanks!
@Grey Bull — you are welcome — I see what you are saying — but one of the rules of Elliott Wave is that wave 4 can not overlap the price territory of wave 1 — and in the ES — there would be overlap on the rally that began on May 20th to the high on May 31st.
@Michael Filighera Thank you for the response. That makes sense. Still learning. Thank you for your teaching. Very informative!!
In corrections there is overlaping very often…just look previous ones.