S&P 500 Holds Above Key Level, Russell 2000 Breaks Support: What to Expect Next
Stocks fell for a second day, with the S&P 500 dropping by around 80 bps. The index gapped lower, unwinding the big buy imbalance at yesterday’s close.
It did find support on a few occasions at 4,700, serving as the put wall yesterday. This lower move likely sent the index into negative gamma, with the zero gamma level at 4,740.
Unless the zero gamma level starts to move lower or the S&P 500 moves higher, we are likely to see negative gamma lead to expanding levels of volatility, which could mean that equities are pressured lower.
Once 4,700 breaks, the index can accelerate as negative gamma expands volatility, and the next significant level of gamma is not until 4650 or 4600.
The nature of the rally was on what looked to be unstable ground, and there was a sizeable gap around 4550. So if things start breaking down below 4,700, then the pace of the sell-off has plenty of room to run until a stabilization area is found.
Yesterday also saw small-cap stocks get hit fairly hard, with the Russell 2000 (IWM) ETF falling by almost 2.7% on the day.
The ETF managed to close below all of the prior tops after just breaking above all of those tops in mid-December.
When an asset moves above its prior highs and fails to find support at those prior highs, it is generally not a sign of good things to come.
Unless the IWM can quickly turn higher and move back above the $199 level, the outlook doesn’t look good. The big support level for the IWM is the gap around $193; below that, a drop back to $180 becomes possible.
The 10-year tried to move beyond the downtrend yesterday but failed, giving back some of the moves higher in rates, following the Fed minutes.
For the most part, the Fed minutes didn’t reveal much we didn’t know, which is
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