January 8th, 2024

Get ready for a two-way tape. My first targets were hit in NQ and RTY. ES fell just short, but overall, the bears reached my initial downside targets from the start of the year. We now have a battle on our hands and I believe we’re heading towards a two-way tape. The market, in my eyes, has three types of environments: range expansion, mean reversion, and consolidation. Currently, we might be in for some consolidation.

Why, you ask? At the start of the year, I received short signals across all the major indexes, which resulted in a mean reversion trade and a decent market sell-off down to my ‘neutral areas’ based on the daily Bollinger bands. Once those areas are reached, we often see mean reversion into the last rally. Typically, the market then tries to push into the primary trend and test the 5-day moving average and, in this case, the YTD AVWAP. If we can stay below those areas, I believe we might see a continuation of this sell-off down to my lower levels. However, we need more evidence to confirm this.

My plan? I’ll monitor the rally this morning and observe how ES, NQ, and RTY react when they reach their respective 5-day SMAs and YTD AVWAPs. I’ll look out for the cumulative delta when they get there and ask myself, Is the market still respecting those areas? If yes, I could re-enter a swing short and even make some day trades on the short side. If we push through the areas, it might be time to start looking for intra-day longs.

Now, if we fail to reach these areas and the market sells off this morning, I’ll use my short term day trading strategy (3-minute opening range, with AVWAP and standard deviation lines) to search for shorts again.

At this point, it’s a waiting game to see how we react today before I make my next trade.

A noteworthy input from my friends at MenthorQ: We’re starting today with negative gamma. This implies that the delta of an option will become more negative as the price of the underlying asset moves. If the spot price increases, our delta will decrease and vice versa. Negative gamma positions can result in wider bid-ask spreads. Market makers and traders may widen their spreads to account for the added risk they’re taking on, which could impact trading.

Today at 5 ET I will be live in Discord discussing the current market environment and how I write my morning note, and ways it can be beneficial to your trading. Hope to see you there. Cheers, DELI

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