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Wednesday, February 3, 2021

Elliott Wave Update ~ 3 February 2021

UPDATE:

VIX Chart.  Collapsing VIX. I think they are trying to finally close that VIX open chart gap, even if only briefly.

Updated tonight's CPCE chart.

Converging MA's.

GAMMA SQUEEZE (ENTIRE MARKET)

I never really learned about "gamma squeezing" until I started to read about the underlying mechanics of it over the last several months via Zero Hedge mainly. It's not that difficult to understand, at least the idea behind it: Options get bought in stock(s), the market maker must hedge to remain neutral by buying the stock if need be to close the "delta"  or the difference that exists when a market maker sells options.  Something to that effect so that market makers can remain as neutral as possible.

If momentum becomes overly so, the delta keeps changing and it becomes "gamma". Basically a feedback loop in which options are bought at ever increasingly out of money strikes, the delta changes, the market makers must by stock in an attempt to close the delta, the stock price keeps moving up changing the delta yet again, more options get bought and the loop feeds itself until it no longer can. So if the delta never has a chance to settle it essentially becomes gamma. Basically creating a delta chasing delta situation which is gamma.  So options (leverage) can drive a stock if the conditions are ripe. 

This is why the hedge funds "cheated" last week in all the heavily shorted stocks. It wasn't only buying the scarce float that worried them, it was killing the gamma squeeze on the options for those stocks which was the real priority. And that is exactly what they did and are still doing. Portnoy was correct in that they should be investigated and go to jail if found guilty. He may not realize the "why" but he was correct in that he was "taking a dick to his face".

Does anyone think if they had not killed the gamma (and outright buying of the stock to boot!) on GME it would be sub-$100 today? They killed the gamma squeeze and froze as many shares as they could get away with.

But back to the gamma and how it is playing out on the entire market.  Conditions are certainly "ripe".  If true market liquidity existed they would not be able to create the gamma squeezes so easily. But there are no active investors left except retail and the hedge funds more or less. Anyone else is just tagging along buying tracking ETFs and or tracking funds (ETFs are another source of leverage). Passive investors and fund managers are mostly just executing their weekly injections of equity-buying (via corporate and government debt) into the mega funds such as 401K's, pension funds, etc.  They are just buying baskets of stocks like everyone else or simply index tracking funds. Nothing fancy about it. Even many hedge funds are becoming somewhat passive in that regard and just buying what everyone else is buying.

WHAT THE CPCE IS TELLING US ABOUT THE MARKET GAMMA SQUEEZE.

At the February 2020 peak, you could look at a CPCE chart with 3, 5, 10, and maybe 30 day moving averages, superimpose it with the VIX or whatever volatility gauges you prefer and get a glimpse of how "complacent" the market had become.  Indeed the market topped at VIX sub 15, and a negative divergence in the moving averages after reaching what historically has been a "complacent" line on the CPCE chart.

Fast forward to post March 2020 crash and now it is all about momentum. Any last shreds of real liquidity had been scared out of the market and the VIX remains at a high state of agitation. The conditions were now ripe for a market wide gamma squeeze.

But is there any one hedge fund or even the Fed that is actively trying to keep the forces of a market-wide gamma squeeze going? Probably not. Its likely just the result of current market forces and computer algorithms which have now "self learnt" to the point where they cannot stop themselves. When the computers have been programmed to "front run" Retail whose order flows are being bought from brokerages like Robinhood by Citadel, the algo's act as an "amplifier" in a stereo system and greatly help spur the direction of stocks into a gamma-like fashion. Regardless of who or what, the CPCE shows the squeeze is real across the entire spectrum of equities.

We can no longer look at 3, 5, and 10 day moving averages to glean useful information such as what happened at most peaks in the last 25 years. The trend has been so persistent and so one-way that we had to use longer moving averages to properly capture the historic market momentum that has never existed like this before to this extent and this amount of persistence. We used to think the NASDAQ at 5000 was a bubble!  Now we don't even blink an eye at NASDAQ 13,610! Such is the effect the persistent trend has upon market participants mental state of awareness. 

There is no negative divergence in the 10, 30, 90 and 180 day moving averages of the CPCE, not yet anyways. They are still working their ways lower. You can however see the 30 day MA has flattened out. Its having a hard time moving lower. The 90 and 180 are naturally catching up. 

WHEN THESE LONG TERM CPCE MOVING AVERAGES CAN NO LONGER SUSTAIN THEMSELVES TO EVER SPIRALLING LOWER LOWS, AND CAN NO LONGER PRODUCE THE GAMMA REQUIRED TO KEEP JUICING THE MARKET, THE MARKET WILL PROBABLY CRASH IN HISTORIC FASHION AS IT WILL HAVE BECOME BIDLESS!  NO SHORTS TO STOP THE FALLING KNIFE, NO MORE CHANGING DELTA TO KEEP STOCKS MOVING UPWARDS.

Simply put, the algorithms will reverse in confusion and eventually produce a negative gamma squeeze on the sell side.

And that I think is the warning from these charts we should probably be wary of.  They will self-sustain until they cannot. The flattened 30 day average is a clue that we are reaching the limit of options driving the market. Soon the 10, 30, 90 day and 6 month average will be tightly grouped...

THE COUNTS
Wilshire within 0.50% of a new intraday high. Best count is below:
Volume retracted again.
The immediate bearish count is that the market has peaked in a wave (ii) expanded flat. I could even call this a "truncated" [v] it is so close to the top. Tomorrow is a key day.
NYSE.
Lower highs in % of up volume vs down and advancers vs. decliners. This seems like a simple point and people say "who cares?" but it shows an underlying market that is dissipating momentum as time goes on. Yes its true we nearly had "Zweig Breadth Thrust" in Sep/Oct - and that has sustained the market momentum as a result - but we haven't had a 90% up volume day since last June.  We have had only two 80% up volume days in 2021 despite the new market highs.
10 year yields on the move again. Higher interest rates are not bullish for the market. Look at all that debt that was sold at a lower yield over the last year....duration risk!

And duration risk can act as its own gamma squeeze in the bond market. I would particularly think so if bonds are coming off a 40 year low in yields.  Indeed all-time low in yields for all time! Europe is still negative! Look at the risk they have! Insane!
The 5 of (5) of [5] count hasn't been abandoned. In fact, both the (B) wave fake peak count and the 5 of (5) both work! Its weird that way. But they both point to an historic peak prior to the collapse of the financial system that is sure to come.
The corresponding weekly chart for that count. If the upper green channel line can be punched through, then likely the red line will be reached thus the upper target range of about 42,440 Wilshire. 











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