Stocks Ripe for a Healthy Correction as Bullish Momentum Wanes
Stocks were pretty flat yesterday, and we were in a boring sideways session. There is little to say besides that the index is hitting resistance around the 78% retracement level and the 5,198 gap has been filled.
A trend line that runs across the tops of the end of April also appears to be serving as resistance. So, at this point, it would appear that all gaps have been filled since the high seen on April 1. No open gaps are remaining.
The 1-week 50 delta options Implied volatility rose sharply yesterday, with the report next Wednesday. These shorter-term dated measures of IV are likely to continue to climb as we head into the CPI report next week.
With the now leaning on data dependence more than ever, every inflation and job report is going to be a high IV event, most likely, and next week has the PPI, CPI, and retail sales all back to back to back.
High-yield spreads also increased yesterday, and those spreads can trade with some of these shorter-dated IV levels. So if we continue to see IV rise, I would think there is a good chance that spreads will widen some more as well.
Arm Holdings (NASDAQ:) yesterday, and they were better on the top and bottom but missed on the full-year revenue guidance, coming in a range of $3.8 billion to $4.1 billion, or $3.95 billion at the mid-point; estimates were for $4.01 billion. Unfortunately, companies have missed less in this market and have been battered. So far, ARM is down 8%, but it wouldn’t surprise me to see it down more.
The implied volatility was at 190% for Friday’s expiration, which is a crazy level. All the call delta and gamma at the $110 and $120 strike prices are going to lose a lot of value, if not completely worthless, which could weigh on the shares as market-maker hedges are unwound. The $100 level has some decent put gamma built up, and that may offer some support for the shares, but once that is broken, the next option level of support is around $90.
Technically, a break of the uptrend that started in April could result in the stock falling further, filling a gap created in February over time.
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