Good Morning! Markets shrugged off a shutdown and rallied hard past 6700, resulting in a .3% increase.
Yesterday I mentioned the possibility of a 6700 breakout, but I didn’t think it would happen yesterday. I thought it would possibly happen next week as the shutdown news would hold equities back temporarily. That didn’t happen.
Negative vanna strikes like 6700 are different from positive ones. Positive ones can create a magnet effect as it switches signs when price passes it. Negative is different. It is a repelling force but once passed it can create a breakout. Because aggregate vanna is positive, and just those strikes were negative, I had a feeling that soon we can see a breakout of 6700 and it would be a jailbreak. That happened sooner than I thought it would, though. It might be from further event vol melt from not having economic reports during the shutdown.
Where would this breakout peak?
From my estimation, the initial peak can be 6750. Markets look destined to hit that, maybe peek a little bit over, and become somewhat of a magnet into Oct. opex. The big issue is now that we have passed dealer short options at 6700, there is a chance for a gamma run down once we hit that strike if the bearish fundamentals (negative ADP numbers, government shutdown, etc) come into focus.
While I think there can be an initial drop soon, there is a path to 7000 by the end of the year, with such a huge vanna strike at that level.