How long will the VIX continue to remain above 40? Why do we still have 100 point swings and why do we have face ripping dips and rallies? As previously mentioned, this correction was the fastest in history and the markets haven’t experienced volatility like this since the 2008 financial crisis.
So let’s take a look at what happened since the 2008 financial crisis:
The rapid selling of 1 week reached a selling climax and found support at 284.82, the October 2019 low. On 3/3/20 at 10 am, the Fed announced an emergency 50 bps rate cut, where SPY briefly peaked at 313.84. In effect, we are range bound between 313.84 and 284.82. Think of this as the high volatility zone.
This is not the first time that this pattern has occurred in market cycles. Wyckoff provides a convenient road map.  This is not to say that we are in accumulation phase. On the contrary, I believe we will continue to the downside and we will enter a distribution phase to the downside. 285.54 served as our lower bound in our trading range, upon which a large automatic rally happened and was short lived.
Market makers do not necessarily trade stocks or options like we do. We have to realize they really trade off of volatility. As previously noted, when autists such as ourselves rapidly purchase options, market makers purchase the underlying asset in order to delta hedge or be delta neutral, and take advantage of the change in gamma and vega. Think of the delta as the first rate of change of the asset, and that gamma is the second derivative, the rate of change of the rate of change. Thus, while delta is linear, gamma is non-linear and really gives you the tendies in a long position. Theta is the rate of time decay, and eats away at your profits. The gamma flip happened at around 325, since MM are more or less net short starting when we passed the 283.2% retracement from the 2008 lows, and the probability of options being in the money favored puts.
Starting around the 325 strike, you can see there are large increases in gamma for both put and call positions, along with corresponding changes in the probability of being in the money. Okay, so MM are most likely short gamma, we are in a place of high volatility, and VIX will continue to remain at elevated levels in this range-bounded zone. So what’s next? The biggest problem right now facing the market is uncertainty. Thus, it is highly likely that we are going to retest the 285 low, which Wyckoff refers to as a secondary test based on the price action on 3/6/20. The 2% rally in the last 10-15 min of trading is mostly MM short covering. Everyone screaming that the Fed is pumping like clockwork need to realize that MM want to close and lock in profits after 2 red days, especially when heading into the weekend. Due to this uncertainty and with additional bad news expected over the weekend, I believe we are going to still face more downside as we close near the 285, before having another large rally to the upside.
This is supported by the large amount of March 20 calls and April 17 puts purchased within the last few hours of trading. Between 305-307 is the 200 DMA and EMA. These call options were purchased at a discount, and will most likely be used for a hedge when the ST bounce and squeeze happens. However, it appears that a lot of MM expect the S&P to hit around 270-285, with 285 the lower end of the trading range. 281 and 273 are the August and June 2019 low’s respectively.
The question over the coming weeks is will continue to rally, form new resistance, and then break out of this high volatility zone? Let’s take a look at the number of cases of coronavirus within the United States.
Note the Y-axis is logarithmic. This means that unless we see a plateauing, or curvature of the line for cases, we are in an exponential phase of growth. Again, we as humans have a relatively easy time grasping linear relations (e.g. delta), but have difficulty rationalizing exponential or non-linear trends (gamma/exponential). As of 11:20 AM, EST, the US has 340 confirmed cases. Another increase of approximately 20% cases compared to yesterday.
CDC reports 164 cases and 11 deaths. Simply dividing case number by deaths does not give the true mortality, since there is a delay of 1-2 weeks from the incubation period. However, this number would be even higher since the CDC had fewer cases. For this example, we will just divide case number and deaths for now, giving a mortality rate of 6.7%. WHO estimates a mortality of 3.4% which is close to what Italy has. In reality, due to limited testing, the mortality rate might be closer to 1% which is 10x higher than the flu. How many undiagnosed cases do we really have in the United States? The next few weeks will reveal a problem orders of magnitude larger than expected. Hence, a retest of the 285 will be essential to test the resilience of the market.
The American Hospital association is predicting 1-2% of patients will require ICU care. ICU units are distinguished from the ER due to the necessity of advanced life support systems such as a mechanical ventilator to aid in breathing.
Let’s say the US takes proactive measures and has 1/10th of these cases. 9.6 million affected, 480,000 admitted to the hospital, and 190,000 requiring ICU intervention. How many beds are in the US ready for ICU treatment? How many are occupied already? If patients cannot access critical care, this will be the tipping point for the US. This is already occurring in Italy and South Korea, where patients need to be transferred to other hospitals due to the overwhelming number of cases each hospital treats. This is explained well in this tweet. 
One more quick note. During high financial stress and downside, gold will be quickly sold and liquidated in order to cover other positions. We are repeatedly entering cycles where gold hits new highs, followed by large swings in the S&P. These are good opportunities to enter quick short positions as gold hits new highs.
Pending another large leg down, especially around the 285 retest, we will see gold quickly sold off again despite the bullish nature of the options. Only until we exit the high volatility zone, do I believe gold will stabilize and continue a run up higher. Before this occurs however, we may see gold prices reach 1400-1500 first. Note the Jun 30 puts at 148 strike.
Things to look at are the 10-yr, additional pending rate cuts from the next FOMC meeting, and oil prices. Commodities tend to provide a more clean signal compared to equities about the global macroeconomic status. This is not a game between bear vs. bull. Look for key levels, position before the large moves. Look for patterns. This is us, WSB, vs. the market makers.
tl;dr Range bound 285-315. Going to retest 285 before moving back to 315. Buckle up, going to be a lot of large swings as volatility will stay high or even increase. Coronavirus cases going to go boom. Gold will move to the upside, but be careful for a large drop.
Just to be SUPER clear, long term puts at April are being played by MM. But there will be a bounce soon since we are so oversold. MM have prepared for this by purchasing large amounts of March 20 calls. Be prepared for their games.
Update 1 3/7/20: US has now 401 cases, an increase of 18% in just 5 hours.
Update 2 3/8/20: WTI oil looking at a 20-25% drop upon opening of futures later today. Can update with a new post if people are interested.
USA confirmed cases 484 as of 4:10 EST. Most likely hit more than 500 by tomorrow. 1-2000 by next week. Around 3-4000 at least by end of month.
Just made a new low on the /ES futures. Bouncing again at 285, the lower range. Most likely going to sell puts at the open.
Wow, we just hit 30/barrel of WTI. Insane. We are witnessing history guys.
Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.