Don't Panic, It's Just a Technical Correction

TL;DR: Over the next couple of weeks, potential pullback targets are SPY 550, Tesla 230-250, while Nvidia and Apple targets remain unchanged from previous ranges.

The Market Continues to Pullback

Wall Street operates with a sense of urgency, one might say haste.

While I had expected a higher probability of a market pullback after the August 2nd FOMC meeting, the old Wall Street hands couldn't even wait for that, selling off aggressively post-CPI data.

Powell had to testify over two days, bearing the brunt. Remember when the banking crisis was shorted right into the FOMC day? What did you all do to the poor guy this time?

But back to the main point, based on option flows, this mini pullback is likely to persist until next week, with SPY finding support around 550.

SPY peaked at 562 on Thursday before rolling over. Call spreads showed institutions selling 562 calls to buy 567 strikes. Some even sold the 557 strikes for this Friday's expiry. So any minor bounce ahead of the Friday open could present a shorting opportunity.

Institutions aggressively selling at-the-money calls suggests a bearish near-term outlook, targeting a 1.2% drop from 557 to 550. That said, put sellers still have a play via selling the 545 puts for expiries into late July.

I have a neutral view on the depth of this pullback.

The large QQQ 20,000 lot call roll from the 510 strikes$QQQ 20240726 510.0 CALL$  for 7/26 expiry out to the 525 strikes $QQQ 20240816 525.0 CALL$  for 8/16 expiry suggests institutions still maintain an overall bullish outlook. This dip is likely just a reset before the next upthrust.

On the QQQ put side, there was notable selling of the 485 strikes for September expiry $QQQ 20240920 485.0 PUT$  . If reached, that would represent a similar 1.2% pullback from current levels, in line with SPY's potential drawdown.

More bullishly, the Russell 2000 ETF (IWM) that ripped higher on Thursday is pricing in a move above 215 by August expiry. This hints at potentially explosive upside for smaller-cap names in the near-term.

While individual names may outperform IWM, I scanned the components but didn't identify any standout trading setups yet. More work needed on optimal trading strategies for this group.

In summary, after parsing through the index option flows, my conclusion is that we're likely to see further downside with SPY 550, QQQ 485 as preliminary targets, offset by continued strength in IWM/small-caps.

Single Stocks

So how might this pullback impact prices for Nvidia, Tesla and Apple?

On Thursday, $NVIDIA Corp(NVDA)$ dropped 5.57%. Option flows were dominated by weekly call spread selling, e.g. 131-134, 128-131, 128-134. Notably, not all of these were outright bearish spreads as some trades appeared to be bullish debit spreads, suggesting some expected Nvidia to rebound on Friday.

However, looking at the overall open interest distribution, Friday's close is more likely in the 125-128 range.

With the July 19th monthly options expiring next week, the hefty open interest at the 120 strike suggests potential for a move down towards 120-125.

If 125 acts as solid support, what might catalyze a break lower or higher for Nvidia?

Keep an eye on next week's major earnings from ASML, TSM and NFLX.

Those who traded Dell (DELL) and Micron (MU) earnings might understand this amusing reality - whether a stock rallies or sells off post-earnings is partly driven by results, but more so by the pre-earnings price level.

If a stock rips ahead of earnings, it typically sells off after. If it sells off into earnings, it can rally off an expected beat.

And these reporting companies, in turn, influence the trajectory for the rest of their respective sector/group.

While there's limited options data on ASML, we can look at Taiwan Semi (TSM) which often sees correlated post-earnings moves.

TSM is up over 40% since reporting stellar numbers back on April 18th. While some of that is due to the Nvidia-led semi rally, TSM's monthly sales updates are also folded in. So their quarterly guidance tends to be the bigger stock driver.

But that expected guidance gets priced in quickly. Two days later, it's back to following the broader trend. For TSM and ASML, their stocks are more sentiment vehicles for any sector rotation.

So from a higher timeframe, if TSM sees further pre-earnings weakness, there's a chance it rallies afterResults. Conversely, if TSM powers into earnings elevated, it sets up for a potential pullback post-numbers. The key zone to watch is 177-205.

Circling back to Nvidia,
Regardless of any knock-on impacts from TSM/ASML earnings, the 120-130 range appears realistic for Nvidia next week. The stock would need to clear this pullback before any attempts at new highs.

$Apple(AAPL)$ options seem to reflect a more bearish institutional posture compared to Nvidia's.

Lots of protective put buying, like the AAPL 205 puts for August $AAPL 20240802 205.0 PUT$  or the 225 puts for September expiry$AAPL 20240920 225.0 PUT$  .

I'd advocate sticking with the previous 220-240 trading range for Apple.

Lastly, for $Tesla Motors(TSLA)$ :

Thursday's most active option trades were weekly put spread sells like 245-250, 230-235 and 255-260.

Next were upside call spread buys, though more bearish in nature like 255-260, 275-280 and 280-290 call spreads.

One standout was a sizable roll from the TSLA 315 calls for August expiry $TSLA 20240802 315.0 CALL$  out to the 340 calls for October $TSLA 20241018 340.0 CALL$ . While rolling up in strike, they cut the size by half.

Similar to QQQ's bullish call roll to higher strikes post-dip, this suggests Tesla could challenge higher levels once this pullback is resolved.

Based on open interest, Friday's likely range is 235-245, with next week seeing 230-250 as the trading zone.

On Thursday's heavy sell-off, I sold some 245 puts with the stock around 255. With those puts trading 9 points out-of-the-money, an entry around 236 fell within my expected downside range, so I deemed it an acceptable risk/reward.

The only concern is whether Tesla ends up leading the market lower given its weightier influence in SPY/QQQ. Hopefully, some other sectors or single names can share the load of this tech-led pullback.

# Options Hub

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  • YueShan
    ·07-14
    Good⭐️⭐️⭐️
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  • ZooHealMe
    ·07-13
    Great article, would you like to share it?
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  • KSR
    ·07-13
    👍
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