Where Are We Going? - Mar. 4, 2025

My Journal

machinaquanta.com

Let’s jump in to review the last two days in markets and what our indicators have been showing. I’ve included more education content in this piece so you can add more tools to your own decision making. Please leave feedback if I can discuss more topics for you!

Monday, Mar. 3

Monday morning’s chat I updated: “Bender not buying the 'rally' [referring to Friday’s rally] but also not signalling to short so...”. So, I stayed out, waiting for a better opportunity and I’m glad I stayed out because while we missed the Friday rally, we also avoided the rug pull on Monday! Bender missed one opportunity BUT saved us from a bad one! Not bad I think. This is what Bender is supposed to do - protect us from pullbacks whenever possible.

After the slam down during Monday, to alleviate some of the growing panic, I posted another update that I saw four independent indicators show a confluence to a reversal occurring near term. Of course, I don’t know when that happens but the markets leave clues.

I’ll summarize from the chat why I had a feeling (and still do) we were approaching a bottom/reversal below.

Knowledge Sharing Time

Exhibit 1: SP500/Treasury 'spread’ compression/expansion

I first found this idea from AGTrader (AG), so credit to him and great follow imo (see, I recommend good people to help you as well). AG identified an imaginary, but useful, spread in the SP500 futures and US30 Yr Treasury futures. The two assets would normally move in sync. However, a few months ago that harmonious movement broke and we saw unusual ‘spread’ expansion develop. In almost all cases the spread violently compressed with SP500 falling, particularly around Vixpiration - dates when VIX options expire every Wednesday. Where I expanded on this idea was to see if compression behaviour would continue when the spread spread ‘inverts’ (i.e. when bonds began outperforming relative to SP500). I was looking for an expansion between 200-300 pts (it’s an arbitrary number). So, I said “Looks ripe for mean reversion, 6th time the charm? If so we seem to be getting close. Does SP500 recover in that case? I think so.”

Exhibit 2: Bender (Pullback Indicator)

Bender, our pullback indicator, was showing upcoming stabilization (either in the form of consolidation or ramping up). Unfortunately, Bender can’t tell us WHEN this happens so we rely on statistics to tell us what’s happened historically - generally the impact is seen within 3 days but can take up to a week. My comment was: “interestingly Bender is showing upcoming stabilization despite everyone saying we fall off a cliff, it could take a bit to materialize...but watch this closely.”

Exhibit 3: Gamma Exposure

GEX or dealer hedging dynamics is another tool we’ve seen where I look for anomalies. We made new lows in SPX (green line) but GEX (orange line) was showing decreasing strength in the selloff. You want dealer dynamics to be in your favour, it wasn’t last week, which is why we didn’t try to catch the knife and buy last week. So my comment was: GEX: also interesting, divergence happening, but opposite to what we saw on Feb. 14 when we full port shorted. This time markets making a new local low but GEX showing there is less and less downside pressure from dealer hedging with the second move down. Does that mean we rip up soon?

Source: https://squeezemetrics.com/monitor/dix

Exhibit 4: VIX

Bottoms or reversals need some capitulation. You don’t really get capitulation until VIX snaps up meaningfully. Based on discussions with some other traders, a reasonable consensus was somewhere between VIX 25-30. On Monday, we were at ~22, not quite there. I said “VIX: starting to be responsive now. Remember, we want VIX to spike at some point here so if anything we can establish a floor of some sort.”

Exhibit 5: Seasonality

We talked seasonality at length in the previous post but my comment was: “Seasonality: remember this quarter is weak, not catastrophic though. There will be a buying opportunity I believe.”

My main takeaway: is I am looking at a confluence of factors to build a higher probability setup of correctly predicting events. This also helps give me some conviction in positions as I want to take swings where I can capture a good portion of the move. I can’t tell you the bottom and top precisely but these tools may give you some conviction to ride the waves. In any event, end of day looked like a decent level to start accumulating again. I present a screenshot below to keep myself accountable. I’m ready for the public shaming - more to come.

Tuesday, Mar. 4

The public shaming continued Tuesday morning with my update that “today was not the day to short” as I certainly wasn’t. With egg on my face, we slammed down again but this time indices were met with buyers! With VIX this high, 100 point swings is common and that’s about what we got today. I was waiting for a failed breakdown setup as a higher probability opportunity to add to a long ES position. By end of day all indices showed buyer wicks - a change of character for now.

Remember the SP500 and Treasury spread we were looking? Well it expanded this morning initially, stretching that ‘elastic band’ to ~330 points, before sharply compressing again. Looks like it works both ways! So, I added to ES and sold my March TLT calls at open (up ~30%).

VIX snapped up and started selling off again. Can it go higher? Absolutely, but these are the events we are preparing for with our tools. It’s murky waters and we don’t have a crystal ball. More than anything I hope this gives you some confidence in your own decision making.

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