As trading closed yesterday, stocks dipped despite an initial surge in the morning. The S&P 500 fell by approximately 0.6%, closing at 5,022, and is now approaching a significant psychological threshold of 5,000 as we head towards Friday’s options expiration (OPEX). This level is anticipated to provide support in the short term; however, a breach before Friday could significantly alter market dynamics.

Market behavior is currently influenced by a substantial build-up of put delta at the 5,200 and 5,100 levels within the S&P 500. Market makers, having likely sold these puts to purchasing customers, find themselves in a short position on the S&P 500. As the index declines, this necessitates market makers to sell off the index to remain hedged. Should the index fall below 5,000, we might see an intensification in selling pressure due to these options coming into the money.

Concurrently, the dynamics within the Nasdaq 100 also suggest caution. The QYLD ETF is set to cover its NASDAQ 100 calls at the 17,900 strike price on April 18, just before their expiration. The impact of this buyback on the market is expected to be minimal due to the reduced notional delta value of these options, currently standing at about $457 million, a significant decrease from past figures that often reached several billions. Additionally, the Nasdaq has recently broken below a megaphone pattern and filled the gap from February 21, signaling potential further declines with immediate support around 17,400.

A critical watch point in this scenario is Nvidia (NASDAQ:NVDA), which tested and nearly breached the $850 support level. The fate of Nvidia is particularly pivotal; as it currently contributes substantially to the year’s gains in the S&P 500—accounting for about 40% of the index’s increase. A potential 21% drop in Nvidia’s stock to fill the gap at $670 could reduce its yearly gain to 35%, significantly impacting the overall index’s performance.

Investors should note, Nvidia’s movements could presage broader market trends, especially given its influence and that of the other major tech stocks (often referred to as the ‘Fab4’), which collectively represent 80% of the S&P 500’s gains this year. A downturn in these stocks could precipitate a rapid market decline.

Market Outlook: If Nvidia’s stock were to decline, not only would it impact Nvidia’s contribution to the S&P 500 but it might also lead to a wider recalibration of the index, potentially lowering the S&P 500’s gains from 252 points to around 202 points for the year.

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