Greetings fellow $ATER Aterians,

I am not a financial adviser and nothing in this post should be taken as financial advice. Do your own due diligence, and make the best decisions for you and your family’s benefit… especially these days where market volatility is extreme and been difficult for even the most seasoned of traders & investors.

The last time I posted a deeply in-depth TA, my analysis was conditional on the idea that we need VOLUME similar to what we had back in April. This did not materialize whatsoever, but we did get a nice recovery bounce from $2.10 up above $2.70 for a brief period this past week. You can review my previous post in this sub, and find what aspects of this analysis (relative to what actually happened the last couple of weeks) led to my $3+ predictions being too optimistic. I will look deeply into this analysis and attempt to explain why this prediction fell short.

There is a lot to unpack. Let’s get started.

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1… The ATER Daily Chart

To get started, let’s take a look at ATER’s current daily chart.

Figure 1: ATER’s daily chart using the Wyckoff Sniper tool (blue regions = accumulation bands, red regions = distribution bands), RSI (middle) and stochastic RSI (bottom). Note the text annotations, which represent observations of the chart and my opinions on what they represent.

A few things stand out to me from this chart:

1. ATER “broke out” of accumulation (note the SOS blue arrow) on July 5, when I predicted that a new algo-cycle would begin.
2. I believe we finished a 13-day algorithm cycle, evident by the low-volume trading days (no more than 5.2M volume on any day since July 5) ending with the GameStop stock split on Friday, July 22.
3. If a new algorithm cycle is to begin, an 8-day cycle leading into Aterian’s earnings report seems the most obvious.
4. Stochastic RSI on the daily is topped out.
5. On several days especially last week, outflows into ATER were higher compared to inflows, possibly indicating added short-selling.
6. The distribution bands are beginning to curl in a fashion suggesting that this painfully long accumulation phase may be taking a break soon.

Tying all of this together, my best guess based on what may happen for the upcoming algorithm cycle is a slow dip down into the blue bands, which would indicate accumulation ahead of a likely earnings beat. Why would the MMs and hedge funds do this? If they did indeed enter short positions last week (based strictly on the large scale outflows compared to inflows), they are expecting the price to dip over the next week and a half into earnings. This both allows further accumulation in the daily blue bands, and short sales add fuel for a move up for an earnings beat. I think this is also evident because, despite the MASSIVE rally in the SPY and QQQ over the last few weeks, small caps like ATER did not exactly lead the charge up. Remember that in April, the major indices were flat/declining while ATER blew up from $2.10 to $7.20 in a matter of weeks. This is by no means what may happen again, but for my own trading purposes, I will interpret any dips to $2.40 (the top blue accumulation line) and any capitulation moves (unlikely but possible ONLY in the event of a market-wide panic, which remains in play given the macroeconomic and worsening geopolitical conditions) at/below $2.10 as institutional accumulation and will be following what they do with their $$$ on the long side to play the upcoming earnings report.

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2… Current Options OI and Data

TLDR; re: options – the option chains are mostly dead right now through August.

PUT option OI below:

Figure 2: put option open interest for ATER for the coming weeks.

And here is CALL option OI:

Figure 3: call option open interest for the coming weeks. Data in Figs 2 and 3 are provided by Unusual Whales.

Next week for ATER, there are less than 3,000 total contracts open on the call side, which is absolutely NOT enough firepower for a “gamma boost” in ATER’s stock price. Conversely, there are only about 700 put contracts open right now. Neither option chain can nor will make a material difference in the stock price.

Recent option flow, both bid and ask-side for ATER:

Figure 4: ATER total option flow with minimum premium of $1000. Data via Unusual Whales.

Figure 4 reinforces the fact that ATER simply does not have enough premium flowing into any option chains. Most of the flow from Friday (and weeks before) has been on the bid-side (meaning: selling calls and puts). Around 60% of the volume was bid-side on Friday with over 63% of the volume being call-side, meaning many calls were being sold to retail. I personally interpret this as MMs seeing up call-walls from $2.5 to $3.5, and given the light volume and stock price floating around $2.5, they will probably target a close just below $2.5 this coming Friday to keep their call premiums (barring major market news of course).

Again, I need to emphasize that option volumes are very low by this stock’s standards, and to not put too much weight on option flows for the short term. When option volume picks up, that will be more indicative of an upcoming move. I will personally be watching for increased FLOOR transactions and to see what institutional volume does ahead of this upcoming earnings report.

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3… How correlated is ATER with GME, AMC and SPY? What I think this means for earnings.

Let’s take a look at the 30-min charts for all of these tickers:

Figure 5: The 30-min charts for (from left to right), ATER, SPY, AMC and GME. Middle and bottom plots are RSI and sRSI. The blue line references the approximate time the GME stock split took place.

Anyone who’s paid close attention to the stock market for the last many months know that certain stocks trade in “baskets”. For example, did anyone notice how Snapchat (SNAP)’s awful earnings report caused Google’s and Meta’s stock prices to furiously dump too? ATER’s correlation with top dog’s AMC and GME is evident (note the price action especially with AMC from Friday… they’re almost exactly the same, quickly falling out of distribution and deep into the 30-min accumulation bands by the afternoon).

**TINFOIL HAT TIME** (my opinion and nobody else’s, so please interpret this as an opinion and not fact): Everyone is well aware that GameStop had a stock split coming up, which theoretically SHOULD have wiped out short positions in the stock. I believe the recent week’s short squeeze, especially in mega-tech (LOL), was done in part to provide leverage so short positions could be closed in the previous weeks with GME and AMC, given the obvious split catalyst. Look at SPY’s 30-min chart for comparison and note that, strictly from this algorithm, SPY remains over-extended above its distribution bands (i.e., people are buying SPY and mega-tech at a vastly marked-up premium) whereas GME is no longer in 30-min distribution and AMC/ATER are in accumulation mode. Now that the split has been executed, GME now has 4x the shares in its float, and any institution holding GME now has a massive liquidity pool to provide to shorts. This is just my opinion, but I see this event as being a rather brutal short-term negative catalyst for the top names in the meme basket (see on GME’s 30 min chart that it has a LOT of room down, whereas ATER and AMC are finding support already… also see ATER’s daily chart in (1) for evidence that it’s near daily support as well).

The price action between SPY and these three stocks is laughable when one considers that small caps are historically the “leader” for gains in a healthy (bull market) environment.

Given where ATER’s chart lies in the daily timeframe, current option volume (both lack of volume and MM positioning in selling calls), I think the memes will be hurt for the short term solely from what transpired with the GME split. In ATER’s case, however, this may be one elaborate guise for MMs to accumulate ahead of ATER’s earnings report. We know that shipping costs have dramatically gone down, they continue to make quarterly gains toward profitability, and last quarter’s goodwill impairment has been absorbed already. Also remember that ATER was trading well above $3.5 before that announcement. We are currently around $2.50 at the time of this writing. Presently… let’s say ATER misses earnings for whatever reason: the report (assuming no dramatic changes to its assets and balance sheet from last quarter) will most likely reveal that the stock price is trading below its asset prices, and should see a bump on this fact alone. I will be watching ATER’s price over the next 7-8 days to infer how earnings may react.

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4… Building on my opinions in (3), the macro-economic headwinds need to be in the back of everyone’s minds.

The market (well, mega-tech and the major indices) had a major ramp the last few weeks. The SPY went from a low of $362 to filling a gap near $400, meaning the SPY is down less than 20% for the year and no longer in a bear market (LOL). This rally happened despite:

1. A record 9.1% YoY inflation report several weeks ago, above every major analyst’s expectations.
2. Service PMI reported of less than 50 (a key recession indicator).
3. 2y-30y bond yields inverting for the first time since the 2008 global financial crisis:

Figure 6: The 2y-30y yield curve inversion.

1. Nearly every major bank (with the exception of Citi bank) missing on earnings, cutting guidance, and suspending share buybacks.
2. The European Central Bank raising interest rates 50 bps to (*drumroll*) 0.0%, at a time when the EUR:USD is near parity.
3. The Japanese Central Bank voting to keep their interest rates negative.
4. As a result of 5 and 6 (among other currencies), the DXY (dollar index) continues to strengthen, implying forward earnings with all companies dealing with overseas products will have lower reported earnings. (Rising DXY is, as a rule of thumb, bad for stocks).
5. Shinzo Abe’s assassination in Japan, and the Prime Ministers of England and Italy resigning.
6. Sri Lanka’s total government collapse.

From this weekend:

1. The WHO declared a global health emergency for MonkeyPox.
2. Russia & Ukraine signed a grain export deal Friday, only for hours later to see Russia attack Ukraine’s grain export infrastructure with missiles.

Bear market rallies are completely normal, and this sort of magnitude is to be expected. The thing that gives me pause for this rally, however, is the timing of all of the above news in the context of the GME split. The big March rally, for example, came after the March FOMC meeting (albeit after a small 25 bps hike, the first one). The May CPI (reported in June) led to the SPY closing around $388. We are now in late July, with 125 bps additional hikes factored in, at least a 75 bps hike coming next week, and trading at $393.

This begs an important question… All of this news could have easily forced the stock market to reach new lows for the year, but it didn’t. Let’s say all of this compounds and creates new lows, with earnings and FOMC continuing into the coming week. FOMC in the past has usually led to nice rallies (see March) when taking a 2-month layoff, which would have made an obvious point for a true bear market rally where small caps can reign supreme again. This didn’t happen, with instead the (still overpriced) mega-tech and large cap stocks leading gains the last few weeks. Was this rally the result of certain institutions/HFs pumping their long positions to gain leverage for the GameStop split (i.e., margin to cover their extended short positions)? Reading this note, via ZH, regarding Goldman’s top clients that they were “frustrated by this rally” had me thinking… if all these buybacks are about to begin, but the indices are trading WELL ABOVE their pre-CPI and pre-rate hike pricing… are they the ones going to get suckered into “buying the top”? I think that’s a hard no, at least until the rest of tech figures out what earnings and guidance look like (keep in mind us average citizens are being squeezed already thru inflation, and purchasing power has to come from somewhere to justify the current equity pricing in large-caps).

This also has me thinking that top clients for the biggest institutions are “frustrated” because (going back to my tinfoil hat theory) certain to-be-unnamed hedge funds needed these prices propped up for leverage to cover their GME and AMC short positions ahead of the massive stock split catalyst. Otherwise… it would be more natural to “buy the dip” after earnings were properly priced in, and a plan to navigate earnings ahead of a recession could be priced in (i.e., a real “bottom”). We are a long ways away from an economic recovery… but this will stay in the back of my mind until our leaders show us something encouraging.

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5… Building on (4), we need to talk about VIX and the “complacency” it’s showing in terms of “fear” in the markets.

As a broader rule of thumb, the VIX is the market’s “fear index”. Higher VIX usually equates to risk-off behavior (i.e., selling of stocks). When VIX comes down, that’s usually great for stocks.

From a more technical perspective, the VIX is a measure of options pricing across the SPY. When VIX is low, that means OTM options are cheaper, implying “lower” risk premium in the event of a dramatic move (up or down).

Here is a look at the Volatility Index:

Figure 7: The daily volatility index.

Since the June 10 CPI report, the VIX has been in free-fall with 19 red trading days (compared to 5 trading days) of the last 24. As news comes out, VIX has done nothing but (mostly) go down. Bear market over, right?

The answer is a bit more complex. Part of the reason VIX has come down so much is because the market was well-hedged into the July 15 OPEX. Folks knew this bear market was in play, bought puts/volatility hedges, and with the SPY still below $400, the decrease in volatility has been the result of folks monetizing their hedges.

Now that the VIX is back around 23, the market is on the verge of experiencing volatility in a “bull market” (i.e., VIX below ~20). The macroeconomic conditions remain extremely unfavorable, and with every day the indices rally further, fixed-strike volatility increases (untethering from the decreasing index volatility represented by the VIX, thereby decreasing underlying support for the market).

Now that these hedges from the July OPEX (and before) are off the market, MMs are now long a ton of volatility (via VIX derivatives and leveraged products like UVXY and UVIX). The further the markets go up from here into positive option gamma territory (i.e., if I buy a long call option, the MM shorts the equivalent amount of stock to remain delta/gamma neutral) the more volatility gets shorted. VIX spikes represent (1) sudden, somewhat unpredictable, market-moving events and (2) massive short-vol covering. (these charts look like parabolic short squeezes for a reason… and we know what those look like with AMC, GME, ATER, etc… don’t discount what this can look like with UVXY and related products if an event happens and too many folks are short vol).

For additional educational content on this phenomenon, I encourage everyone to listen to Cem Karsan, who runs the very successful Kai Volatility Advisers (link to an 8-minute interview video in the comments).

Can volatility continue decreasing despite this backdrop? Of course it can: earnings next week can blow everyone’s expectations, the Fed can pivot during Wednesday’s FOMC results, and war can end/geopolitical tensions can ease. Volatility is event drive, and VIX won’t go up without a major market-moving event. If VIX does indeed come down, that would be obvious good news for ATER and the other small caps. Food for thought here…

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Parting Thoughts…

This is a treacherous market right now, and I’m continuing to learn from this process while watching ATER and the broader market closely. I’m optimistic about ATER’s earnings, and will be watching the price action to hopefully gain insight into how that may affect the price (and more importantly give all of us investors guidance into their success during this upcoming recession).

Anyone who follows my conversations in Anon’s discord know I’m very bearish on the macroeconomic outlook. I believe once we have a path forward from the recession, and everyday citizen’s lives materially improve in the economy, anyone short ATER (or the market) will get catapulted and we will see the stock not only go up but stay up into the next bull market. I as much as anyone want to see this sooner rather than later, but this outlook is what we are all up against and must account for in thinking about how our portfolios will fare.

Patience is a virtue here, and these next two weeks will definitely test it for me.

Trade safe and continued well wishes to everyone in the gATER family!