Following a 2.7% drop in the S&P 500 due to tariff concerns and a 1.3% rebound, traders consider the market’s stability. Monday’s session remained within Friday’s trading range, suggesting lack of market direction amid recent fluctuations.

Market Influences

The upcoming China tariff deadline on 1 November and tensions around AI bubble fears challenge the market, which hasn’t seen a 6% correction since 1966. The key price levels are identified as a close above 6,762 for market continuation, and a move below 6,550 indicating potential caution within three weeks.

Australia’s unemployment rate is projected to rise slightly in September, with 17,000 jobs expected to be added. The Dow Jones remains flat following earnings reports, while gold holds steady amid geopolitical tensions.

Bitcoin’s recent market activity suggests potential for structural recovery despite a 2% decline. Similarly, Lido DAO experiences a rally following the Lido V3 testnet launch, securing stability above $1.00.

In currency movements, the EUR/USD gains momentum, trading above 1.1600 due to a weaker dollar. GBP/USD hovers around the 1.3400 mark as sellers pressure the US dollar, while gold maintains a strong position at around $4,200 driven by trade and political concerns.

We’re looking at a market holding its breath after the sharp tariff-induced drop last Friday and the unconvincing recovery on Monday. The “inside day” pattern signals significant indecision among traders. The real test is the approaching November 1 China tariff deadline, which is now just over two weeks away.

Volatility and Strategic Approaches

Market anxiety is clearly reflected in the CBOE Volatility Index (VIX), which we’ve seen jump to 21.5, well above its year-to-date average of 16. This heightened volatility is reminiscent of the 2018-2019 trade war period, where headline risks repeatedly caused sharp market swings. Consequently, we are seeing a notable increase in demand for put options on major indices like the SPX.

The key levels for the S&P 500 are 6,762 for a bullish continuation and 6,550 as the critical support. A strategic approach could involve using bull call spreads with a strike price above 6,762 to profit from a potential breakout with limited risk. Conversely, traders anticipating a breakdown below 6,550 might consider buying put options as a hedge or a direct speculative bet on further downside.

We’re also seeing classic signs of a flight to safety, with gold recently breaking above $4,200 an ounce for the first time since the geopolitical flare-up earlier this year. This is happening alongside a weakening US Dollar Index (DXY), which has dipped below 104, suggesting traders are diversifying away from US assets. This environment could make options on gold ETFs an attractive tool for hedging against further equity market turmoil.

The current nervousness is clashing with the market’s incredible resilience, as we have not seen a pullback of 6% or more since early 2024. This sets up a classic tug-of-war between fears of an overextended AI-driven rally and the powerful underlying momentum. For traders who believe a significant move is imminent but are unsure of the direction, long straddles or strangles on the SPY could be a way to play the expected spike in volatility around the tariff deadline.

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