- Financial markets are priced to perfection.
- Vaccine progress, stimulus both positives.
- Innovation gains traction, softens inflation.
- Depth, breadth of recovery remains rough.
- Sentiment and positioning levels elevated.
- Higher-time frame breakouts remain intact.
What Happened: U.S. index futures auctioned to new all-time highs before weakening into Friday’s derivative expiry.
What Does It Mean: After participants established a rally-high in the December 9 overnight session, the S&P 500 liquidated down to the balance-area boundary near $3,625.00.
After the December 14 gap open on COVID-19 coronavirus vaccine and stimulus progress, for the remainder of the week, indices negated prior selling, establishing a new all-time high. Friday’s trade managed to repair some structural deficiencies left in the aforementioned advance.
What To Expect: Friday’s session found responsive buyers surface at the low-volume node (LVNode) near $3,680.00. Low-volume areas denote directional conviction and ought to resist future auction rotations. Auctioning through the LVNode would foreshadow further rotation and trade as low as the balance-area low.
Given that the higher-time frame breakout remains intact and selling appears non-committal, participants will come into Monday’s session knowing the following:
- Both sentiment and positioning are historically stretched, while the recovery remains uneven.
- Inflation remains cool due to the profound influence of disruptive innovation.
- U.S. Congress reaches deal on COVID-19 aid package, plans votes for Monday.
- The decline in realized correlation due to factor and sector rotation, as well as the return of systematic option selling strategies will push the long-gamma narrative in which volatility is suppressed and the market pins or slowly rises in a range-bound fashion.
- The S&P 500’s higher-time frame breakout remains intact (see chart below); JPMorgan Chase & Co. (NYSE: JPM) confirms equities will rally short-term with the S&P 500 auctioning as high as $4,000.
- Despite high CAPE ratios, stock-market valuations aren’t that absurd.
Therefore, the following frameworks for next week’s trade apply.
In the best case, buyers maintain conviction and hold the index above the $3,680.00 LVNode. Auctioning below said reference denotes a change in conviction. Participants would then look for a response near the $3,667.75 HVNode. Failure to remain above the HVNode would portend rotation, further balancing.
In the worst case, participants initiate below the $3,625.00 balance-area low, jeopardizing the higher-time frame breakout.
Conclusion: As BlackRock Inc (NYSE: BLK) said, “a rising tide lifts all boats”; though financial markets have largely priced in positive news surrounding vaccines and stimulus, the rally remains intact, bolstered by a drive for yield — technical factors as a result of systemic and hedge fund strategies, among other things.
Levels Of Interest: $3,740.75 and $3773.75 price extensions, $3,724.25 all-time rally high, the micro-composite HVNode at $3,707.75, $3,691.00, and $3,667.75, as well as the $3,680 LVNode and poor structure near the $3,625.00 balance-area low.
Bonus: Here is a look at some of the opportunities unfolding.