Notice: To view this week’s big picture outlook, click here.
What Happened: Market participants further digested higher prices, as evidenced by U.S. index futures balancing within prior range.
What Does It Mean: For ten sessions in a row, the S&P 500 has consolidated near the $3,800 high-open interest strike.
What To Expect: Thursday’s regular session (9:30 AM – 4:00 PM ET) will likely open in prior-balance and -range, suggesting no immediate directional opportunity, again.
Given the open inside of a developing balance area, participants can expect higher volatility. As a result, focus should be directed to price levels that, if broken, would denote a change in tone, as well as the following dynamics:
- The failure to resolve directionally points to the absence of larger, other time frame participants (i.e., institutions that don’t transact at technical levels). Still, all broad-market indices are in an uptrend, evidenced by higher prices and value. This recent pause is healthy; consolidation after trend allows prices to converge with value, forming high-volume areas. The prices in this area are valuable and offer favorable entry and exit.
- The minimal excess rally high at $3,824.25 remains intact. Excess forms after an auction has traveled too far in a particular direction and portends a sustained reversal. The absence of excess, in the case of a high, suggests not enough conviction; in such case participants will (1) liquidate (i.e., back off the high) and strengthen the market, before (2) following through. Participants have already accomplished the first reaction.
- The pinch and subsequent recovery of the volume-weighted average price, anchored from the Sunday evening open, suggests further upside resolve as the average participant, from the anchoring point, holds a profitable position.
- The week ending January 8 established a v-pattern recovery, a price sequence that ought to be followed by further price discovery, as high as the 100% price projection, which happens to be near the multi-month upside breakout target at $4,000.
- Unsupportive speculative flows and delta (e.g., commitment of buying or selling), as can be viewed by the order flow graphic below.
Moreover, in light of the above dynamics, the normal course of action is responsive trade. However, any break that finds increased involvement (i.e., supportive flows and delta) above $3,824.25 or below $3,763.75, in the S&P 500, would favor continuation.
Noting: In most cases, a break-out from balance is usually the start of a short-term auction. Therefore, placing trades in the direction of the break is the normal course of action. Trading back into the consolidation, thereby invalidating the break-out, would portend a move to the other end of balance.
Levels Of Interest: $3,824.25 regular trade high and $3,763.75 balance low.