Notice: To view this week’s big picture outlook, click here.
What Happened: Ahead of President elect-Joe Biden’s inauguration, U.S. index futures auctioned higher overnight.
What Does It Mean: After prices were advertised below balance in the week prior, responsive buyers in the S&P 500 began a rally that found acceptance back inside a larger balance-area, near the $3,800 high-open interest strike.
Given the failed breakdown, odds favor a return to the high-end of balance, the $3,824.25 balance-area high (BAH).
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.
What To Expect: Wednesday’s regular session (9:30 AM – 4:00 PM ET) will open inside of a larger 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:
- All broad-market indices are in an uptrend, evidenced by higher prices and value. The 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.
- 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.
- Increased capital was not committed into yesterday’s highs, evidenced by a divergent delta (i.e., the difference between buying and selling pressure), as can be viewed by the order flow graphic 1.
- A proxy for buying derived from short sales (i.e., liquidity provision on the market making side) declined, as can be viewed by graphic 2.
Moreover, in light of the above dynamics, any break that finds increased involvement (i.e., supportive flows and delta) above $3,807.25 or below $3,793.75, in the S&P 500, would favor continuation.
Levels Of Interest: $3,824.25 BAH, as well as the $3,807.25 and $3,793.75 high-volume nodes (HVNode).
Bonus: Despite all broad-market indices being in an uptrend, evidenced by higher prices and value, cracks are forming under the surface.
Simply put, the risk and reward dynamics, at these price levels, are poor.